consumer finance group may have to raise equity after profit plunge

One shareholder with around 1 per cent described the statement, in which the board said they still see merit in the deal that they agreed to terminate, as “delusional”.

Following Monday’s call for Ms Christian and fellow director John Wylie to resign, shareholders of the embattled consumer finance and commercial leasing group have told The Australian Financial Review their pleas continue to fall on deaf ears.

“They’re denying any kind of wrongdoing,” said one small shareholder of the directors.

“What’s consistent among every single investor I’ve spoken with, whether they supported the deal or not, was that they wanted the opportunity to decide themselves.”

Another said he was insulted by the board’s messages to Humm shareholders after it was made clear in an explanatory booklet released in late May that the deal lacked the support of the company’s founder and 23 per cent holder Andrew Abercrombie.

“They were so adamant in all of those statements that this was such a good deal and kept telling shareholders to support it. They were treating us like muppets – if we didn’t like it we didn’t have to vote for it, but they made the decision themselves. It was up to the shareholders to decide,” he said.

As many waited for the letter to arrive, one analyst saidHumm will have to raise equity following the collapse of its deal with Latitude Financial.

Andrew Abercrombie, Humm’s founder and major shareholder, has campaigned against the sale. Craig Sillitoe

Morningstar analyst Shaun Ler said the sharp deterioration in Humm’s profits revealed during the board’s battle to persuade shareholders to support the sale of the Humm consumer finance (HCF) division to Latitude left it at risk of breaching covenants.

“We are wary that Humm may breach its covenants. However, we estimate its market price already compensates for a dilutive raising,” Mr Ler said in a note.

Although Humm does not disclose its covenants, Mr Ler said its forecast equity-to-receivables ratio would fall to 17 per cent – ​​much lower than its five-year average of 27 per cent – ​​without a $150 million to $300 million raising.

Morningstar also cut its outlook for Humm, saying the “bearish rhetoric from Humm’s board on HCF suggests its near-term prospects are difficult”.

“The greater surprise was the revelation of Humm’s cash net profit after tax of $17 million for the fiscal year to May,” said Mr Ler. “Annualizing this sees a full year NPAT of $19 million, 59 per cent lower than the prior year. This is below our forecast of $28 million and the $25 million stated in [the independent expert] Kroll’s report.

While Ms Christian said the deal value falling below the $260 million bottom of Kroll’s range was the justification for walking away, Mr Ler said the profit downgrade suggested there had been a big change in the operating environment since it was written “only about a month ago ”.

“Higher interest costs and a delay in volume growth are the likely culprits,” Mr Ler said.

Ratings cut

Morningstar cut its fair value for Humm shares from $1.20 to 80¢, saying the cost of goods sold would average 5.5 per cent for 2023-24, up from 3.4 per cent, before going back to 4 per cent in 2025-26.

“We also forecast higher operating expenses, with growing signs that it needs considerably more outgoings than historically to operate,” Mr Ler said.

On Monday, Macquarie analyst Josh Freiman cut his rating for Latitude from “outperform” to “neutral”, saying without access to HCF’s receivables book it would struggle to grow earnings as much as previously forecast.

On Monday called shareholders for Ms Christian and director John Wylie to step down from the board, saying they did not act in their best interests by ending the sale.

Latitude had offered 150 million of its shares and $35 million in cash for Humm’s consumer finance division in a deal that was structured as a sale, requiring 50 per cent of shareholders’ support. The since-scrapped vote was scheduled for Thursday and early votes could be changed until Tuesday.

The deal was originally worth $335 million but with no “make-good” provision the decline in Latitude shares since January saw the value fall to $245 million last Thursday. Humm’s majority directors agreed to a mutual termination on Friday morning, saying the deal had fallen below Kroll’s fair value range floor of $260 million.

Ms Christian revealed on Sunday that 78 per cent of the 50 per cent of shareholders who had voted early indicated they did not support the deal, blaming a campaign by renegade director Mr Abercrombie to drum up opposition to the deal.

Mr Abercrombie said he was not opposed to a deal at a higher value, but other shareholders said they would have changed their votes to support the original offer if they had known it would be terminated before the vote.

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