KUALA LUMPUR (March 20): Pawnbroker Well Chip Group Bhd (KL:WELLCHIP) looks set to ride on the coattails of record-high gold prices as underserved consumers turn to pawn loans, amid declining approval rates for conventional loan, Kenanga Research said.

Gold bullion reached an all-time high of US$3,055.96 on Thursday.

In a note on the company on Thursday, Kenanga Research said gold price achieving record-highs is slated to improve pawn loan disbursements as gold bearers can draw down higher amounts on their pledges.

“We believe pawnbrokers will remain a popular alternative to traditional loans, especially for underserved communities. This trend aligns with the decline in approval rates for personal loans, which dropped from 41% in 2013 to 34% in 2024, and credit cards, which fell from 63% in 2013 to 47% in 2024,” Kenanga Research said.

Strong gold prices enable higher pawn loan values, with gold pledges accounting for 90% of the group's collateral.

While falling gold prices pose some risk, Kenanga Research said Well Chip is protected by a 95% margin on gold pledges. In case of default, the group can resell pledges at better rates. Therefore, it said, only sharp declines in gold prices would significantly affect pawnbrokers.

Its current gross impaired loan ranges between 7% and 8%.

The firm values Well Chip at RM1.60 a share, a more than 60% premium to its current asking price, and has an “add” call on the stock. Consensus values it at RM1.43 a share.

Well Chip shares traded at 98 sen earlier, giving the company a market capitalisation of RM588 million. It has fallen almost 11% this year.

The stock’s price has come off its initial public offering price of RM1.15 a share, likely spurred by delays in the company's expansion plans, Kenanga Research said.

About RM40 milion of its IPO proceeds were allocated to expand its footprint, having identified five new locations in Johor and two in Melaka, which will take its location count to 30 from 23.

“We opine the recent selldown in Well Chip was spurred by the delays in its pawnbroking outlet expansion, being a key feature of its IPO. Concerns are likely to dissipate with the gradual establishment of said outlets, as the group still demonstrated strong earnings growth from its existing footprint,” the research firm said.

Well Chip planned to open four outlets per year since its July 2024 listing but faced delays.

The first outlet in Johor is set to be launched by the second quarter of financial year 2025 (2QFY2025), with six more expected by the end of FY2025.

Kenanga Research said outlets usually break even within 18-24 months, potentially becoming profit-accretive by FY2027.

That said, the injection of the three mature Perak outlets, since its IPO, should noticeably bolster near-term earnings post completion in the first quarter of financial year 2025.

The group announced a four sen dividend for FY2024, a payout of 48%, above its guided 35% for the first three years of listing.