KUCHING: As a one-of-its-kind company, upcoming listing Pappajack Bhd (Pappajack) is on analysts’ radars based on growing sentiment for its provision of pawnbroking services.
As at February 14, 2022, the group operates 25 pawnbroking outlets in total, with 12 located in Selangor, three in Kuala Lumpur, five in Pulau Pinang, one in Negeri Sembilan, two in Johor and two in Perak.
Each pawnbroking outlet is held and operated by a subsidiary of the group. Each subsidiary is individually licensed by the Kementerian Perumahan dan Kerajaan Tempatan (KPKT), and as such, adheres to the regulations under the Pawnbrokers Act 1972 and guidelines issued by the KPKT.
This includes, amongst others, prescribed interest rate, administrative fees chargeable to customers, operational model and all administrative procedures set by the KPKT.
“Deriving monthly interest charges and administrative fees from its walk-in customers, Pappajack’s customers are the general public aged 18 years and above who seek micro-loans, but may be financially underserved by conventional financial institutions,” commented analysts with Public Investment Bank Bhd (PublicInvest Research).
“Moving forward, Pappajack’s business expansion in the long term is premised on the setting up and opening of new pawnbroking outlets and/or acquiring third party pawnbroking outlets to widen its network and increase its market reach.
“We derive a fair value of RM0.35 based on a 1.4 times its price to book multiples to its FY22 book value per share of 25 sen. The IPO is expected to raise approximately RM50.1 million from the issuance of 167 million new shares.
Apart from utilising 38.4 per cent of the proceeds to expand pawnbroking outlets, 54.1 per cent of the proceeds are allocated as cash capital for its existing 20 pawnbroking outlets, which have been identified as outlets with higher growth rate.”
RHB Research Institute Sdn Bhd (RHB Research) is projecting a three-year earnings cumulative annual growth rate (CAGR) of about 26.6 per cent for Pappajack, mainly driven by the expansion of pawnbroking outlets (by 20 per cent) and growing capital (by 40 per cent).
With a total capital of more than RM150 million (including IPO proceeds) available for loan, interest income could potentially reach RM27 million, assuming an average interest rate of 18 per cent per annum.
“While we take in higher operating and staff costs in relation to outlet expansion, operating leverage could cushion net margin once the newer outlets gain traction and mature.
“While Pappajack is in a class of its own, the valuation is comparable to other non-bank financial institutions.
“We note that it is at a net cash position, and involved in a secured lending business as compared to traditional banks and other NBFIs. Secondly, its superior 26.6 per cent CAGR triumphs the industry average.
“Thirdly, massive underserved market size and everlasting demand with the group’s current market share of only 2.9 per cent.
“Besides, the lower return on equity of 9.3 per cent versus its peers points to potential re-rating should it opt for financial leverage to further expand its business.”
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