Write up on Maxi-Cash

Maxi-Cash Financial Services Corp Ltd (5UF.SI)

Recommend to: Reduce Exposure

Intrinsic value: S$0.31, Previous Closing Price: S$0.40

Main Activities

Maxi-Cash offers financial services in the form of pawn-broking which acts like collateralised micro-loan to customers on short term time frame with redemption period up to 6 months. It also engages in retail and trading of pre-owned jewellery and watches through retail outlet.

Incorporated in 2008 and wholly owned by Aspial(a listed company in SGX retailing under the brand of Aspial and Lee-Wah), it now has pawnshops and retail outlets at 28 locations, most of them are in strategic locations(near to bus interchanges and MRT station) across the island. Its market share in pawn-broking business is approximately 13% in terms of number of licensed pawnbrokers incorporated in Singapore. The company successfully raised an IPO in June 2012 which raised about S$16m in cash proceeds. This will serve as a capital to expand the business operations by increasing the number of pawnshops and through strategic acquisition, joint ventures or strategic alliances.

Key development

Overcrowded for Pawn-brokering Business

According to Singapore Registry of Pawnbrokers, the number of pawnshop outlets increased to 200 in 2013 from 127 in 2009(Up 57.5%), this is partly due to the opening of the 2 integrated resorts and people seeking more short term financing to deal with the liquidity issues. However judging from the increased in IPO activities for pawn brokering busineses(ValueMax has just been listed in SGX), means that there will be a fierce competition among the 3 dominant players(ValueMax, MoneyMax and Maxi-Cash) to grab the market shares. Given the low interest rate in the market and Pawnbrokers Act that the business cannot charge more than 1.5% a month, we view that there is a limited upside to the interest income that the company can earn going forward.

Lower gold price contributing to lower gross margin

The recent slump in gold price(from average price USD1800 per ounce in 2012 to current price of USD1300 per ounce) also drives down the gross margin for the company. This is due to the fact that the pawn-brokering business have distributed a higher loan amount to the customer when the gold price was higher than the current price. Current potential customers might also not willing to trade giving the low sentiments of the gold price, therefore there is a possibility that revenue might not grow from here if the gold price remain side way for the near term.

New proposed regulation might reduce ROC

Currently the government is looking to make several amendments to the Pawnbrokers Act to tighten regulations and further professionalise the industry. One of the changes being proposed is an increase in the security deposit for each pawnbroking outlet to S$100K from S$20K currently. We foresee this will increase the capital required to setup new outlet and further reduce the return on capital if the amendment pass through.

Highlight from Financial Statement 2012

Revenue increased by 14.6% to a record $100.5m from $87.7m. Increased in revenue mainly contributed by higher interest income from providing collateral loan services(up 84.5% YtoY). Revenue from retail and trading of pre-owned jewellery increased 6.5% to S$78.2m from S$73.4m

Pretax profit for pawnbrokering business increased more than 300% from S$1.5m to S$6.2m due to operating cost not increasing within the segment despite of higher net interest income. However for retail and trading of jewellery business, there is a pre tax loss of S$0.1m due to lower gross margin and higher operation expenses.

High P/E > 30 also seemed to be on the high side of the valuation. Currently the company is not generating a positive cash flow from operation due to cash being used for working capital such as loan issued to customers

ROE and ROA stands at 6.53% and 2.12% respectively, which indicates that there is a rivalry between the competitors and thus not able to earn a higher return of equity. We foresee the ROE will remain flat at this level.

Valuation

Using a single stage residual income model and the current ROE of 6.6%, we drive the intrinsic value of SGD0.31 which is lower than the current price of SGD0.40. Reduce exposure for this counter