First look into stocks: Maxi-Cash
To improve my financial literacy, and prepare for increased excess liquidity in the future (I hope), I will try to look at the financial results of one stock a month and pen down my thoughts. Several months later, i can review how that analysis turned out.
I took notice of Maxi-Cash after seeing that both Maxi-Cash and Value Max were reported in the papers for improving share prices and profits, and the business is one that I think I can understand.
The stock is currently priced at $0.183 and a 52 week range of $0.102-0.198.
Earnings
From 2015 to 2016, profits went up 193% from around $4m to $11.5m. This looks good since revenue was going up without proportional increases in other costs. The increase in revenue was due to increase in the retail of jewelry watches and branded bags. With a PE(ttm) of 6.55 (which i also note is lower than Valuemax). This appears to be quite a good price.
Balance sheet
The balance sheet is less impressive. While there is an increase in net assets, most of these assets are receivables which have a risk of not being recovered. Though this is offset by their retail business which reduces the impact of defaults.
The balance sheet also shows a large amount of interest bearing loans as liabilities (173m/210m), these are also repayble within 12 months. Not really sure why it is so large, it appears risky if their own cash base is made out of a large amount debt.
The current NAV of $0.13 means the shares are trading at a premium to the book value. Considering most of these assets are merely receivables, this would be quite a large premium to buy into.
Maybe I am thinking of this wrongly and other investors treat the receivables more favorably as their amount is more certain and realisable compared to large fixed assets which are booked at purchase price and may end up sold at a large discount.
Cash flow
While the current cash balance has stayed the same from 2015, there is significant net cash outflow from operations and interest of $30m , compared to profits of $20m. most of the incoming cash seems to come from short term borrowings and a rights issue. I would worry whether their cash flow is sustainable in the long term, especially since the business is about credit. If cash continues to flow out from operations, the company may end up having to increase borrowings and incur more interest expenses, or call for more equity fund raising.
Business Outlook
As set out in the financial results, the Group will be operating in a challenging market, with keen competition, volatile gold prices, a maturing local economy, and weak retail sentiment.
At this point I think I know too little about how gold prices work and how they may affect this business so this would be an uncertain area for me. My understanding is that gold is one way to diversify an investment portfolio, so the relative effects of gold on this business would be quite relevant in knowing the precise exposure of a portfolio if this was added in.
Another concern in my mind is that, besides a weakening retail market, people now have more options for liquidating their excess luxury items, which may impact the pledge business. There are increasing amounts of second hand marketplaces such as Carousell available where one can get spare liquidity. I am not sure if these are truly viable alternatives to obtain cash, and they also do not give a chance to get the item back.
Dividend
The Group declared a final dividend of $0.01, and together with its interim dividend, the total dividend for the year is $0.015 per share. which represents a yield of around 8% at the current price. It is also a greater dividend to the previous year despite there being a rights issue to increase the number of shares. If the dividend maintains over 2017 this would be quite attractive.
Conclusion
The improving results over the year, good p/e ratio, and dividend yield does give this investment some promise. However, risks in the balance sheet, especially the price to book value, and the cash flow will mean there might be some risk taking a position here. I am also not confident that there is enough market space in Singapore for them to achieve significant growth at this point, and there do not appear to be any plans for other forms of expansion.
Disclaimer
The above are merely my own personal thoughts for general interest purposes only and does not constitute any form of financial/investment advice or recommendation of any kind, and is not intended to be relied on for any form of financial or investment decision making.