(Sept 9): Singapore-listed pawnbrokers ValueMax Group, Maxi-Cash Financial Services Corp and MoneyMax Financial Services have largely been under the radar, as investors tend to focus on larger and more visible companies. Unsurprisingly, their shares are either languishing or hovering near their all-time low, with an average daily trading volume of 100,000 shares. 

The lack of attention paid to these stocks, however, does not negate an investing opportunity. Gold prices, which have been climbing rapidly in recent months, could boost the performances of these pawnbrokers. In particular, a lower loan-to-value ratio may prompt a higher redemption rate, but if the pawned item is not redeemed, the company stands to benefit from reselling or auctioning it off at a higher price. Coupled with their undervalued status, pawnbrokers could be a good addition to one’s portfolio.

Since late May, gold prices have soared about 20% to trade at US$1,529.29 an ounce on Sept 2 — the highest in the last six years. Market observers reckon the precious yellow metal could climb higher. Howie Lee, an economist at OCBC Bank, says there is a chance that gold prices may surpass US$1,600 an ounce in the -medium term. 

The reason for this is a combination of  factors, according to Lee. Historically, gold prices tend to go on sustained bull runs when yields on 10-year US Treasury bonds fall below 2%, he points out. These yields are now trading far below that level. Coupled with the new global interest rate cut cycle and a slowdown in global growth, the supporting factors for gold’s upward trajectory appear strong, he says.

Kirsty Clark, investment specialist at M&G Investments, agrees. She notes that the trade war between the US and China, Brexit uncertainty and other geopolitical tensions are additional factors driving gold prices up. “Gold tends to perform well in times of heightened uncertainty and investor risk aversion,” she says. “The risk factors that have boosted interest in gold year to date remain. So, there is reason to believe the gold price can rise from here as investors look for safe-haven assets amid ongoing global uncertainty.”

Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers, has forecast gold prices to hit US$1,750 an ounce over the next 12 months. Breaching the US$1,900 level may even be possible over the next 24 months, he says, depending on the severity of the economic downturn. So, which pawnbroker should investors consider investing in?

Attractive fundamentals

The cheapest of the three is ValueMax. Based on its Sept 2 closing price of 28 cents, the stock has the lowest price-to-earnings ratio of 6.8 times and lowest price-to-book value of 0.7 times. This compares with its net asset value (NAV) per share of 38.45 cents as at June 30. The stock has an attractive 12-month trailing dividend yield of 4.7% and is flat so far this year. 

Apart from pawnbroking, ValueMax provides moneylending services — both secured and unsecured loans — to businessmen and corporates that have urgent cash needs. The company also sells new and pre-owned jewellery such as gold and diamond jewellery, gold bars and coins, branded watches and Hermès bags. In addition, the company’s gold wholesale trading company purchases scrap gold from other pawnbrokers and jewellery traders and sells fine gold bars to jewellery factories, wholesalers and retailers. ValueMax has 33 pawnbroking and retail outlets in Singapore as well as one jewellery retail outlet, one moneylending outlet and one remittance outlet. In Malaysia, the company has 11 pawnbroking outlets via associate companies.

For 2QFY2019 ended June 30, ValueMax reported a marginal y-o-y revenue growth of 0.7% to $55.4 million. The improvement in the top line came on the back of higher revenue contributions from the retail and trading of jewellery and gold, and from its moneylending businesses, offset by the lower revenue contribution from the pawnbroking business. Still, earnings surged 57.8% y-o-y to $6.7 million as its gross profit margin widened to 24.4% from 21.3% a year ago.

Amid higher gold prices, ValueMax says it intends to expand its network of outlets both organically and inorganically. “The group will continue to explore acquisition opportunities and suitable locations to grow our network of pawnshops and retail outlets,” the company says in the notes accompanying the financial statements.

For yield-seeking investors, investors may want to consider Maxi-Cash. Based on its Sept 2 closing price of 12.5 cents, the stock has the highest 12-month trailing dividend yield of 5.2%. As at June 30, the company had an NAV per share of 13.58 cents. However, the stock is the most expensive among its peers, trading at 12.1 times earnings and 0.9 times book value, despite a year-to-date decline of 7.4%.

Like its peers, Maxi-Cash has other businesses apart from pawnbroking. The company sells new and pre-owned jewellery, watches and luxury bags and its own brand of gold jewellery called LeGold. It also provides secured lending to corporates under its moneylending business. The company has 44 outlets across Singapore.

For 2QFY2019 ended June 30, Maxi-Cash reported a y-o-y revenue decline of 19% to $45.4 million. The weaker top line was mainly due to lower sales from the retail and trading of jewellery and branded merchandise, despite higher revenue contribution from the pawnbroking and -moneylending businesses. Earnings dropped 20% y-o-y to $2.8 million as gross profit declined. 

Despite being the smallest pawnbroker by market cap, MoneyMax has the largest pawnbroking chain of 72 outlets in Singapore and Malaysia. The company also sells pre-owned jewellery and luxury items such as watches and bags. It introduced the Love Gold jewellery collection in 2016, followed by the Peppa Pig jewellery collection — its first intellectual property (IP) jewellery series — last year. Moreover, the company via a joint venture provides financial leasing services in Chongqing and automotive financial services through its subsidiary MoneyMax Leasing. In addition, the company entered into a joint venture to develop a live B2B online auction platform with Tokyo-listed Aucnet in 2017. The platform focuses on luxury branded merchandise, and gold and diamond jewellery.

Compared with its peers, MoneyMax has the highest growth in the top and bottom lines for 2QFY2019 ended June 30. The company’s revenue grew 33.3% y-o-y to $45.9 million on the back of higher revenue contribution from its retail and trading of pre-owned items, and pawnbroking segment. Earnings jumped 20.6% y-o-y to $2.1 million despite higher expenses.

MoneyMax is trading at 11.6 times earnings and 0.7 times book value, based on its Sept 2 closing price of 13.9 cents. The company had an NAV per share of 20.75 cents as at June 30. The stock is down 7.3% so far this year.

High leverage 

While gold prices may continue to stay high, an improvement in the macro and -geopolitical environment could dampen gold prices. Clark of M&G Investments says circumstances are changing on an almost-daily basis. Thus, should one or several of these risks abate, a pickup in risk appetite could reverse the gains in gold prices, she says.

OCBC’s Lee says gold prices are unlikely to surpass the all-time high of US$1,900.20 an ounce in 2011, as the macroeconomic conditions were different then. “The potential downturn that we may be experiencing is far less in magnitude compared with the crisis of 2008. The US also launched multiple quantitative easing programmes then, which, owing to their initial novelty, sparked fears of uncontrollable inflation. On the contrary, the world is currently battling persistently low inflationary pressures,” he says.

The pawnbrokers’ high levels of leverage could also be a risk. Maxi-Cash had a net debt position of $280 million as at June 30, followed by ValueMax’s $266.5 million and MoneyMax’s $158.7 million. Still, Maxi-Cash had the highest liquidity, as it had a current ratio of 1.7 times as at June 30, followed by ValueMax’s 1.5 times and MoneyMax’s 1.3 times.

Competition from digital bank entrants

Over the long term, the pawnbrokers could face stiffer competition with the entry of digital banks. The Monetary Authority of Singapore began accepting applications for new digital bank licences on Aug 29 and will do so until Dec 31. The licences will be given out to non-bank players to engage the underserved segments of the Singapore market, that is, those not served by the traditional and incumbent banks. In particular, digital full banks will be allowed to take deposits from and provide a wide range of financial services to the retail and non-retail customer segment. On the other hand, digital wholesale banks will be permitted to serve small and medium-sized enterprises and other non-retail segments. The digital banks will start operations in mid-2021.

Hagen Rooke, counsel at legal firm Reed Smith in alliance with Resource Law, says firms already engaging the underserved segments, such as pawnbrokers, are likely to face increased pressure to differentiate themselves from digital banks. “Existing players will now need to identify the underserved market segments that the new digital banks are likely to target, and make a strategic decision as to how to respond to the [new] market dynamics. It makes sense for them to make this assessment now, while they still have first-mover advantage. There will no doubt be a broad spectrum of responses to this challenge, ranging from specialisation to collaboration and diversification.”

On the flip side, the digital bank licences could provide an opportunity for pawnbrokers to enter the banking space. “This is a great opportunity for existing players, as the new licences will increase awareness of digital services and the focus of the overall ecosystem will shift towards supporting them. For example, the micro-pensions and micro-insurance subsectors are likely to see a host of new product providers in the market, increasing competition and the services available to consumers,” says -Varun Mittal, global emerging markets fintech leader at EY.

So far, however, none of the pawnbrokers have publicly announced their intention to apply for the digital bank licence. Asked whether ValueMax has applied for a digital bank licence, CEO Yeah Hiang Nam in an interview with The Edge Singapore declined to comment except to say: “We are always thinking of how to adapt and innovate in the market.” 

Maxi-Cash CEO Ng Leok Cheng says the company does not intend to apply for a digital bank licence, as it prefers to focus on enhancing the digital solutions offered by its core businesses. While he acknowledges that competition from digital banks is “inevitable”, he prefers to look on the bright side. “Definitely, it is not a zero sum game. Both can co-exist,” he says. “The important thing is that you can learn from [the competition] and, hopefully, [that] keeps us on our toes.” MoneyMax did not respond to queries from The Edge Singapore.

For now, pawnbrokers could become an attractive investment option as long as gold prices stay high.