Humm looks for takeovers as cash profit drops 25.3pc on margin squeeze and rising costs

Humm Group is on the lookout for smaller rivals to snap up after reporting a 25.3 per cent drop in annual cash profit after tax to $51.1m.

Humm Group is on the lookout for smaller rivals to snap up after reporting a 25.3 per cent drop in annual cash profit after tax to $51.1m on the back of falling margins, and increased expenses as it branched out into new products and expanded overseas.

The group’s buy now, pay later consumer finance division – that had been subject to a controversial and ultimately failed takeover offer from Latitude Financial – posted a 51.4 per cent drop in cash profit after tax to $22.4m, even though volumes rose during that period.

Humm chief executive Rebecca James said as market conditions worsen in the BNPL sector “we will see consolidation” adding that its decision to separate out its BNPL business – ahead of the failed Latitude takeover – from its other operations makes it easier to take advantage of weaker rivals.

“We are looking for small, accretive acquisitions from businesses that don’t have the strength of balance sheet that Humm has,” Ms James told The Australian. “The separation gives us optionality to take advantage of opportunities as they occur in the market.”

Humm has moved to cut costs at its consumer finance unit and since May has increased merchant service fees by 125 to 150 basis points for a $4000 ticket item – the median price of a Humm purchase – over an average three-year term.

“We have taken steps to rationalise our products to align with our vision of being the favoured way to pay for bigger purchases, resulting in the closure of bundll and humm in NZ and hummpro,” Ms James said.

The products combined contributed to a cash profit after tax drag of $17m in the 2022 financial year, she said.

Once the market darlings, BNPL players are now in a vicious cycle as competition among players has increased, funding costs have risen sharply, and rising inflation is leading to increased defaults on payments as the economy has slowed.

As competition intensified, the majority of Humm’s board had pushed to sell the consumer lending arm to Latitude, warning the unit was not profitable.

However, the largest shareholder and outlier board member Andrew Abercrombie had vocally opposed the deal, concerned it undervalued the potential of the consumer lending business, with recent market falls only worsening the potential value shortfall.

Eventually, the majority of the board gave up on the sale and resigned or announced their intention to leave en masse, with only Mr Abercrombie to remain.

Meantime, over at Latitude, CEO Ahmed Fahour announced his surprise resignation last week.

As part of its profit statement for the year ended June 30, Humm posted a statutory net loss of $170.3m, including a non-cash write off of $162.8m for intangibles.

Humm reported a 20.6 per cent increase in receivables to $3.3bn and said it had $112.7m in unrestricted cash. The company also announced a “proposed” fully franked final dividend of 1.4c a share, taking the full year dividend to 3.1c per share.

“At the group level we are focused on our core business as a bigger ticket instalment financier across both our businesses,” Ms James said. “We have taken a disciplined approach and prioritised our strategic initiatives resulting in the closure of certain products and a focus on margin to ensure that we are in the strongest position to continue to grow our business in a profitable and competitive manner.”

The high-profile consumer finance unit has taken steps to improve profitably during the period, including shutting down struggling divisions such humm NZ, and transition its Little Things product offering to be a part of its Big Things offering.

Humm also obtained a credit licence in the UK later than it had anticipated, which resulted in lower volumes than forecast.

“In response to the changing macro environment, the Consumer Finance business will refocus on its core products, platforms and systems that deliver the greatest customer experience and opportunities for profitable growth,” Ms James said.

“Humm group has reprioritised its focus on its core strength – partnerships across its cards and point of sale businesses, in particular, in its larger ticket point of sale instalment offerings.”

Experts have suggested that once interest rates rise above 2.65 per cent, every BNPL transaction is underwater. Analysts have said delinquencies are already rising, and Treasury is currently undertaking a review of BNPL to decide whether to classify the product as credit.

Had Humm continued with the proposed sale of the consumer finance unit to Latitude, investors would have received 150 million Latitude shares and $35m.

At the time the deal was announced, it valued the business at $350m. This had fallen below $245m by the time the sale was called off.

Humm shares closed up 5.41pc at 58c on Thursday.