9 things to know about Pappajack Berhad before you invest

Pawnshop operator, Pappajack Berhad (“Pappajack”), is scheduled to be listed on the ACE Market of Bursa Malaysia on April 1. 

Under the initial public offering (IPO), the company will offer 167 million new shares at 30 sen each to raise RM50.1 million, which will partly finance the expansion of the company’s pawn shops across the country.

If you are looking at Pappajack with interest, here are 9 things to know before you invest.  

1. Business overview

Pappajack operates 25 pawnbroking outlets in Peninsular Malaysia which are licensed by the Ministry of Housing and Local Government of Malaysia (KPKT), providing pawn loans of up to RM10,000 per pawn transaction (i.e. pawn ticket) against the pledges of gold (i.e. gold jewellery, gold bars and gold coins) and luxury watches. 

For gold, Pappajack provides a loan margin of up to 90% of the prevailing market value (i.e. spot price) of the pledge. As for luxury watches, it provides pawn loans with a margin of up to 80% of the prevailing market value. 

The prevailing market value of pledges (gold and luxury watches) are computed based on the spot prices published by independent third-party gold trading platforms and an online luxury watch trading platform respectively. Pawn tickets issued to customers have a validity period of up to six months.

Its customers are the general public aged 18 years and above who seek micro-loans. Its customers may be financially unserved or underserved by conventional financial institutions. 

The processing time to verify its customers’ identity and authenticity of the pledges is, on average, within 1 hour for each customer, and pawn loans can be disbursed on an immediate basis upon verification. 

Pappajack’s source of funds consist of internally generated funds, as well as capital injections from shareholders and shareholders’ advances. A fixed annual interest rate of 4% is incurred from the shareholders’ advances. 

A summary of the business model is illustrated in the chart below. 

(Source: IPO prospectus)

The following are key operating data of the company’s pawnbroking services for the financial years (FYEs) ended 31 December 2018, 31 December 2019, 31 December 2020, and the financial period ended (FPE) 30 September 2021 respectively. 

(Source: IPO prospectus)

2. Revenue streams

Pappajack’s revenue streams can be segmented into revenue from monthly interest charges (maximum 2%) earned from the pawn loan and one-off administrative fees (maximum RM0.50) from its pawnbroking services, as well as the sale of unredeemed or bid pledges. 

Unredeemed gold pledges not exceeding RM200 (gold and luxury watches) are sold via public auctions conducted by licensed auctioneers. 

Pappajack has an aggregated outstanding pawn loan transaction including interest accrued amounted to RM114.36 million (as at 30 September 2021). 

The chart below illustrates the company’s revenue streams. 

(Source: IPO prospectus)

3. Revenue segmentation

Revenue segmentation by business segment

The breakdown of the company’s revenue segmentation by business segment is as follows:

(Source: IPO prospectus)

We note from the above segmentation that pawnbroking is the key drive of the company’s revenue. Revenue from pawnbroking has grown by more than tripled from RM4.6 million for the FYE 2018 to RM14.3 million for the FPE 2021. 

Revenue segmentation by geographical region

The breakdown of the company’s revenue segmentation by geographical locations is as follows. 

(Source: IPO prospectus)

We note from the above segmentation that the central region is the largest revenue contributor to the company, since a total of 15 outlets are located in Selangor and Kuala Lumpur. 

4. Future plans and business strategies 

Pappajack’s future plans and business strategies are as follows: 

  1. Expansion of 5 new pawnbroking outlets

The company targets to open 5 new pawnbroking outlets in Pulau Pinang, Pahang and Selangor.

The outlet location, renovation status and pawnbroking license application status of the new outlets are as follows.

(Source: IPO prospectus)

  1.  Longer-term expansion plans

In the longer term, Pappajack’s business expansion is premised on the setting up and opening new pawnbroking outlets and/ or acquiring third party pawnbroking companies to widen its coverage and increase its market reach. The company plans to raise additional funds from bank borrowings and/ or the capital market to finance its business expansion when required. 

5. Utilisation of proceeds

The company expects to use the gross proceeds to the public issue of RM50.1 million in the following manner. 

(Source: IPO prospectus)

6. Industry outlook and competitive landscape

Non-bank financial institutions (NBFI) include pawnbrokers, money lending organization, non-bank suppliers of credit, and hire purchase finance, among others. 

Pawnbrokers are controlled by KPKT under the Pawnbrokers Act 1972, as opposed to banks, which are regulated by Bank Negara Malaysia. 

KPKT requires each pawnbroking establishment to be licensed. KPKT has also set the maximum amount of pawn loan that may be issued under a single pawn ticket at RM10,000, as well as the monthly interest at 2%. 

According to an independent market research report by Smith Zander, there are 718 companies with pawnbroking licenses issued by KPKT. 

Studying the pawnbroking industry in six states, namely Johor, Kuala Lumpur, Negeri Sembilan, Pulau Pinang, Perak and Selangor, Smith Zander noted that the pawnbroking industry in these 6 states represented approximately 79% of the pawnbroking industry in Malaysia, in 2020. 

In terms of revenue, the pawnbroking industry in Malaysia grew from RM0.93 billion in 2017 to RM1.11 billion in 2019, but declined slightly to RM0.84 billion in 2020, thereby registering an overall compound annual growth rate (CAGR) of 5.76% during the period.

In 2020, Smith Zander estimates that Pappajack commands a market share of 3.66% in the 6 states which it operates and 2.88% of the overall pawnbroking industry in Malaysia. 

7. Financial highlights

The following table sets out the financial highlights of the company for FYE 2018 to FYE 2020 and FPE 30 June 2020 and FPE 30 June 2021.

(Source: IPO prospectus)

(Source: IPO prospectus)

The company’s revenue and profit growth is impressive. Revenue has tripled from RM10.0 million in FY 2018 to RM30.8 million in FY 2020; meanwhile, profits have quintupled from RM1.6 million in FY 2018 to RM8.2 million in FY 2020.  

The increase in revenue and profits is in tandem to the company’s expansion of its pawnbroking outlets from 8 outlets in FY 2018 to 25 outlets in FY 2021, which were funded by capital injections from shareholders and shareholders’ advances to increase the company’s cash capital to deploy pawn loans to its customers. 

8. Promoters and substantial shareholders 

The promoters and substantial shareholders after the IPO are set out below.

(Source: IPO factsheet)

Mr. Lim Boon Hua is the company’s Managing Director / Chief Executive Officer. As an entrepreneur, he has ventured into various businesses including the supply of domestic maids and manpower, food and beverage business, as well as pawnbroking business. 

In 2013, Mr. Lim Boon Hua together with his sister, Ms. Lim Siew Fang, jointly set-up Pappajack to venture into the provision of pawnbroking services. 

In his capacity as Managing Director/ Chief Executive Officer, Mr. Lim Boon Hua plays a leading role in the formulation of business direction and strategies of the company. 

Ms. Liew Siew Fang is a substantial shareholder of the company. As an entrepreneur, she also sits on the board of directors of several private companies in Malaysia for personal investment purposes. 

Mr. Law Book Ching is a substantial shareholder and Executive Director. He is responsible for the development and implementation of strategic plans of the company, namely in the area of business expansions, competition studies and corporate communications. 

Ms. Lee Kooi Lan, is a substantial shareholder and spouse of Mr. Lim Boon Hua. She is responsible for matters relating to communication, streamlining and coordination of all corporate and administrative matters amongst the pawnbroking outlets in the central region. 

9. IPO valuation  

With an IPO price of RM0.30, Pappajack will have a market capitalisation of RM200.4 million, based on enlarged issued share capital of 668.0 million shares upon listing. 

This translates to a price earnings ratio (PE) of 24.4 times (based on FYE 2020 profits). Pappajack presently does not have any formal dividend policy. 

As with all new listings, investors might want to wait and monitor if the management can execute its business plans and deliver on its commitments, before rushing to make an investment.  

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