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The pawnbroker has taken the stock market by storm since listing in February
Thursday 02 Nov 2017 Author: David Stevenson

There have been some spectacular failures in the dog-eat-dog world of pawnbroking including the collapse of Albemarle & Bond three years ago. That hasn’t deterred investors from backing fellow pawnbroker Ramsdens (RFX:AIM) whose share price has doubled to 172p since it joined the stock market in February this year.

So why is Ramsdens special? It is worth a quick history lesson to answer that question.

Albemarle & Bond saw its share price drop from 400p in 2011 to a mere 6.65p in 2014 when its stock was suspended, illustrating how a well-known company went from boom to bust in a short period of time.

The decline of gold prices from 2011 highs of $1,900 per ounce to around $1,300 per ounce in 2014 clearly didn’t help Albemarle & Bond or its quoted peer H&T (HAT:AIM), as you can see from the accompanying chart.

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Pawnbrokers enjoyed a boom time when gold was priced high as it encouraged more people to cash in their gold jewellery.

The drop in the gold price hurt pawnbrokers’ earnings. So did growing competition in the unsecured loans market; big names like Wonga were gobbling up market share.

Liberum analyst Julian Bates says the falling gold price resulted in ‘decisive action’ by Ramsdens as the company shortened the length of time a pawned item could be loaned to five months from seven months.

That meant cash would be freed up if the customer had no intention of paying, as Ramsdens could sell the pledged item sooner than before.

Making money from foreign money

Ramsdens now generates the largest chunk of earnings from foreign exchange (FX), representing 37% of gross profit in the financial year ending 31 March 2017.

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The company’s move into buying and selling money for foreign travel sets it apart from its larger rivals such as H&T which is less dominant in this area.

‘H&T does not consider [FX] a major area of focus and instead switched its focus to unsecured lending. Conversely Ramsdens has elected not to grow an unsecured lending business,’ says Bates at Liberum.

In 2006 Ramsdens started its high street currency exchange venture and by 2011 it had a wholesale business.

As the company buys currency wholesale, it uses hedging strategies to try and mitigate big swings in currency valuations. Chief financial officer Martin Clyburn says Brexit was a good test of its hedging policy. ‘We emerged from Brexit without scars,’ he adds.

Growing presence                 

Ramsdens derives its earnings from five different sources including pawnbroking (25% of gross profit), jewellery retailing (14% of gross profit) and selling/buying back electronic items.

This diversification is helping the business to thrive. Bates at Liberum even notes that much of the company’s natural competition is exiting or significantly scaling back its high street presence. ‘We believe this presents both organic and acquisition opportunities,’ he comments.

Chief executive Peter Kenyon believes putting all of the company’s various business segments under the umbrella name Ramsdens is another distinguishing factor.

‘We trade as Ramsdens so haven’t limited ourselves to our pawnbroking. The advertising is all about Ramsdens, behind that we can appeal to different markets,’ he adds.

This in direct contrast to H&T, which has rebranded 35 of its shops to ‘Discount Secondhand Jewellery by Est. 1897’.

Ramsdens’ performance has led analysts to upgrade earnings forecasts twice since it joined the stock market earlier this year. Investors will hope this trend is continued when the company reports half year results on 27 November.

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The shares are up by 21% since we featured Ramsdens as one of Great Ideas on 15 June. We’ll update our view on the stock once the results are out later this month. (DS)

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