Macquarie downgrades Latitude on outlook concerns after Humm deal collapse
The failure of the Humm-Latitude tie-up has nixed any potential for double digit growth for the Ahmed Fahour-led lender, analysts warn.
Macquarie has slashed its outlook on Latitude after the buy now, pay later provider terminated the sale agreement with fellow listed lender Humm.
Macquarie analysts said the deal’s failure meant Latitude faced the loss of an add-on that could have delivered “double digit” growth at a time when earnings were under pressure.
The analysis comes as Macquarie warns that lenders like Latitude may face lending losses close to “those we assumed for major banks’ consumer credit portfolios during Covid provisioning scenario analysis”.
Macquarie has cut its outlook on Latitude from outperform to neutral, with analysts noting they would be “watching consumer balance sheets closely” for a deterioration in the outlook for the business.
Latitude’s price target was slashed to $1.40, from $2.25.
Shares in the Ahmed Fahour-led business fell 10.7 per cent to $1.25 on Monday.
Macquarie analysts said BNPL operators were facing a riskier credit environment, but noted “consumer stress has yet to play out in numbers”.
Latitude is tipped as one of the most exposed lenders given its “materially higher skew to unsecured lending”.
“While we recognise the possibility of a recovery in travel, and therefore credit card spend as travel ramps up, we see an increased risk of earnings impacts from reduced consumer discretionary spend and higher impairments as rates rise,” the Macquarie analysts said.
“With a higher skew to unsecured lending than other non-bank lenders under coverage, we see the risk-return for investors as unexciting.”
The proposed tie-up with Latitude was pitched at giving the single operator scale to compete on razor-thin margins in BNPL lending. But Macquarie analysts said the failure of the deal did not mean the sale was dead for good, noting “there may be scope for the asset to be acquired subsequently at an affordable price should Humm’s operating performance remain a drag”.
The deal, which as first proposed would have seen Latitude purchase Humm for 150 million shares and a $35m cash payment, was scuttled on Friday after near overwhelming shareholder opposition.
In a market update on Sunday, Humm chair Christine Christian attacked former chairman Andrew Abercrombie for his “deceitful and … destructive corporate play” in opposing the deal.
Mr Abercrombie had mounted a vocal opposition to the sale, warning it undervalued the consumer lending division.
The deal, initially valued at $350m, had sunk in recent weeks to just $245m after sharemarket ructions.
Mr Abercrombie blamed Humm’s board for the failure of the deal, “who consistently positioned the consumer finance business negatively, creating an environment where Latitude could not credibly increase its offer price”.
Humm had said the BNPL division was under “significant pressure”.
“In addition, owing to the majority board’s failure to negotiate a ‘make good’ provision to require Latitude to pay cash to match any deficiency in the Humm share price below the $2 VWAP, the global market rout took the deal from a low value to a garage sale,” Mr Abercrombie said.
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