I expect another very strong result from Commercial thisweek....

I expect another very strong result from Commercial thisweek. Over last 3 years all Humm’s problemshave been in Consumer, apart from the whole group being badly caught out by raterises in last 18 months. At 1H24, HUM was keen to point out that the repricingof products was already mitigating the effect of the interest rate shock: we needto see this repricing ramping up.

I hope for a much cleaner set of FY24 results, with littleor no further losses in suspended products and UK, and fewer adjustments between statutory,cash and normalised profits.Humm’s disclosurehas improved in the last 2 years, but these and other changes of presentation makeit hard to assess some of the underlying movements in figures, and their causes.

Losses on suspended products and related costs have been identified,and shown as separate adjustments to reach “Normalised” profit, since FY22. Totalsuch amounts since 30 June 21 were nil in AU and NZ cards, $2.1m after tax in Commercialand $66m after tax in PosPP (which includes international). HUM’s reports have not disclosed the split of these losses between Australia (Humm Big and Little Things)and international. My figures below show the Normalised Cash Profit after Taxfor each segment after removing the $66m of losses etc in PosPP.

	Normalised Cash Profit After tax $m	1H24	FY23	FY22	FY21
1	PosPP Australia	(2.5)	9.3	9.4	18.3*
2	international	(2.5)	(2.8)	(1.9)	(2.0)*
3	Total PosPP	(5.0)	6.7	7.5	16.3*
4
5	AU cards	3.7	5.4	4.6	8.3
6	NZ cards	7.8	20.6	29.6	28.9
7	Total Consumer	6.5	32.7	41.7	53.5

*my estimates as HUM has not discloseda complete set of Normalised figures for FY21.

They show:

PosPP Australiadid well in FY21; profit halved in FY22 and 23, and slumped in IH24.

International has made small losses consistently, excluding its part of the huge $66m losseson suspended products, some of which is for UK;the split between UK and Australiahasn’t been disclosed, I believe.

Profit levels at AU cards have been consistent. NZ cards, a much bigger profit contributor, wasstrong in FY21 and 22 but slid in FY23 and again in 1H24.

Slide 8 of 1H24 presentation said that Cost/Income ratio (Normalised)of Commercial was a very good 33.1%, a 1.7% improvement on PCP, becauseexpenses rose only 6% v 39% increase in receivables.From Slides 8 and 11 I derived Consumer Cost /Incomeof 80.9% in 1H24 v 70% in PCP. Some ofthis % jump was caused by the squeeze in net interest margin (NOI). These figuresare terrible and need to be slashed. Humm has made some cost savings but thesehave been offset by new costs. The newcosts may be justified as business improvements, but overall cost disciplineneeds to go much further. Note that these terrible figures exclude the costsrelated to suspended products.

This is very frustrating because Humm’s major risk (lossesfor bad debts) is at quite goodlevels, and improving, in Consumer and is excellent in Commercial.

The highoperating costs were reflected in Return on Equity. Normalised return on equityfor the group in 1H24 was 10.0% v 13.0% in PCP:that blends a very strong 25.2% NROE in Commercial with a terrible Normalised ROE in Consumerof about 3.3% annualised. That figure was not released by Humm- it’s my own derivation.Again this Normalised ROE excluded the huge losses for suspended products which,if included, would cause roughly zero ROE for Consumer in 1H24 and FY23, and under5% in FY22.

Insummary: Humm’s credit control seems OK, and superb in Commercial; Humm wasbadly caught out by insufficient hedging of interest rate risk (a serious failureas maintaining a good net interest margin is a fundamental need of this business;suspended products (and the UK market) have cost a fortune and taken far toolong to close down; operational costs in Consumer are far too high and needurgent and severe action.

The jump in unrestricted cash to $159m at 31/12/23 was very positive;I hope that 2H24 will show a further rise. If Humm chooses to spend some of thiscash on M&A it must be very disciplined; otherwise Humm should resume theshare buyback while the price is at such a large discount to NTA.

DYOR. Not advice