A licensed pawnbroker - offering short-term finance with a redemption period of 6 months for each pledge transaction, which is renewable - also trades/retails pre-owned watches & jewellery. Operates 24 branches now.
Issues not discussed in the IPO prospectus
This report discusses a few issues that are relevant in understanding this IPO, but had not been mentioned or elaborated upon in the prospectus. Calculations have been made from numbers provided in the prospectus and other sources in this regard. Opinions regarding gold price and interest rate have been used to infer likely areas that might affect profitability of Maxi-Cash. Readers are therefore expected to have read the prospectus and consulted with their financial advisers, so that they could better understand the issues raised, before investing.
The issues (discussed more fully on page 2) are:
- Market share of 13%, as defined in the prospectus, is the number of licenses held by Maxi-Cash divided by the total number of pawnbroking licenses in Singapore. We calculated that, in terms of loan amount, this share is about 8.2%. Viewed positively, it means that as the number of years of operating experience grows from 3 (FY11), the two market share numbers should near.
- The current low interest rate environment affords it a comfortable interest rate margin for pawnbroking profit.
- $10.6m operating overheads (FY11) = $5.6m rental + $5m admin/marketing & other expense. With expansion plans, these overheads may not behave like a fixed cost item yet. A fixed cost item is one that increases less than proportionately to any increase in revenue.
- Applied for 4 additional pawnbroking licenses but Little India, a popular location among peers, is not included.
- A positive 1Q12 result has been announced in the Aspial segment result. FY12 is expected to be better.
- The trading segment is cyclical. Increase in loan amounts (industry) is, to some extent, attributed to the increase in gold price: 2011 over 2010; and, ytd2012 over 2011. Gold price decrease is stated only as a risk in the prospectus.
KIVs affecting share price Positives are increases in loan amount market share; low interest rates; overheads per unit decreases; and, hedging of trading/inventories.
Negatives are decrease in gold price; increase in interest rates; and, increase in overheads that is not accompanied by expansion.
Market share
Page 84 of prospectus - Maxi-Cash states that its “market share of the pawnbroking business in terms of number of licenced pawnbrokers is approximately 13.0% at 1 May”.
The very low trade receivable turnover of 4 days (FY10) and 1 day (FY11) – page 83, prospectus - means almost $0 balance. Therefore the $64.4m (FY10) and $123.9m (FY11) – page A5, prospectus – of trade & other receivables are the outstanding pawnbroking loan amounts. Assuming a straight-line monthly increase in loan amounts from Dec10 of $64.4m to Dec11 of $123.9m; interest at 1% in the first month of loan and 1.5% in subsequent months, interest earned of $14.26m for FY11 – page A45, prospectus; we derive the average length of loan to be 2.8 months. And, we found the loans granted in FY11 to be $406.3m.
According to DOS Monthly Digest of Statistics May 2012 issue, section 13.14-Pledges at Pawnshops, the loans granted by all the pawnbrokers in 2011 amounted to $4.946.8b. Therefore, Maxi-Cash has a 8.2% market share (i.e. $406.3m/$4946.8m).
We understand that 2011 is the third year of operations. If one assumes that experience (years) translates to loan amount (higher) up to a certain number of years, then going forward the loan amount should increase as should their market share, at their existing branches.
If Maxi-Cash loans had performed to number of branches, that 13% would translate to $643m. Proportionately, interest earned would have been $22.56m instead of $14.26m, an increase of 58%. We highlight this to gauge upside oomph.
Interest rates
The effective borrowing rate FY11 is 2.12% - page A37, prospectus. On the average outstanding loan amount of $94.15m ($64.4m ~ $123.9m), the interest rate earned is 15.15%. The margin is a comfortable 13.0%. Only Yangzhijiang has a similar margin. Until the Fed raises rates again in 2014 or earlier, this stays comfortable.
Overheads $10.595m
You can find this at page A4, prospectus. Page A29, rental for FY11 = $5.548m. The balance of $5.047m is made up mainly of general & admin, and sales & marketing expenses.
We note current “future minimum rental payable under noncancellable operating leases as at 31 Dec11” on page A41, prospectus of $6.24m. There is a similar obligation under financial lease of $0.92m. Total = $7.14m, higher than FY11 as some newer branches that started in 2011 got leases charged out of less than 12 months. There will also be additional 4,638 ft2 space (=6084-1012-434) per page 73-75, prospectus. Existing space totals 13,371ft2.
Marketing activities, if these remain visible, can easily be factored into your forecasting of the overheads total.
Popular pawnshop areas
From the List of Pawnbrokers (according to Registrar of Pawnbrokers) as at 1 June, the popular locations are: Woodlands, Ang Mo Kio, Bedok, Tampines, Hougang, Yishun, Jurong West, Toa Payoh, Geylang, Clementi, Jurong East, Chinatown, Serangoon, Little India, Bukit Batok, Pasir Ris, CCK/YT/BP, Boon Lay, Redhill, and Sengkang.
While Redhill and Pasir Ris are selected, Little India and Sengkang are not. Expansion, in addition to that already announced, will further add to rental expense.
Aspial 1Q12 result
In its recent result announcement, it said, “The Financial Service Business (which is Maxi-Cash) continued to achieve substantially higher pre-tax profits. Pre-tax profit for 1Q12 was $1.7m as compared to $0.1m in 1Q11. The higher pretax profit was contributed by both pawnbroking and retail and trading of pre-owned jewellery and watches.”
“The Group expects its loan portfolio to continue its healthy growth this year. Income from the pawnbroking and trading of pre-owned jewellery and watches are expected to grow further. Therefore, the Group expects its Financial Service Business to perform better in 2012 compared to last year.”
The average gold price in S$, 1Q12/1Q11, increased by 20.6% ($1690.57x1.263587/$1386.26x1.2777778). Please do give credit to the gold price effect if you are using such numbers for your forecasting.
Gold
The author is a long term gold bull but a short term bear. The 2009 trendline had been broken. Relying on the 2005 trendline could mean a slim chance of $1040 by late 2012 or a better chance of $1200 by 1H2014.
There is no discussion on any hedging of the gold price. Only the risk disclosure is evident in the prospectus. People, who believe (the author is not one of them) that hedging at a certain cost could make its trading segment better, should factor another element of discount in their forecast.
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