The potential and volatility of the business is not yet known, thus a PE of 5.8 can either be very expensive or very cheap few years down the road.
Quote:One interesting observation is by comparing 2010 and 2011 AR. Maxi-Cash (Financing segment) asset increases from 77.9 Mils to 163.0 Mils while liability increases from 54.8 Mils to 117.5 Mils. The equity increases from 23.1 Mils to 45.5 Mils.
While the equity increases from 23.1 mils to 45.5 mil, 90% of the increase comes from the property development segment. Therefore, aspial uses capital from its property development segment to expand Maxi-cash. The rapid increase of both asset and liabilities are due to the nature of the business in the financial sector which includes brokerage and bank as they act as an intermediary. Assuming Maxi-cash has $20 in its balance sheet right now and you pawn your jewellery piece for $80. The company will book $80 in trade and other receivables (under Loans to customers in the footnote) and negative $60 in cash. The company will then have to borrow an additional $60 so that it can pay you in cash. As such, if you examine their balance sheet, the only portion of current and non-current liabilities that have risen is "Interest bearing loans and borrowings".
Assuming that the customer redeem his items, they will get to earn a total of 8.5% interest for lending to their customers for 6 months. Given that their interest rate payable for their own loans are at 1.96% pa, that will means a 7.5% gross margin for each pawn business that they undertake. After taking into account staff and rental cost, that probably will leave them with very low profit margin which is why banks alike often have low ROA but very high ROE. A high turnover is necessary to generate higher ROE, but unlike banks, they are unable to take on as much gearing. They will be able to maintain their 8.5% gross margin if they have sufficient cash in hand or interest free loan, which is probably why they injected their property development equity into the pawning business.
Do take note that under the Pawnbrokers Act in Singapore, a maximum of 1.5% interest rate per month is allowed to be charged, which brings about a huge risk if interest rate rises. If you look at their interest rate for their loans undertaken in 2010 and 2009, it is at an average of 2.5% and 2.8% which partly explain why they make a loss. In the long run, we should not expect our Sibor to remain at such a low rate.
This is also part of the reason why they are seeking to spin off the business in SGX now that they are profitable to raise interest free cash. Of course, there's no such thing as free cash though in terms of accounting they will get to earn their 8.5% gross margin, but equity always come at a cost called WACC.(btw, since they have promised to pay out 60% of profit as dividend for the 1st year, you can treat it as a non nterest-free loan) And should interest rates rise to the extent that they find it hard to maintain profitable, like REITS, expect some placement or rights issue to raise "interest-free" cash, else they have to reject customers. Given that the law only allows a maximum interest rate of 1.5% per month to be charged for the pawner, their profit margin will essentially be capped.
Another risk lies in the default of loans and hence pawn shop often loans cash at around 60-70% of the valuation of the item. Under the Pawnbrokers Act again, any object that has not been redeemed within 6 months will be sent to a public auction. In the case that bid received is lower than the 60%+ 8.5% interest rate, the pawn shop will then have to write off part of the receivables. However, should the bid exceed the 60%+ 8.5%+ expenses incurred, the surplus will be returned to the person who has pawned off the item.
They do have a secondary business of retailing and trading of 2nd-hand jewellery which I am not too sure on though I don't think it is worth much excitement about.
To conclude, you can call them a "defensive" stock, given that they will get more customers and lower interest rate during a recession. However, when the economy recovers ....