Pawnbroking

Three well-known pawnbrokers are listed in Singapore. Coincidentally (or maybe not so coincidentally), they were are listed in 2012 – 2013. How are their performances since IPO?

Maxi-Cash Financial Services saw a decline of 14.7% since its IPO in 2012.

MaxiCash - share price - 2016-09-20.PNG

Valuemax Group experienced a fall of 55% since its IPO in 2013.

Valuemax - share price - 2016-09-20.PNG

MoneyMax Financial Services suffered a drop of 61% since its IPO in 2013.

Moneymax - share price - 2016-09-20.PNG

Are the declines for three of them coincidence? I don’t think so.

During their IPOs, they were all valued at high valuation multiples of 20-40x P/E. Their business models and financial numbers clearly do not justify such high valuation multiples. To simplify it, they are essentially financial service companies that are doing lending and charging interest rates. If that sounds familiar to you, then yes, that’s what banks are doing. Banks are mostly valued at low teens P/E. The three Singapore banks (DBS, OCBC, UOB) are currently valued at 9 – 10x P/E.

The bankers or corporate advisors managed to priced their shares at high valuation during IPO and launched it successfully. Ignorant investors paid a huge price and suffered a painful loss.

If there is one thing that investors can learn to improve their overall investment performance, it’s to avoid participation in IPO. This indiscriminate avoidance of IPO certainly does not work for all cases. For example, it would miss out Google! But, no formula works for all cases. IPO has a special sales team behind who is working hard to earn more money from the public.

The second thing that investors can learn is to find out the general valuation multiples for the sector and refuse to pay (far) above that average, especially during IPO. By paying too much, investors could even lose money when the Company is doing ok (no or slow earnings growth). Remember, in short term, share price fluctuates more due to change in expectation than change in fundamentals or earnings.

Now, have a quick look at the balance sheet of all three pawnbrokers (for 30-June-2016). They are all highly leveraged, meaning that they are loaded with lots of debt to run their business.

Company Total Equity Debt Debt / Equity
Maxi-Cash 72m 66.7m 93%
Valuemax 164m 164m 100%
Moneymax 63m 126m 200%

Their ROA are below 5% and ROE are below 10%. Even with such high leveraged, their ROE remains so low. This tells us that they have poor return on capital. The third thing for investors to learn is to avoid companies with low ROE.

For people who know how to value banks and financial services firms, they may be less concern with low ROA and ROE. It’s normal for banks to be highly leveraged. The skills to value banks/financial firms are different from the skills to value non-financial firms. If you don’t know how to value financial firms, then don’t. Just focus on other sectors you know.

 

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