SINGAPORE (Sept 7): KGI Securities has initiated coverage on ValueMax at “buy” with a target price of 39 cents, based on a price-to-book (P/B) ratio of 1.15 times FY17F estimates and in view of robust future earnings growth as well as a lower-for-longer interest rate environment.

The group operates pawnbroking and moneylending services, as well as deals in the retail and trading of pre-owned jewellery and gold.

In a Thursday report, analyst Colin Tan highlights how ValueMax’s high-margin moneylending business, which was started in 2014, has fuelled “remarkable” earnings per share (EPS) growth of 54.9% and 17.9% in FY15 and FY16, respectively, and says he expects strong growth momentum to continue in the next two financial years ahead.

He sees the stock as undervalued at a P/B of 0.9 times.

Overall, Tan says he appreciates Valuemax for its strong growth engine through moneylending, and says its “recessionary-proof” business model could stand to benefit from rising gold prices.

Based on the analyst’s observations, revenue from this particular segment more than doubled in each of the past four quarters, while the expansion of its pawnbroking business may see higher revenue contributions on the back of a continued recovery in gold prices.

“The group is also poised to benefit from rising gold prices which could enhance the yield on unredeemed pawn pledges and higher sale prices to scrap gold traders,” says Tan.

“ValueMax continues to see lacklustre contribution from the retail and trading segment while its other two SGX-listed peers (Maxi-Cash and MoneyMax) enjoyed growth through pawning and retailing services of pre-owned luxury bags. We could possibly see further earnings growth upside if ValueMax opts to extend its service offerings to luxury bags, in our view,” he adds.

“ValueMax is the most conservative among the three Singapore pawnbroking stocks in expanding the pawnbroking and retail business, and we think there is plenty of headroom for it to gear up to accelerate growth."

As at 12.29pm, shares in ValueMax are trading 1.8% higher at 28 cents.