Following up on our recent M&A article, we shall explore a recent acquisition by ValueMax Group Ltd (SGX:T61) today . How does this recent S$1mil acquisition by ValueMax fit into the operations of the Group?
What Does VaueMax Do?
Pawnbrokers are providers of secured loans. When an item is pawned for a loan, the pawner may redeem it within a certain contractual period for a pre-determined amount. If the loan is not fulfilled within the contractual period that item would then be offered for sale.
How a pawnbroker differs from financial institutions would be the accounting for a defaulted loan. Since the pawnbroker has physical possession of the item and may recoup the loan value through the sale of the said item, the customer would not be in default of the loan and thus would not affect their credit records. Another revenue source would be the resale of items sold directly to the pawnbrokers.
Traditional pawnbrokers have two key sources of income:
1) Pawnbroking – Secured loan providers
2) Retail & Trading – Of pawned items and/or own line of merchandise
Note: From ValueMax Group Ltd 15 Aug 2014 analyst briefing presentation slides
Acquisition of VM Credit Pte Ltd
In Sep 2014, ValueMax’s announced that with a moneylender’s license, they could officially accept a wider range of collateral, for example – properties. This was where VM Credit Pte Ltd came into the picture – as a “strategic” acquisition. ValueMax could offer loans to customers with property as collateral! This was a whole different ball game!
VM Credit holds a moneylender’s license and is principally engage in the moneylending business involving secured and unsecured loans. ValueMax had plans for VM Credit to “commence its business of granting loans secured against collaterals such as properties. This is in line with the Group’s strategy to further expand its secured lending business and will provide an additional revenue stream for the Group”.
From Pawnbroking To Foreclosure?
If a customer was unable to redeem their collateral, the pawnshop would take possession of their pawned article. But what if the article in question is a landed property?
This might result in logistical and operational nightmares whilst getting caught with a very illiquid asset. At the moment, the writer doesn’t have sufficient information to come up with how ValueMax’s property-as-collateral business works in detail.
Why Is ValueMax Exploring A New Business Segment?
As mentioned in our earlier article, pawnshops offer a maximum of 6 months for the loan, charging a maximum interest of 1.5% for each month.
ValueMax’s management indicated that they would charge interest rates of around 1% per month, lower than their usual pawnbroking business but they expect to enjoy a significantly higher gross margin of around 70%!
Conventionally, we would assume that relative to jewellery one should have a higher compensation for holding an illiquid asset – property. However it seems that there wasn’t much of a risk-reward tradeoff between either asset classes. This new direction might be attributed towards the highly competitive environments that these pawnbrokers operate in.
Value In Action
Given that this was a rather recent development, we were of the opinion that it may be better for us to err on the side of conservatism and observe how things pan out for a period of time before taking any further investment action!
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All views and opinions articulated in the article were expressed in Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Mun Hong does not own any shares in the companies mentioned above.