• MYR2.11 FV on 25x FY25F P/E. At a MYR1.15/share IPO price, Well Chip Group will raise MYR172.5m from the public issuance of 150m shares. The proceeds will mainly be used to fund the pawnbroker’s expansion plans within and beyond its home state of Johor, as well as for the cash capital requirements of its existing and new pawnshops. Our 25x P/E target was obtained after benchmarking against the group’s domestic peers.

• Pawn king of the south. Well Chip is principally involved in the provision of pawnbroking services via its network of 23 pawnshops, all of which are located in Johor. The group estimates that it commands a 36% market share in the state, making it the largest pawnbroker in Johor. Well Chip benefits from the expertise and experience of parent company ValueMax Group (VMAX SP, NR), which has a 36-year track record of providing pawnbroking services in Singapore. Both parties share the ValueMax Pawnbroking System, which allows for improved operational efficiency, transaction processing times, and risk management.

• Expansion plans. Well Chip has earmarked MYR28m of its IPO proceeds to be used to establish five new pawnshops in Johor. Additionally, the group is also looking to set up its first two pawnshops in Melaka, marking its maiden venture outside of its home state. In FY23, Well Chip processed an average of over 23,000 pawn transactions/outlet, with a yield of c.MYR144/transaction. We expect the group to book a 16% FY23-26 CAGR in pawn loan transactions, leading to a 16% CAGR in pawn loans disbursed (FY23: MYR990.6m) within the same period.

• An optimistic outlook. According to an independent market research report by Protégé Associates, the domestic pawnbroking industry is expected to grow at an 11.4% CAGR between 2024 and 2028. Gradually increasing income levels in Johor could also lead to greater popularity of gold as an investment, especially among individuals underserved by incumbent financial institutions – this is beneficial for Well Chip, in our view. Additionally, the group’s soon-to-be public listed entity status should provide it with greater visibility to incumbent banks, and could make it easier for Well Chip to obtain bank borrowings at more favourable rates for cash capital.

• Earnings estimates and valuation. We forecast core PATAMI of MYR44.8m for FY24 (c.+27% YoY) with a 17% FY23-26F bottomline CAGR. Growth is expected to be driven by a strong increase in pawn loan disbursements in tandem with the greater availability of cash capital and steady network expansion. We derive our MYR2.11 FV by pegging a 25x target P/E to our FY25F EPS. Given its stronger transactions per store credentials and listing on the Main Market, along with the backing of a reputable and experienced parent, we think Well Chip deserves to trade at least at the P/E level of its cheapest peer.

Source: RHB Securities Research - 5 Jul 2024