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Does MoneyMax’s Latest Acquisition Make Sense?

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Editor’s note: This article is a republished piece of work that has been edited after the original was found to have misstated terms of the deal. The Fool regrets the error. You can read the original here

MoneyMax Financial Services (SGX: 5WJ), one of our city-state’s largest pawn broking chains, is expanding into Malaysia.

It announced last Friday that it will be investing RM15.63 million (around S$6.1 million) for a 51% stake in a network of eight Malaysian pawnshops which are mostly located in the state of Johor in Malaysia. This represents around 5.3% of MoneyMax’s market capitalisation.

The deal would see MoneyMax’s wholly-owned subsidiary, Cash Online Sdn Bhd (COL), enter into an agreement with Mr. Chong Mei Sang as part of an alliance “to grow the Malaysian network to up to 34 over the next few years”. MoneyMax will be funding the investment using internal resources and/or bank borrowings.

This latest move by MoneyMax will expand its store network – from 37 in Singapore currently – to 45 in total in Singapore and Malaysia. In the future, MoneyMax could potentially have up to 71 outlets in total in both countries.

Under the agreement, COL will pay Mr.Chong an initial investment of RM4 million for the eight stores that are already operating. The rest of the amount will be paid in tranches as agreed.

Mr. Peter Lim, Executive Chairman and Chief Executive Officer of MoneyMax, commented on the acquisition, “This investment is highly significant as it is the first major corporate action since our IPO and marks the start of our regional expansion. Mr. Chong brings with him experience and relationships which will help us accelerate our growth in Malaysia, a market with exciting opportunities.”

From the above, Mr. Peter Lim sure sounds upbeat. But, does the investment make financial sense for MoneyMax?

For the 12 months ended 31 December 2013, the Malaysia outlets as a whole saw a net loss of around RM131,000 (around S$51,000). The net tangible assets (NTA) of the acquisition target during the same period were around RM2.5 million (around S$1 million).

We can calculate the price-to-NTA ratio of the acquisition to determine if the investment makes sense. Since MoneyMax will be acquiring a 51% stake in the Malaysian pawnshops for an initial amount of RM4 million, this would value the whole 8-chain operation at RM7.84 million. This thus brings the price-to-NTA ratio for the Malaysian pawn broking chain to around 3.1x. Such a multiple seems slightly high for a loss-making operation.

In comparison, companies like Super Group (SGX: S10), SIA Engineering Company (SGX: S59), and The Hour Glass (SGX: E5P), are trading at an approximate price-to-NTA ratio of between 1.2 and 4.2. Although the three companies are certainly not in the pawn broking business (the trio are involved in F&B, aircraft maintenance, repair and overhaul, and luxury watches respectively), they are what you would call companies that generate a lot of cash flow and profits, consistently.

Maybe MoneyMax can turn around the loss-making Malaysian outlets by streamlining its operations and achieve efficiency. Who knows? Only time will tell if this acquisition is a prudent one.

The market took well to the news though. The share price of the firm rose 4.6% on Monday following the announcement. Currently, the pawn broking outfit is trading at S$0.35 a share, which translates to a historical price/earnings ratio of 186.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P owns shares in Super Group.