To this end, Yeo notes that ValueMax’s share price performance has had a “high correlation” to gold prices at a ratio of 0.8 out of 1 over the past four years.
He writes: “The stock trades at its historical price-to-earnings ratio (P/E) of just 6.6 times – below that of regional peers – and provides upside to growth, mainly driven by loan book expansion via new outlets and acquisitions.”
Based on the analyst’s analysis, the correlation between the price of gold and the amount of pawnbroking loans given in Singapore is relatively strong, at 0.7.
Between the gold price and the value of loan per pledge, the correlation is even stronger, at 0.9.
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As such, Yeo notes that while customers are pledging for more loans when the price of gold is high, each pledge would yield a higher loan amount.
“An environment of strong gold price bodes well for pawnbrokers – providing them with the ability to supply more loans and increase loan book for net interest income (NII) revenue growth,” writes Yeo.
Hence, he notes that the tailwind from a more elevated gold price is expected to benefit ValueMax.
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At this point in time, the company’s core strategy is to expand its store network and acquire smaller pawn shops to gain higher footfall and grow its loan book.
Through store network expansion and customer base, Yeo notes that ValueMax is able to grow its number and value of pledges for a larger loan book that will translate into higher NII.
Meanwhile, the company’s gold trading and retail segment is also benefiting from rising gold prices.
Sales in this segment tracks the gold price “almost perfectly”, notes Yeo, at a correlation of 0.96 out of 1.
With the high gold price environment, he notes that ValueMax’s gold trading customers will tend to offload their gold inventory, increasing trading activities and revenue.
As such, Yeo expects the gold trading and retail segment to continue benefiting from a higher expected gold price outlook.
Key risks noted by him include a fluctuation in gold prices, the US$ as well as interest rates, which could affect profitability.
A decline in gold price would lower the value of ValueMax’s gold inventory and the amount of loans it can extend to customers, while unredeemed pledges in a lower gold price environment could also result in the loss of interest income and a lower realisable value from its gold collateral.
As at 1.543pm, shares in ValueMax are trading 0.5 cents higher or 0.8% up at 63 cents.
