Is this 19p pawnshop worth £1.74?

When banks turned their back on borrowers after 2008, the pawnshops sensed an opening.

And to put it bluntly, they made a killing. I mean, pawnbrokers completely de-risk the loan by taking full collateral from the punter. And still they charge exorbitant interest rates!

Albemarle & Bond (Lon: ABM) is one of the biggest pawnbrokers in the UK. And it wants to cement its position at the top.

The only problem with that is that over the last year or so, just about every area of its business has taken a whack. With the plummeting gold price, punters aren’t rushing to cash in unwanted jewellery.

The banks have gradually started to re-open their doors to borrowers, and the payday loans business looks like it’s about to face a rather nasty regulatory shock.

To top it all, competition has been stiff – you can’t have missed the changing nature of UK high streets, with new cash lenders and pawnbrokers popping up all over the place.

ABM invested heavily in setting up new shops (and taking over others). But it now appears that the company overstretched itself. In October, it tried to raise money by way of a rights issue. A rights issue is effectively the issue of new shares to existing holders at a pre-set price – in this case, 50p. Alas, the biggest shareholder, US pawnbroker EZCorp, said it wasn’t prepared to back the issue.

What had been a steady share price decline turned into a rout.

Here’s the three-year price chart. From four quid to 19p in less than two years:

Albemarle & Bond 3-year share price chart

Source: Digital look

Last week, the company announced that it has resorted to melting down its gold holdings in order to meet the debt schedule. It will also shut its online payday loans operation. And the trouble hasn’t stopped there. This morning it was announced that four of the company’s directors will leave the board.

Wow! It just goes to show what a mess can be made of a business that, up until recently, was in one of the only growing sectors on the high street.


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Book value or share price?

But despite all these woes, if you look at the business, you might think that the share price fall has been overdone. After all, even with debt, the book value of the business (the value of assets) amounted to some £1.74 at the time of the latest full accounts.

The main issue is of course the debt and managing the company cash flow. It’s all well and good saying that the company has £1.74 in assets. But if it hasn’t got the cash flow to keep the banks happy, then it can yet be forced into liquidation.

But there’s more to the share price fall than just cash flow. When the company abandoned a rights issue earlier, that whacked investor confidence. Not only that, but the company has delayed publishing its results until next Monday. The markets absolutely hate delayed results. That’s just another element of uncertainty that’s not needed right now.

But there’s one more thing that explains the share price fall. And it’s one every private investor must be aware of. Especially if considering buying stocks like ABM in the hope of recovery…

The poison pill

So should a brave investor consider ‘catching a falling knife’ as they say? That is, is it a good idea to buy some stock on the hope that there will be a recovery?

Provided the thing doesn’t go bust, one could certainly imagine ABM stock bouncing from the sub-20p mark to well over a pound in the coming years.

And if this company were privately owned, I wouldn’t bet against it. When it comes to privately owned businesses, owners will move heaven and earth to keep the thing afloat.

For starters, they’re less likely to get into trouble in the first place. I mean, in the case of ABM, trouble brewed from over-expansion. Those are classic powerplay antics from a management team that doesn’t actually own the business.

But secondly, even if private businesses do get into financial straits, management tend to have a few tricks up their sleeve. It may include putting their own personal wealth on the line, or finding other routes to raising finance – rich friends or bankers will often scratch a back when required.

But when it comes to publicly-owned stocks, such avenues are seldom pursued. In publicly-owned business, the solution to a funding crisis will all too often involve stiffing the ordinary shareholders.

And that, my friend, is why the share price of ABM is now below 20p.

To my mind, it is no reflection of the true value of this stock. Like I say, the book value of the business is over £1.50 – though we can’t put an exact figure on that until next Monday.

For sure, the company will not be returning to form any time soon. After all, it’s smelting much of its stock and severely constraining new business in its lending units.

That said, this is still a decent business. With a bit of streamlining (and debt management), one might expect a return to profitability after the current financial year is out. In fact, for all we know, the business could still turn in a profit for the year ending June 2013 (which is due to be reported next week).

All the company has actually said is that it has been losing money for the first five months of the current year. For the period about to be reported, analysts have pencilled in 20p in profit per share. And we know that this figure is too high – the company has said that much.

This is certainly one to watch. Will the company struggle on and just about get by? Or will it require financing – financing that comes with a sharp sting in the tale for current shareholders?

We shall see. This whole situation highlights one of the nastiest sides of stock-market investing. When it comes to refinancing businesses, ordinary shareholders find that they’re all out of friends in the right places.

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One Response

  1. 02/12/2013, Merrall wrote

    Interesting article, but not sure if the author has any idea how a pawnbrokers work.

    Firstly ABM went into the buying gold market like there was no tomorrow, paying for gold on a base of $1750/ troy ounce, when the gold price dropped to $1200/t.oz then there are problems. (For the record, a Troy ounce = 31.5 grams approx, while Avoir is 28 g approx.)

    The pawnbroking side again used the high base price, but only offered only 10% of the retail price to the client (Just over scrap value). With the base price dropping so quickly, it is not really worth while the client coming back to reclaim the goods. So the sums (profits) that would have been made by customers reclaiming are gone and ABM has to melt the gold to try and get their money back, plus any “profits” has to be repaid back to the client. ABM are losers each way they turn.

    The £1.74 mostly refers to the amount (value) in Pawn, but as mentioned, this, in this case, does not reflect the true value of the actual goods.

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