BNPL - Latitude Buys Humm in a Dud Deal

Latitude and Humm are both unsecured card based lenders with very small BNPL portfolios – this is not a BNPL play.

The credit card lending market in Australia is a total mess with cards only 1.25% of total retail lending – yet the AFR pce sings “will allow Latitude to compete… with major banks” which is total rubbish.

?Latitude only has $5 billion in receivables in Australia – down from $5.4 billion the prior year. Revenue at June 30th was $506 million down 14%, while profit a pitiful $89 million.

This is not a well-managed business, a pale intimation of GE Capital its predecessor before private equity got involved – its stock price reflects this at $2.00. ??

Humm is Not a BNPL?Business???

BNPL only represents 27% of revenue.

Humm is a?card?lending business?with 51% revenue coming from credit cards in?Australia?and NZ - plus leases makes it an?unsecured?lender.?

Total?consumer?receivables?- $1.865 billion - therefore $300 million in?Latitude?shares plus $35 million cash is very low – Humm were desperate to sell.

Card?businesses?are?typical valued?by?assets?or?customer?value (cost of?acquisition).?

New Zealand cards is Humms biggest business with $134 million in revenue – card lending in total make up 51% of revenue and 75% of profit.?

Humms BNPL?business?- revenue $120.6 million or 27% of total and 2% of profit – but….. BNPL bad debts $33.2 million or 56.5% of bad debts -?similar?with marketing expenses $13.3 million or 46% of total which just shows what a drain the BNPL folly has been.

Humm is a shadow of the original Flexi business, buying first BNPL player Adelaide based Certegy for $31 million in ?2008 – did they compete with Afterpay and then Zip (which changed its stance in 2015 to launch BNPL) with an app? No, not until it was too late.

Its not like it was a surprise, this incarnation of BNPL started with Klarna, Afterpay Holland (nothing to do with Afterpay Australia) in 2005, Affirm 2012 and many others before Afterpay Australia launched in 2014 - asleep at the wheel more like.

Credit Card Lending has Declined for a Decade

Once upon a time Australia was in the Top 10 credit card markets in the world - today its doesn't even make the Top 30 - yet Australia is 12th largest economy.

Credit cards continue a decade long fall – this is what the banks, Humm and Latitude are supposed fighting to reverse not being diverted into BNPL apps.

Australians starting switching to debit cards in 2009 – this trend has just increased with 51 million debit cards spending $435 billion annually up 14% on last year.

Consumer credit cards with $199 billion sales and BNPL with $11.4 billion are growing at single figures.

Credit card average balance owing $18.0 billion or 13.3% down on 12 months ago and down 47% from $34 billion in 2014.

The critical number is average balance per card?– Australia has $1072 or US$756 which is peanuts and very, very low by international standards, USA US$8076 with balance owing $6760, UK US$5674 with US$4350.

These are the critical numbers which are not being challenged or reversed.

Consumer cards credit/charge cards issued 15.7 million.

Australian consumers have cancelled 6.376 million cards since July 2016. (The last time Australia had 15.9 million credit/charge cards was February 2006).

?Financial Review is at it Again

This is very poor financial ‘journalism’ by the AFR and simply allows a CEO to spruik his stock – it’s more akin to PR than journalism.

No questions about the unsecured lending market and/or credit cards in particular, nothing on job losses – you don’t get $55 million in “annual cost synergies” without big jobs losses mostly in Sydney – Latitude is Melbourne based Humm is Sydney HQ.

Very little about the total implosion of the Australian BNPL market, which RBA figures clearly shows has peaked at $11.4 billion in 2021, which is 65 basis points of retail payments and BNPL stocks which have been routed in less than 12 months – let’s hope investors read more wildly than this pce.

Nothing about the global collapse of BNPL - leading players PayPal and Affirm have seen their stocks tank - down 66% and 78% respectively.

Nothing about Humm partner card clients many of whom compete with Harvey Norman or other Latitude clients – so expect heavy partner defections from the new entity.?

Putting two badly run businesses together won’t make a good business.

?

Latitude’s Ahmed Fahour explains why Humm will help it take on banks?

AFR James Eyers Senior Reporter?Feb 18, 2022

?Latitude CEO Ahmed Fahour said the acquisition of Humm will deliver profitable growth for shareholders as the combined companies push instalment payments into the solar, travel, healthcare, electronics and household furniture sectors, avoiding intense competition in buy now, pay later for small purchases.

Amid a market rout of listed BNPL stocks, Mr Fahour said the execution of binding agreements with Humm was well-timed as the retail sector reemerges after the omicron wave. He said the combined company was probably the only profitable buy now, pay later or instalment business globally. He added that the deal will allow Latitude to compete more effectively with major banks in personal loans.

Latitude, which will report interim results on Monday, and Humm recommended shareholders support the $335 million deal?first announced on January 6. That price tag delivers Latitude Humm’s $1.8 billion loan book, over 2.6 million customers and relationships with around 60,000 merchants.

Describing a “beautiful tuck-in acquisition” that will deliver $55 million of “truly amazing and highly value accretive” annual cost synergies, Mr Fahour told analysts he’s confident of getting regulatory approval, given Latitude competes with companies such as PayPal, major banks and other “global giants with no boundaries”.

He emphasised much of the focus for BNPL providers like Zip – whose shares are down almost 80 per cent this year – and Afterpay has been on high-velocity payments for relatively low-value transactions, paid back over a short cycles of about six weeks.

In contrast, Humm and Latitude fund larger purchases that can be paid back over months and even years, meaning they compete more with bank loans, rather than the credit card market Afterpay and Zip have targeted.

Latitude also has a different revenue structure to Afterpay, which only charges customers if they are late to repay. Latitude earns revenue from interest on loans and cards and, for its interest-free instalment products, charges monthly account service fees (typically $8.95 a month) and penalty interest rates (25 per cent) if loans aren’t repaid at the end of the term. It also charges merchant service fees. But it doesn’t report revenue split out for each of these categories.

Yet while Latitude is more like traditional credit providers in some respects, its strategy is also being influenced by two of the foundational elements of BNPL: driving incremental value to merchants through higher sales and order sizes, and making quick credit decisions at the point of sale. Mr Fahour said this distinguishes Latitude from the banks.

“We provide a service banks find very difficult – an unsecured loan for say $5000 paid over a couple of years,” Mr Fahour said. “For a bank that would take a lot of work and investment and time to cash, where we have a near-instant instore experience.

“Banks are not set up for that. You also need true, deep partnerships with merchants... [Banks] don’t work with the merchant but their consumers.”

Latitude has 5 million customers for its instalment products, making about two-thirds of its profit from fees on them, paid by customers and retailers. One-third of profits are interest-bearing loans to 150,000 customers, a cross-sell rate of around 6 per cent.

LatitudePay, its attempt to play in the short-duration small end of the buy now, pay later market, accounts for only $100 million of Latitude’s $7 billion in total volumes and this product will be killed, and rolled into Humm’s brands. (Humm’s credit card will move to Latitude.) At Humm, around one-third of its $1 billion in volume goes to small-ticket items with two-thirds for larger ticket items on which Mr Fahour wants to focus more aggressively.

Latitude already works with Harvey Norman and JB Hi-Fi, is the exclusive instalment provider for Apple in Australia and NZ, and also counts Samsung as a customer. It will now push harder into solar (where Humm has been a big player through its Flexigroup/Certegy business) and into healthcare and travel, both strong areas for Humm.

Mr Fahour told analysts he was as excited about this deal as the acquisition of StarTrack made when he was CEO of Australia Post.

“Think about how fortuitous our timing is,” he said. “I am sure it is not lost upon you around the world what is happening to this sector and where the prices have gone ... I would like to think commentators would think this is not only a good strategic deal, but our timing is not bad either.”

The deal will boost liquidity for Latitude’s shares, which have drifted from $2.50 to $2 since a compliance listing on the ASX in April last year.?About 65 per cent of the issued capital has been locked up with the vendors KKR, Deutsche Bank and Varde; half their stake comes out of escrow at the end of February. The deal will increase the free float of shares that could see it included in major indexes.

Humm will be paid for with 150 million Latitude shares and $35 million in cash, allowing Humm shareholders to participate in any upside if they hold the stock and Mr Fahour’s strategy comes off. Humm CEO Rebecca James will join Latitude.

Completion is expected mid-year subject to regulatory approvals by the competition and foreign investment regulators in Australia and Zealand and the RBNZ.

?On the economy, Mr Fahour said the omicron impact had bottomed out in January and “we are starting to see on all indicators a good bounceback in early February, and if that momentum continues it a great opportunity for us”.

He will brief the market again on Monday as Latitude releases its interim results. “For us, it is about B2B2C, where merchants, customers and ourselves work together to help a transaction to occur.“