A name like Pappajack Bhd can easily be mistaken for a food & beverage franchise operator.
If one were to hazard a guess, not many would think Pappajack is involved in pawnbroking, which is one of the oldest trades known to humanity.
Still, who would have thought there will be so much interest in Pappajack, which is the first pawnshop operator to be listed on Bursa Malaysia.
In just 2 days of trading, Pappajack already touched a high of 48 sen - this is a whopping 60% premium over its listing price of 30 sen.
Why the keen interest in Pappajack? Is the business model so unique that investors find it hard to miss?
Its valuations based on a PER of 24x appear to be quite steep compared to its regional peers.
At the current price level, the counter is even more ‘expensive’ based on a PER of 41x !!!
That said, investors probably recognise that during challenging times like these, people will need cash to survive.
As long as they have assets to convert to cold hard cash, pawnbroking business will continue to thrive.
Pawnshops are providers of unconventional financial services to a population that is often underserved by lenders in towns, and in rural areas outside major towns and cities.
Pawnshops traditionally provide cash to some who live paycheque to paycheque, or live on little savings, accepting something of equal value to the loan as collateral,
Here is a snapshot of its business.
How does it work
It provides 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 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.
Pawn tickets issued to customers have a validity period of up to 6 months.
Revenue streams
Papajack’s revenue streams 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 are sold directly to scrap collectors, while pawns exceeding RM200 (gold and luxury watches) are sold via public auctions conducted by licensed auctioneers.
Customers:
Customers for our pawn loans are the general public aged 18 years and above who seek microloans.
Its target customers are populations who may be financially unserved or underserved by conventional financial institutions.
Those who purchase unredeemed or bid pledges comprise mainly scrap collectors
Outlets:
Pappajack is already operating 25 pawnbroking outlets in Peninsular Malaysia which are licensed by the Ministry of Housing and Local Government of Malaysia.
Outstanding pawn loan transaction
Papajack has an aggregated outstanding pawn loan transaction including interest accrued amounted to RM114.36 million (as at 30 September 2021)
Risks:
Exposed to unlawful and suspicious pawn transactions and transactions of stolen gold or luxury watches.
- no assurance that the measures taken to prevent the use of our pawnbroking services for money laundering or terrorists financing purposes can fully eliminate unlawful and suspicious pawn transactions in our pawnbroking outlets
- no assurance that the measures taken for prevention of unlawful dealings can fully eliminate transactions of stolen gold or luxury watches in our pawnbroking outlets
- risk of losing the pledges when confiscated by the police and as a result may not be able to recover the losses incurred
- The total loss incurred from the confiscation was RM79,326.90 and was not recovered. Any loss arising from confiscation of pledges are not covered under the jeweller’s block insurance policy and will be written off 12 months from the date of pawn ticket issuance.
Its pledge value is susceptible to gold price volatility.
- It receives gold as pledges for the provision of pawn loans to our customers.
- The pledge value is influenced by gold price volatility as it offers pawn loans to customers against the pledges of gold based on a loan margin which factors in the prevailing market value of the pledge.
Operates in a highly fragmented and competitive industry, expects to face competition from existing industry players who are chain pawnbroking outlets
- According to the IMR Report, based on the latest available information, there are 716 companies with pawnbroking licences issued by the KPKT in Malaysia.
- To remain competitive in the pawnbroking industry, it offers attractive loan margins, provide quality customer service and quick service time.
There are more risks associated with the pawnbroking business but if one believes such business will survive as people at any point in life would resort to such services as they can turn their assets into cash immediately.