HMY - Harmoney Corp Limited

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A premium PE would imply some underlying ongoing permanent advantage. In the case of Harmoney, they talk up their credit assessment methods. From the Prospectus p19:

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Credit assessment

Harmoney has invested in building (and continually improving) a proprietary credit scorecard to assess potential customers. The credit scorecard assesses both credit bureau data (positive and negative), and customer supplied information. The credit scorecard categorises customers across 25 credit grades in New Zealand, and 20 in Australia. From this, it is able to generate interest rates between 6.99 – 24.69% (New Zealand) per annum and 6.99 – 25.69% (Australia) per annum to optimise the risk‐return profile of loans within its loan book. The improved performance of this proprietary intellectual property over time is demonstrated through its increasing predictive accuracy. Harmoney has continuously refined its credit scorecard to ensure that Harmoney is able to make accurate real‐time decisions about approving and pricing lines of credit.

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They keep costs down by automating their debt collection tasks.

A further advantage Harmoney have is their partnership with Google. Google account holder behaviour is used to target prospective Harmoney customers. From AR2020 p25

"Harmoney also introduces its brand advertising to users whom Google has determined to have intent in the short‐term future to search for a personal loan. Google Smart Bidding accounted for approximately one third (35%) of new loan originations website traffic in New Zealand and Australia in FY20"

Again this process is automated.

From p42 we get more of an idea of the size and duration of loans that Harmoney is targetting:

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Personal loans in this segment of the market:

• are typically used by borrowers for purposes such as consolidating debt, financing home renovations, vehicle purchases or holidays, and funding other life events;
• are typically for principal amounts varying between $2,000 and $70,000 in New Zealand and A$2,000 and A$70,000 in Australia; and
• typically have maturities ranging from two to seven years.

The interest rates charged in the industry vary significantly depending on the credit profile of the borrower, and, for personal loans, whether the loan is secured or unsecured.

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A 7% interest rate secured loan is quite respectable. A 27% interest rate unsecured loan, you would hope for the sake of the borrower is short term (that interest bill would sting if the loan was for two years). p57 would suggest that most Harmoney lending is unsecured.

More information on typical Harmoney customers on p57

"Harmoney’s customers tend to hold stable incomes with over 70% having office, professional or trade occupations and are represented across multiple age ranges."

In summary, I think we are looking at high margin low running cost loans aimed at a demographic that should have relatively high paying jobs, giving a good chance of repayment. The prospectus reads in a very positive way. And if Harmoney can execute well, it may very well end up as a successful story. To me it does sound a little too good to be true though. There are plenty of other lenders, including Heartland, who would be very pleased to service the kind of customers that Harmoney is targetting directly. To me Harmoney's offering doesn't sound unique enough. Other lenders, like Heartland also claim fast digital platform approval of loans. I have no doubt that Google would been keen to market to their users to other financial institutions - not just Harmoney,

If Harmoney's proposed high profit margin can become reality, then due to the ability for other players to copy Harmoney's strategy, I still wouldn't invest with a long term PE of more than 15. That might correspond to a short term PE of 30 (reference: number pulled out of thin air). Nevertheless, I think Harmoney would have to put a lot more runs on the board before it could justify that IPO price. I would call this IPO speculative, with that next year's prospective PE of 100 in mind. Sometimes speculation pays off. But I am comfortable with Heartland managing 'my' investment in Harmoney for me, for now. I won't be seeking a direct stake,

SNOOPY

So it all boils down to the competitive advantage they can create and maintain through their proprietary Stellare system which will more accurately but very cheaply assess and rate borrowers. This will allow them to undercut competitors (esp bricks and mortars and people based models i.e. banks) on the proffered interest rates , and yet still enjoy profits and thus attract more repeat business and new customers.

Yes I agree Snoops, it does sound okay in the prospectus as a business model but I'm not bothered to take it any further, as someone said 'lending money at the beginning of a recession '???