Harmoney Corp Limited (HMY) Earnings Call Transcript & Summary

[Audio Gap] quarterly performance update. My name is Michael Pegum from Ethicus Advisory Partners. And we are pleased to have Managing Director, Mr. David Stevens; and Chief Financial Officer, Mr. Simon Ward, with us to present the company's performance for the 9 months ended 31 March 2025. A bit of housekeeping. The company will answer investor questions at the conclusion of this presentation. [Operator Instructions] I will pass over to Mr. Stevens to commence the presentation. Thank you this morning for your interest.

Hello, and welcome to Harmoney's Third Quarter 2025 Trading Update. I'm David Stevens, the CEO and Managing Director of Harmoney. With me today is Simon Ward, our Chief Financial Officer. We're looking forward to sharing our continued strong progress with our first half momentum continuing into our third quarter and answering any questions you may have. Now turning to Slide 2. Today, I'll begin with an update to our financial year '25 profit guidance, then our third quarter year-to-date financial results before discussing our outlook, introducing our new on-market share buyback program and then a reminder of the embedded value in our business before responding to your questions. Now turning to Slide 3. The third quarter financial year '25 has seen a continuation of our first half momentum as continuing loan book growth and widening lending margins combined with ongoing disciplined cost management, enabling us to upgrade our current year cash NPAT guidance from $5 million to $5.5 million. We remain on track to achieve 20% cash return on equity run rate in fourth quarter '25 with 14% already achieved in this year-to-date. The New Zealand transition to Stellare 2.0 remains on track to be completed within financial year '25, with all new customer lending now on Stellare 2.0 from fourth quarter '25 and the migration of existing customer loans also well underway. Our year-to-date loan portfolio net interest margin is 9.1% and our new lending margins continuing at over 10%, which we expect our loan portfolio to finish the year comfortably within our 9% to 10% targeted range. Next year, financial year '26, we're continuing to target our cash NPAT of over $10 million and a cash return on equity of more than 25%. This will be driven by accelerated loan book growth from having fully transitioned to Stellare 2.0 in both countries. With the New Zealand Stellare 2.0 rollout and migration completing by 30 June 2025, we're looking forward to shifting significant resources to product innovation in financial year '26, driving further top line growth across the business. We also expect to maintain our net interest margin within our targeted 9% to 10% range through financial year '26 as we accelerate our loan book growth. Now turning to Slide 4, updating our key metrics for year-to-date. Our loan book has now reached $798 million, a 5% increase compared to the same point last year. This growth has been driven by the strong origination performance of Stellare 2.0 in Australia, where our loan book has grown by 16% to $464 million. Originations remained intentionally subdued in New Zealand, awaiting the full implementation of Stellare 2.0 in that market, resulting in the New Zealand loan book contracting by 6% to $368 million. Our net interest margin has continued to improve, up by 30 basis points to 9.1%, driven by our new lending, continuing at greater than 10%. Year-to-date credit losses are at 3.8%, down from 4.1%, and 90-day arrears remained low at 0.69%. These positive trends are driving the 60 basis point increase in our risk-adjusted margin to 5.3%, up from 4.7%. Our focus on automation and scalability is evident in our exceptional industry-leading low cost-to-income ratio of 18%, down from an already low 21%. Now turning to Slide 5, which looks in more detail at our capital position. Harmoney has a well-diversified funding program with warehouses from 3 of the big 4 Australian banks as well as being an established capital markets issuer of asset-backed securities. As is typical with warehouse and asset-backed securitization funding arrangements, Harmoney's own money is also invested in its loan book. The strong credit quality of Harmoney's loan book means that we can be extremely capital efficient with borrowings supporting 96% of the current loan book and Harmoney providing the rest. That capital efficiency also means that Harmoney's existing accessible cash reserves of more than $25 million are sufficient to support loan book growth of over 50% to $1.2 billion without any need to raise further equity. In addition to those existing cash reserves, Harmoney being profitable enables us to reinvest profits as our equity in further loan book growth, taking growth well beyond the $1.2 billion supported by existing cash reserves. This year-to-date has been an example of just that, with this year's loan book growth being entirely funded from this year's profits and growing our cash reserves from the start of the year. Now turning to Slide 6, which introduces our new on-market share buyback program. The Board and management sees significant value in Harmoney's equity at current levels, and so today announced that Harmoney will undertake an on-market buyback of its own shares. Following the buyback, given Harmoney's strong cash NPAT results, capital position and outlook, it expects to be in a position to repay some of its corporate debt, which can be done without penalty from December '25, having already canceled $7.5 million of undrawn corporate debt. Following the above actions, Harmoney will also retain substantial cash reserves to materially grow its loan book into the future financial years without the need to raise any equity. Harmoney is authorized to buy back its ordinary shares on market without shareholder approval, provided the number of shares it acquires within a 12-month period does not exceed 5% of its total shares. The buyback will commence on about 13th of May 2025 and will end no later than the 29th of April 2026. Now turning to Slide 7. Next, I wanted to take a moment to reiterate an important insight from our half year results presentation, which is a significant value that is embedded in Harmoney's existing loan book, which may not be well understood. You can see in the chart on the left that Harmoney's own equity in loans on its balance sheet plus its net cash, that being our cash less our corporate debt, totaled $50 million. Then on top of this, the expected risk-adjusted income for the loan book is at least an additional $70 million with risk-adjusted income being the net income after deduction of funding costs and credit losses. This takes a total embedded value in just the existing loan book to at least $120 million. Importantly, the $70 million of risk-adjusted income is based on our realistic typical repayment experiences with some borrowers paying off their loans ahead of schedule as we do not impose any fees or penalties on them for doing so. If we calculate it based on the contracted repayment schedule, the embedded risk adjusted income would be significantly higher than $70 million. Then moving on to the right-hand side of the page. There is additional value embedded in Harmoney's business model, our proprietary platform and processes. We have our proprietary highly automated customer acquisition and credit assessment engine in Stellare 2.0, which delivers over 10,000 new applicants creating an account every month. Our great customer experience then sees our customers returning again and again for their future borrowing needs at next to 0 additional cost to Harmoney due to our direct relationship with those customers. Our AI attracts prime borrowers at a net interest margin of over 10% and a risk-adjusted margin of greater than 5%, and we do this at an 18% cost-to-income ratio. We also have an established and diversified funding program in place with warehouse funding from 3 of the big 4 Australian banks and an ABS program with existing total capacity of over $980 million for immediate growth needs and the market confidence to expand beyond this when required. Now turning to Slide 8. We're about to move to -- on to answering questions that have been raised during this presentation, but I'd like to take this opportunity to remind you that Harmoney has set up Investor Hub, which is a dedicated platform for investors to learn more about us and engage directly with Harmoney's leadership team. I'd encourage you to sign up as this is where we regularly post new content, including videos accompanying our ASX announcements, interviews, research reports and webinars. If you think of any questions after today's presentation is completed, I'd encourage you to log in and ask those on Investor Hub. We will now endeavor to respond as quickly as we can. Now we will turn to answering your questions on today's call. Thank you.

Thanks, David. Thanks very much for that. Obviously, quite numerous questions here in the Q&A field, so I'll start the batting with can you explain how the company plans to balance the buyback versus funding the equity portion of the loan book growth and how you model that loan book growth.

Yes. Obviously, we'll retain enough cash in the business to achieve our forecasts. And as I said earlier, once we get the migration done and New Zealand live on Stellare 2.0, a lot of our resources frees up to work on product innovation, in particular. So we've got that modeled in. The buyback is up to 5%. We don't have to get to 5%. We don't have to do any. But obviously, we see value in where -- for all shareholders in where the current share price is. And yes, obviously, we've modeled this out. Yes, that's what we do. We give guidance out, and we model that and we have buffers and things like that in there built in. But yes, absolutely. We don't -- we're well across the capital position of the business.

Beautiful. Thanks, David. Next question. It obviously looks like the warehouse facility has increased, but the question is, is there appetite to lift the level of access to that warehouse facility. And if that occurred, would this lift the pace of growth and profitability?

The question's referring to -- look, we speak to the banks weekly. The banks are very supportive. We've increased the current warehouses by $80 million in the last 3 months. There's absolute appetite from the banks, and we always have the option to securitize the portfolio as well. So there's plenty of capacity. Obviously, we don't have too much capacity in any one time because you pay undrawn line fees and those things. So that's important getting that balance right. I guess importantly, facilities have all been renewed for long term, and we ensure that our facilities renew at different times. You don't want all your facilities renewing at one point for obvious reasons in case there's a downturn in the cycle or there's some tariff program running in another country that we've got no control over. So we're very conservative on how we manage our funding lines and our capacity in our renewal periods.

Beautiful. Thank you. Another note of congratulations with a question around looking at the loan book growth at average around 7% annual growth run rate in the previous 2 quarters and has increased to about 8% in Q3. The question is, is this a start of an upward trend or just statistical noise.

Yes. Look, I think it really comes back to the point around our platform. Our platform is our business. We're very different to other fintech lenders, if you like. We -- our platform finds the customer right through to settles a customer. We're not a broker model, where introducers come in, and the platform's just used to facilitate the transaction. We've talked a lot about Stellare 2.0, which has obviously been live across Australia. It's live in New Zealand on new loans, but once that's fully migrated, we'd expect the loan book growth in both countries to pick up. As you know, more customers we bring on to our platform, as new customers come back for their returning and repeat loans, we get a huge chunk of that, which creates a start of the snowball. So the new customers start of it and they -- that goes into a snowball, which becomes bigger and bigger as we bring more customers into our platform. So yes, I wouldn't say statistical. It's starting to -- yes, as I said, once we get resources fully off the migration and the rollout, then they can obviously move on to product innovation alike, and that's where we expect to get the top line growth from while we've got continued focus on new business and existing customers as opposed to a new platform and migrating a platform.

David, good question here from [ left ]. Great to see the buyback announced in addition to cash NPAT guidance upgrade to FY '25. Looking beyond that and looking ahead, both should impact the FY '26 cash NPAT guidance and ROE, but both of those remain unchanged. Is it a wait-and-see thing?

Not really. Look, we only gave the guidance out for -- or the target out for '26 2 months ago if you look at the end of February -- at the end of April. So look, we'll look to ideally improve that number in the -- in our August -- or our June results. So yes, look, we're comfortable with that number. There is a plus next to the $10 million. Probably worth focusing on that. But yes, look, we'll look to narrow that number off, confirm that number as we get towards the end of the year.

Fair enough. Our next question, re other segments, auto and personal loan segments, how they're performing. Also, has volatility in markets affected the cost of swaps and your cost of funding?

Yes. So look, we're really predominantly in the personal loan segment. We're not in auto per se. We've got a very small part of -- where 1% of the books is our auto product that we launched a few years ago. We really parked that one when we started building the new platform. But auto is obviously an area that we may look to go into as part of that product innovation that I spoke about. So I guess, watch the space there. Look, the volatility in markets, not -- yes, equity markets obviously had an impact on the debt markets, again, -- and this, right, comes back to my point I just raised. We don't have all our funding coming due at 1 point in time deliberately. So you don't get sort of stuck on taking a higher rate across your book. So it hasn't really had an impact at all to be honest. And as I said, most of the book's hedged anyway. So a few weeks of volatility or a few months of volatility, to be honest on the size loan book we have, is a rounding error.

Thanks for that. Next question, is the $70 million risk-adjusted income embedded in the existing loan book discounted? And if you could talk to any assumptions around that, would be great.

I hand that one over to Simon because he's a little bit closer to that model.

Yes. So it is discounted to the extent that, as Dave mentioned in the presentation, it doesn't include the full contractual payments. It's based on our experience of payments. And then, yes, there is a discount rate applied to it to discount that back to today's values.

Thanks, Simon. Probably more question around geographic diversity. I don't think you have any plans here. Is there any thought about additional geographic areas where Stellare could be deployed. David?

Look, Stellare definitely could be deployed in different geographics out of Australia and New Zealand, but there's absolutely no short- or medium-term plans to do that. We feel the significant growth that we can get off the back of just Australia and New Zealand are now having our resources on a brand-new state-of-the-art platform. So there's plenty of growth to come in Australia and New Zealand. But talking longer term, yes, it absolutely is built in a way that you could use it beyond these -- the shores of Aussie and Kiwi.

Fair enough. Two-part question here. Question around the background of the composition of the corporate loan. And also will the company continue to do quarterly reports?

Yes. The corporate loan is pretty vanilla in terms of this space. So a loan over the corporate entity doesn't conclude the warehouses where all the loan contracts sit. Yes, this is our third one. We've had it since Harmoney has been in existence, and it expires on June '26, and we can early repay all or part of it from December '25. We'll obviously look to renew the terms on that facility the second half of this year. And for the quarterly updates, yes, look, we obviously aren't required to do quarterlies because we're cash positive, so we don't have to do [ 4 Cs ]. But we choose to do them. This is the first time we've done a call for a quarterly. So I'll do a call every quarterly, but obviously, with announcing the share buyback and obviously, the rest of the results, we thought it was a good opportunity to do a call.

I suppose adding to that, David, the quarterly updates you do only outside the interim and final reporting periods also.

Yes. That's all, obviously the quarterly. Yes, so the September and the March quarter.

Yes. Fair enough. I think you asked and answered this one. Is tariffs having any impact to you?

None. The short answer is no.

Are you factoring further decline in interest rates when forecasting your cash NPAT in 2026?

No. Bear in mind, we borrow off swap rate. We have hedges in place. So that's a good point to sort of highlight. Like our new lending margin's over 10% net interest margin, whereas the book's at 9.1%. So it does take quite a while for -- even if interest rates were to drop tomorrow, the impact on -- doesn't have a huge impact because it takes a while to flow through the book. But no, we haven't baked in -- we tend to operate around margin, so if the interest rates drop a little bit on funding, we might pass it back at the top level as well. So -- but no, there's no interest rate reduction built in to get to that number.

Thanks for that. Just could you remind us the average loan size and the duration for new originations?

Yes. So it's around $18,000, the new loan size, the returning customers more like [ 25 ]. And then duration is normally around 2.5 to 3 years.

Beautiful. Question around cost-to-income ratio of 18%. Is that just about optimized or can we expect to further drift lower?

We'll always try to make it lower. But really, yes, that will be coming from increasing income rather than -- we will have a little bit of saving when we shut Stellare 1.0 down completely, but we don't have any plans to increase management teams or the like. We've got -- we are a platform business, and we said that from day 1. We can grow this business to multiples of what it is with largely untouching that cost base. That's the beauty of the platform. That's what we are. And that's why we've got the market leading one there, and we can continue to do that. So there's absolutely a reason that, that should continue to come down if we just don't have to increase the cost base. Sure, we have a few more collectors as the book gets bigger, that's fine. But you're not talking a big cost to the business.

Yes. I'm just going to consolidate a couple of questions here around questions that have been asked a bit around customer acquisition costs but also more around repeat customers coming back and basically, if you give a comment about sort of repeat business metrics.

Yes. So we typically historically have had for every customer that borrow -- took out a long with us, say, for $20,000, had come back and taken out another $28,000 over the next 5, 6 years. That's the experience we've had in New Zealand. That experience is similar in Australia. It's a little bit wonky at the moment because we -- with the new platform, there's a few different rules in there and things like that. So we're moving around a little bit. But it's -- that's roughly the -- what happens with our existing customers. It's a big part of our business because we have an -- we have a direct relationship with them. So we market back to them to come back to us. We don't have to go through brokers and relying upon that to get the customer back. So it is a big piece of our business, and we have a big campaign around that. We expect to -- yes, that's the part of the business which we expect to keep growing. And again, that snowball I talked about earlier, the more customers we bring on into the platform, the more customers that come back for repeat loans. And they don't get charged fees. They can early repay the loan at any point, even though they get a fixed rate, and they don't pay any break fees at all. So that becomes very attractive for customers to use us for points of time. But we have a lot of really high-quality, what you classify as very, very prime customers that are coming back and taking out loans for 12 months, so might be waiting to refinance their mortgage and want to do something to their house in the meantime and rather take a loan with us that they can pay off and then consolidate into their home loan, get the heaps of that. And that's fine. That's the way our model works.

Fair enough. I'm going to consolidate 2 more questions, Dave. It's around net interest margins and how they're tracking. Obviously, with improvement to 9.1% and new lending being above 10%, is that level sustainable? And what are the key factors that could impact that in the future?

Yes. Look, obviously, we've always had a stated 9% to 10% sort of target range for our NIM. Obviously, as more of that 10% comes back into -- of the newer business becomes a bigger portion of the loan book. That tracks that 9.1% up. Look, interest rates in personal loan space haven't really moved that much. Obviously, if the base rates start to fall down, you might see banks lower credit card rates and things like that. It's important we sit -- our loans sit around the sort of credit card interest rate or lower -- ideally lower than the credit card interest rate, so -- which we focus on. But I think if that comes down, our cost of funds comes down as well. And remembering, it's only on the new business. So the new business lending rate comes down, our funding rate comes down as well. So I think it's pretty well matched.

Fair enough. Just a question around risk adjusted income of the $70 million. Does that include operating expenses or only the interest expense?

Sorry, I missed that one.

The $70 million risk-adjusted income, does it include operating expenses or only interest expenses?

It includes interest expenses and losses. It doesn't include operating costs. It will be very minimal in that scenario.

Fair enough. We're coming to finishing post here. Just a question around the -- I think you've answered this about the mix of -- the question is about do you think the buyback is the best allocation of capital given the life cycle -- where you are sitting in the life cycle of the company and isn't scale the biggest driver of ROE for Harmoney and unlocking that scalability.

We've got plenty of cash to do that. The reality is the share price has been significantly undervalued for some time, and the Board feels the best -- and management feels and the best views of all shareholders to commence a share buyback. As I said, we're not -- we're up to 5 -- it's only up to 5%, which you're talking is like a couple of -- $2.5 million or $3 million. It's not going to change the world as far as our capital position. But I think it just shows the market that we believe that the stock is undervalued, and it's the best interest of shareholders to buy back that stock if at these depressed levels.

Fair enough. Final question just around the balancing act of growing originations and improving the credit quality at the same time. How does the company think about that?

Think about it every minute of every day. Obviously, getting that mix right is critically important. And I think we're doing a pretty good job at that, right? The reality of it is you've got to take some loss because you've got to let enough in the top. Particularly as a direct business, we don't have filtered deals, where a broker might have filtered them out because they're not going to get through or they send it to a particular financier that likes different risk appetite, right? We get everything, and we get everything from the real top end of town customer to someone that we would never lend money to and everything in between. So I think the new platform is really -- is another step above where we were on the old platform in terms of that and as we are aging as a business as well, we've been doing this in Harmoney for over 12 years now. And I was running Flexigroup before this. And it was years and years and years of experience that you had in your scorecards and your credit decisioning that really helped you get that mix right. It's -- we can all talk about AI and all this stuff that you can build credit models from. It's not there. You need real data, real history to be able to build these things up, and it does take time. It's exactly the same when obviously that -- the time at the wheel, I suppose, both from a company perspective and from a management experience perspective is critical. And I think we're getting that mix pretty right. We're targeted. If we can make a 5.5%, 6% risk-adjusted margin, that's a great outcome for everybody. That basically means for every $100 million we put on the loan book, that's another $6 million in profit. And that's sort of way we sort of focus the business around that, and that's sort of our target sits. So getting that mix right is important and something I said, we look constantly tweaking that. And the new platform allows us to tweak that a lot faster than what we would have been able to in the past.

Right, yes. It looks like we've exhausted the Q&A chatbox and...

And the hour.

And the half hour. So what I will do now, David, is pass back to yourself to -- for any closing comments.

No. Look, thanks, everyone, for the time. If there's any further follow-up questions, please e-mail us through Investor Hub, and we'll do our best to get back to your questions. Thanks very much for your time, and have a great day.

Cheers. Thank you. That concludes our presentation today. And everyone, thanks for your interest and attendance.

Thank you.