Latitude double downs on BNPL

Thu 06 Jan 22, 1:19pm (AEST)
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Key Points

  • Latitude has put forth a bid to acquire Humm's BNPL business for $335m
  • The acquisition will skew Latitude's earnings away from lending
  • This comes amid free falling BNPL valuations as investors shift from tech stocks

Latitude Group's (ASX: LFS) plans to acquire Humm’s (ASX: HUM) consumer business which includes BNPL, instalments and cards services found favour with the market today, with the share price up 2.80% two hours out from the close.

The transaction will be a scrip and cash offering comprising 150m Latitude shares and $35m cash, valuing the deal at approximately $335m.  

Latitude expects annualised combined synergies and cash earnings from the acquisition to exceed $100m pre-tax in 2023. The transaction is expected to be double digit earnings-per-share accretive assuming full run rate synergies are achieved. 

Latitude Managing Director and Group CEO Ahmed Fahour commented on the acquisition, saying: 

“Humm's consumer business is highly accretive to Latitude’s shareholders. The proposed Transaction would enable us to accelerate the deployment of BNPL and instalment solutions for our customers and merchant partners in Australia/New Zealand and accelerate our growth in our international markets.”

BNPL leadership 

Latitude believes the acquisition will cement its position as a leading instalments and consumer lending business in the A&NZ region. 

Since acquiring Genoapay in December 2018 and the launch of LatitudePay in August 2019, the business has emerged as the 3rd most recognised BNPL brand, according to the company’s 2021 IPO prospectus. 

The transaction will create a combined Group with over 5 million customers and more than 70,000 merchants, predominantly in the A&NZ region. 

This figure could rival BNPL leader Afterpay (ASX: APT), which reported 3.6m active customers in its FY21 results. (Note: active customers) 

Shift away from lending 

The Humm acquisition will heavily skew Latitude’s transaction volumes and earnings towards BNPL-related activities. 

From a volume perspective in the first half to 30 June 2021: 

  • Instalments $2.11bn (57.9%) 

  • Lending $1.53bn (42.1%) 

In terms of operating income: 

  • Instalments $259.6m (61%) 

  • Lending $155.6m (36.5%)

  • Other $10.8m (2.5%)

During the same period, Humm delivered $473m of BNPL transaction volumes.

Needless to say, the post-acquisition Latitude will become instalments first, lending later.

BNPL investors look away

BNPL valuations have plummeted across the board amid a rotation away from technology stocks.

Smaller BNPL players like Splitit (ASX: SPT), Openpay (ASX: OPY) and Laybuy (ASX: LBY) are trading at record lows, down more than 50% in the last 12-months.

Things haven't fared much better for BNPL darling Afterpay, which has tumbled 40% since its Block takeover offer on 2 August 2021.

An optimist might view Latitude's move as an opportunity to pick up small but profitable BNPL player for cheap.

However, with the market currently pricing in the likelihood of at least 3 rate hikes in the US by December 2022. The prospect of higher borrowing costs could humble valuations of fast growing, richly valued companies.

Consensus does not cover this stock.

Based on Morningstar's fair value of $2.20 (17 November 2021), the stock looks undervalued.

Written By

Kerry Sun

Finance Writer & Social Media

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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