This article first appeared in The Edge Malaysia Weekly on April 29, 2024 - May 5, 2024

LICENSED pawnbrokers, whose loans are collateralised against gold in the form of gold jewellery, gold bars and gold coins, are benefiting from the rise in the price of the precious metal, as pawn value and the number of transactions increase.

Year to date, gold has risen 12.7% to US$2,325 per troy ounce on the back of geopolitical uncertainties, central bank buying and expectations of a weaker greenback, with the US Federal Reserve projected to start cutting rates this year.

“For the first quarter of 2024, we observed that there were more customers patronising our pawnshops, leading to more pawn transactions. Also, we do observe the pawn amount per ticket has increased in value. This is attributed to the increase in the gold price for the past 12 months and customers are able to fetch a higher pawn price for each gram of gold jewellery,” says Low Kai Loon, executive director of Bursa Malaysia-listed Evergreen Max Cash Capital Bhd (EMCC), which operates 27 pawnshops in the country.

The company, which derived 35.2% and 74% of its revenue and profit before tax (PBT) respectively from pawnbroking for its financial year ended Dec 31, 2023 (FY2023), expects revenue from this segment to grow 20% this year.

Pawnbrokers serve segments of the population that do not have access to services offered by financial institutions by giving out loans of up to 80% to 90% of the market value of the gold or luxury watches pledged. Each pawn ticket is valid for six months and expired tickets can be renewed.

Customers pay monthly interest of up to 2% per pledge and, at the end of the term, they can redeem the assets when they pay back the principal sum or they could renew their pawn tickets for another six months.

The pawnbroker’s revenue is made up of the interest and sale of unredeemed pledges.

EMCC says the rise in gold prices led to higher revenue and profitability from the sale of unredeemed pledges, as 99% of these pledges consisted of gold.

“However, the rise in gold price also incentivises pawnbroking customers to redeem their pawned gold (owing to appreciation of pawned gold), thereby causing the volume of unredeemed pledges to fall. In EMCC’s view, we always wish for pawnbroking customers to come forth to redeem their pawned gold regardless of the price of gold,” says Low.

For EMCC, the sale of unredeemed gold pledges falls under the trading and retailing of gold and luxury products segment, which contributed 64.8% and 27% to its total revenue and PBT respectively in FY2023.

Revenue for the segment rose 67.4% year on year in FY2023 to RM62.6 million, due to higher sales volume of unredeemed gold pledges and higher sales value of pre-owned gold products (owing to higher volume and higher gold prices).

Overall, for FY2024, EMCC is projecting revenue growth of 20% to 30%.

There are two pawnbrokers listed on Bursa Malaysia: Pappajack Bhd, which was listed on April 1, 2022, and EMCC, which was listed on Sept 26, 2023. Well Chip Group Bhd is preparing for its listing, with its draft prospectus exposed for public comment late last year. It is said to be targeting a listing by mid-year.

“Channel checks indicate that pawn shops are doing a thriving business, as the value of gold jewellery has soared over the past 12 months. The value of collateral has substantially increased in a short space of six months, thus enabling borrowers to borrow higher amounts,” notes private investor Ian Yoong, who expects listed pawnshop operators to report earnings growth of 20% to 25% for this calendar year based on a price-earnings ratio (PER) of 25 to 30 times.

While gold has been trading higher over the past year, which is expected to benefit pawnbrokers, conversely, a sudden downward movement in gold prices will be negative for pawnbrokers as the value of pledges declines and customers fail to redeem their pledges. When this happens, pawnbrokers will have to sell the unredeemed gold pledges at lower prices.

In terms of valuation, as at last Thursday (April 25), Pappajack and EMCC traded at a trailing 12-month (TTM) PER of 33.17 and 23.5 times respectively.

On the other hand, Singapore-listed pawnbrokers trade at much lower valuations. Moneymax Financial Services Ltd and Valuemax Group Ltd had TTM PERs of just 5.1 and 5.57 times respectively.

An industry observer notes that this could be due to the lack of investor relation activities by the Singapore-listed players. Of the three Singapore Exchange-listed pawnbrokers, Moneymax and Aspial operate pawnshops in both Singapore and Malaysia.

There is currently no analyst coverage on pawnbrokers in Malaysia and Singapore.

A check of the substantial shareholders of the Bursa-listed pawnbrokers shows that they are predominantly individuals or private companies with few institutional investors. This could be due to the perception that pawnbrokers are conduits for money laundering.

In the Malaysian pawnbrokers’ listing prospectus, it is noted under “risks related to the business” that they are exposed to unlawful and suspicious pawn transactions. They also face the risk of gold pledged items being confiscated by police, in which case, losses arising in such an event are not covered by jeweller’s block insurance policy and will be written off.

However, the value of confiscated pledged gold is low compared to the pledged receivables.

Furthermore, pawnbrokers are required under the law to “undertake preventive measures and are obligated to conduct customer due diligence, keep proper records of our customers and transactions as well as report suspicious transactions under the Anti-Money Laundering Act 2001”.

Pawnbrokers are licensed by the Ministry of Local Government Development and governed under the Pawnbrokers Act 1972. They are required to conduct know-your-customer (KYC) verification processes on customers, keep records of their details and pawn transactions, and report suspicious transactions to Bank Negara Malaysia.

Pappajack has 41 pawnbroking outlets in Malaysia; and EMCC has 27.

Commenting on the demand for pawnbroking services in times of high gold prices, Low says numerous factors affect the demand for pawnbroking.

“During economic bad times, for example, we foresee the demand for pawnbroking will increase. The need for pawnbroking services is probably coming from the need for short-term financial support. Therefore, we take the view that the high price [of gold] is not the main reason that customers come forth to pawn, and does not incentivise them to do so. On the contrary, with high gold prices, customers may be incentivised to sell or trade in their gold jewellery instead,” he explains.

With more pawnbrokers listed on Bursa, only time will tell whether they will become more mainstream among institutional investors. Until then, they are likely to remain under the radar of most investors, a situation compounded by their high PERs. 

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