HUM LFS offer much too low

HUM’s FY21 and 20 profits were distorted by its large covid macro overlay provision in FY20 and write back of 50% of that in FY21. These reduced after-tax profit by $30.3m in 20 and increased it by $15.1m in FY21. Now assume, for example, that the Consumer business accounted for much of that provision and subsequent write back, say 12m after tax gain in FY21. If so, normalised Consumer cash NPAT in 21 would be roughly 1.2+ 16.8+ 26.1- 12= $34.1m.

LFS $335m proposal for Consumer is only 9.8x this: that’s a rather low multiple for the established credit card ops but very low for so-called high growth BNPL, albeit that that’s only recently (just) profitable at HUM. Moreover, LFS expects to make up to $70m (per annum, presumably) pre-tax synergy benefits from this acquisition by removing duplication etc, say $49m post tax; so LFS expects to enjoy an effective proforma FY21 NPAT contribution of approx 34.1m+ 49m = $83.1m, for which it’s offering only a 4x multiple. (Even worse on likely FY22 figures). Much too low.

Conversely, if the HUM Board believes that the whole HUM group should be worth $1B+, using peers’ multiples, as they recently said, but also thinks that $335m is an acceptable price for Consumer, that implies that they think HUM’s Commercial and Leasing division is worth over $665m. Yet C+L made only $22.3m cash NPAT in FY21. Even if you give it the benefit of the doubt and say that none of that result was inflated by the covid overlay write back in 21, that value imputes a PE multiple of (at least) 15x to C+L, to be consistent with what the board “believes” the overall group value is. That is much too high for an established and capital intensive business like C+L exposed to strong competition.

Either the board is absurdly optimistic to believe that HUM as a whole should be worth $1B+, or LFS is offering only $335m for Consumer, which- implicitly, to be consistent with the Board’s thinking - "ought" to be worth roughly double that. The truth is probably roughly in the middle

It is amazing that the board would even consider such a low offer.

This is not advice. DYOR