HUM good and bad, page-3

Hi Silver Trade.

Thanks for your analysis. I acknowledge your valuation comments, with some precautionary qualifications. I’ve used the PE method, with some adjustments, below.

I’m unclear where you saw “Normalized diluted EPS (provided as 0.008 in 2023)”: The eps in Note 18 of AR 2023 of minus 0.4c is derived from statutory profit, not even cash profit.The most useful figures are normalised epsin table 4.3 on P32. I confirmed with Humm that 13.67c for FY23is normalised and diluted for the potential equity awards in the LTI scheme. Humm warned me that the other figures (FY22 and before) on that line-described as "cash eps"- are based on their old profit called Cash NPAT but not normalised, which makes the table very confusing.However, the 13.67c for FY23 is definitely normalised and diluted.My equivalent (see later) is 15c normalised but before dilution.

I wouldn’tapply a PE as high as 15 to HUM, especially in the current market which is applyingvery low valuations to the whole finance co sector-much lower than PEs for banks.Even in a more normal market I wouldn’t use a PE of much over 10, as these cos are very highly geared and so much higher risk than most listed cos.

Price/ Book.Please see my notes below: you have to deduct the sub debt which is, confusingly,held in “Shareholders Equity”).P/B is a useful check but I wouldn’t rely much on it.Except in some special cases it uses net assets at cost less depreciation. Successful cos ought to be worth (much) more that- i.e. ought to be able to generate more than merely maintaining their cost of assets. Cos valued below BV- except in the short term- have destroyed value- or at least their stock market price equates to that opinion.

I feel your EV istoo bullish. An EV multiple of 8 is equivalent to a PE multiple of 12.5c x pre taxcash flow (assuming cash long term aligns with ebitda) and a PE of 17x aftertax earnings. I agree with your rationale but I’d use a much lower EV multiple.You say “For the stock price to reach $2.50 using a P/E ratio, Humm needs to achieve an EPS of $0.167” You re using a PE of 15 for that. This is ofcourse a subjective choice, but I wouldn’t want to go above a max of 10 in the currentmarket; certainly not until Humm’s earnings have stabilised and the market is convincedthat is has permanently stopped the large losses in suspended products. Re Normalised eps pls see figures below. Humm itself said Norm eps for FY23 was 13.67cfully diluted, and this supports my figure of 15c without dilution.

I accept that all these mattersare subjective and interrelated- i.e. what is a fair value for PE, DCF and P/B.I don’t feel that $2.50 is achievable forHUM, unless the market radically rerates the whole sector, not just HUM, and HUMdoesn’t deserve that- yet.On a PE of 10a price of $2.50 needs eps of 25c compared with 15c now (and that is using thevery benign “normalised” profit measure which excludes all the bad stuff of thelast 3 years. 25c eps would be $123m pa after tax earnings. On true shareholdersfunds excluding sub debt ( i.e. $521m) that would give ROE of a very high 24%.As it happens, Commercial IS achieving thatnow. The problem is that Consumer made only 3.3% ROE in 1H 24 even using normalisedprofits. If Humm can turn Consumeraround to match the superb performance of Commercial a $2.50 price might bejustifiable- but I reckon that needs at least two more years of hard work andruthless decisions.

Group Normalised CashPAT

	$m	1H24	FY23	FY22	FY21
1	Commercial	21.6	42.3	35.2	15.5
2	Consumer	6.5	32.7	41.7	53.5
3	Group	28.1	75.0	76.9	69.0

	Approx Norm’d eps	11.3c*	15c	15.2c	13.5c

* Annualised ^ before dilution for performance shares

Maintainable earnings(my estimates)

Commercial $42m pa x 7 = $294m

Consumer$32m pa x 6 = $192m

I am comfortable that to use PE of 7 and 6 is very cautious; I chose a slightly higher PE for Commercial as its record is stronger and less erratic. I concede that it would be OK to increase these PEs a bit, say to 9 and 7.5. That would increase my valuation below by $132m or 26 cents per share to $1.10.

Proforma valuation at31/12/2023

		$m
1	Unrestricted cash	159
2	Corporate debt	(61)
3	Subordinated debt	(54)
4	Working Capital	(30)	Note 1
5	Commercial	294
6	Consumer	192
7	Capex	(85)	Note 2
8	Total	415m
9	Value per share	84c

Note 1. From the unrestricted cash I have deducted $30m for working capital for operating expenses, to avoid double counting with the valuations of the two divisions.I.e. for caution I have assumed that the valuations of the 2 divisions need an implicit amount of cash to fund working capital = 1.5 months of operating expenses; without such cash the two divisions couldn’t function.

Note 2 To reach its Normalised cash profit Humm adds back expense of depreciation etc as a “noncash” time. I think this is invalid: the business must spend money to maintain capital items and IT etc. Most of the expense is for IT and software.I have therefore deducted an amount to allow for cash expenditure on capital equipment and IT. The average amount Humm added back for FY22 to 24 was $18.6m pa pre tax, or $13m pa after tax. I have capitalised this at the same average PE of 6.5 that I used for the businesses valuations. It’s necessary to neutralise Humm’s Normalised profit against for this, as it overstates profitability.

I don’t object to Humm normalisation calculations removing losses for suspended products (as they should, I hope stop now); nor for adjusting the noncash element in the AASB9 determination of the credit loss provision (i.e. to show only the actual cash write off for bad loans, and remove the adjustment caused by the accounting policy, which can make the credit loss for accounting purposes very volatile).

At 31/12/23 there were 495,152,650 ordinary shares

Book value at 31/1223 of $574.6m included the $53.6m subordinated debt within “shareholders equity”for accounting purposes because it doesn’t have a fixed repayment date.This must be removed to get true book value because it is a debt, not an equity instrument; it belongs to the co that owns F+P Finance (this is a relic of FY16 when Humm bought its NZ credit card business from F+P) The true book value at 31/12 23 was therefore $521m =$1.05 per share.

I’m desperately hopingthat the results tomorrow contain no more garbage or horrors. 1H24 was very disappointing.Not advice. DYOR