ICRA Lanka reaffirms the issuer rating of [SL]BBB+ with Stable outlook for Capital Alliance Holdings Ltd
|Instrument||Previous Rated Amount (LKR Mn)||Current Rated Amount (LKR Mn)||Rating Action|
|Issuer rating||N/A||N/A||[SL]BBB+ (Stable); reaffirmed|
ICRA Lanka Limited, subsidiary of ICRA Limited, a group company of Moody’s Investors Service, has reaffirmed the issuer rating of [SL]BBB+ (pronounced SL triple B plus) with Stable outlook for Capital Alliance Holdings Ltd (CALH or “the Company”).
The rating factors in CALH’s status as the holding company of Capital Alliance Limited (CAL), a leading standalone primary dealer (PD) in Sri Lanka (Issuer rating of [SL]A-/Stable outlook). The rating also factors in CALH’s position as the holding company of the group, with entities offering various financial services, including stock broking, asset management and corporate advisory services; contribution to net profits from these businesses however is quite modest at present. Consequently, CALH’s performance is highly dependent on CAL. The rating factors in the improvement in standalone leverage to 2.42 times (3.35 times in March 2019 and 3.14 times in March 2018) and net worth of LKR 479 Mn in December 2019. Going forward, CALH is expected to continue as a non-operating holding company of the group, while ICRA Lanka envisages the capital profile to improve with the expected earnings generation of its subsidiary companies. Company had access to LKR 525 Mn of funding lines in October 2019, which provides comfort from a liquidity perspective. Further, ICRA Lanka envisages support from the promoters or other promoter-owned entities, if required. Going forward, performance of the subsidiaries, especially CAL, and maintaining healthy levels of capitalization and liquidity, are key from a rating perspective.
The outlook may be revised to “Positive” if CALH’s standalone financial profile improves significantly or if the risk profile of the subsidiaries, especially CAL, improves. The outlook may be revised to “Negative” in case of an increase in standalone leverage, weakening in its liquidity and earnings or in case of a deterioration in the risk profile of CAL.
Key rating drivers
Holding company of CAL; other group entities offer diverse financial services: CALH’s subsidiary, CAL, is a leading primary dealer in Sri Lanka (90.8% owned by CALH). CALH is expected to continue to benefit from the dividend flow from its primary dealer operation.Other group entities offering various financial and capital market services create synergies, whilst diversifying income sources. Capital Alliance Partners Limited, which provides corporate finance advisory services reported a total fee income of LKR 140 Mn in FY2019 (LKR 271 Mn in FY2018). The asset and wealth management division, Capital Alliance Investments, reported a total income of LKR 133 Mn in FY2019 (LKR 191 in FY2018); total assets under management stood at LKR 21 Bn in March 2019 and grew to LKR 39 Bn in January 2020. Capital Alliance Securities (Pvt) Limited, a licensed stock broker on the Colombo Stock Exchange, reported a total income of LKR 95 Mn in FY2019 (LKR 137 in FY2018). Income from the IT division and from standalone investments was together LKR 18 Mn in FY2019 (LKR 58 Mn in FY2018). A recent business venture of CALH to operate a multi-family office offering various advisory services is expected to further augment the fee-based income of the group and create additional synergies. Nonetheless, contribution from businesses apart from the PD operation, remain relatively modest currently.
Group performance is significantly dependant on CAL: Group performance is largely driven by the primary dealer operation, which represented over 85% of consolidated assets and 75% of group operating income in FY2019; thus, the group is susceptible to risks (especially market risk) inherent to the PD industry.
Modest standalone earnings profile: As a holding company, CALH is primarily dependent on the dividend income flow from its key operating subsidiary, the primary dealer business. In FY2019, dividend income stood at LKR 3 Mn on trading share portfolio vis-à-vis LKR 140 Mn in FY2018 and LKR 200 Mn in FY2017, which accounted for 1%, 45% and 70% respectively, of the recurring total income. Due to trading losses incurred by the PD business, CALH reported a standalone net loss of LKR 39 Mn in FY2019 vis-à-vis a net profit of LKR 761 Mn in FY2018 on the back of one-off capital gains of LKR 731 Mn (gains from the divestment of its tea brokering subsidiary amounting to LKR 313 Mn and gains from a share repurchase of CAL amounting to LKR 418 Mn), while net profits in FY2016 and FY2017 stood at about LKR 115-120 Mn per annum. ICRA Lanka envisages company’s earnings to be healthy in the current fiscal, due to the robust earnings of CAL; same is expected to remain linked to CAL’s performance going forward as contribution from other subsidiaries is modest.
Moderate capitalization profile; likely to improve: Standalone net worth of CALH stood at LKR 479 Mn in December 2019 and LKR 483 Mn in March 2019, with gearing at 2.42 times and 3.35 times, respectively. ICRA Lanka takes note of the dividend payouts and share re-purchases over the period FY2016-FY2018, and modest profitability of the PD in FY2019, which has kept networth at range-bound levels. Going forward, ICRA Lanka envisages CALH to continue operating as a pure investment holding company, while capital profile may improve with the expected earnings generation of its subsidiary companies. From a liquidity perspective, standalone interest cover stood at around 1.0 times in December 2019, compared with 0.7 times in March 2019 (7.2 times in March 2018). As in October 2019, company had unutilized bank lines of around LKR 525 Mn, supporting its liquidity profile. In addition, ICRA Lanka envisages support from the promoters or other promoter-owned entities, if required. Ability to keep gearing under control going forward would be crucial, considering the lumpy nature of cash flows of holding companies.
Analytical approach: For arriving at the ratings, ICRA Lanka has applied its rating methodologies as indicated below.
Links to applicable criteria: ICRA Lanka Issuer Rating Methodology
About the Company:
Capital Alliance Holdings Ltd (CALH), through its subsidiaries provides a wide range of financial and capital market solutions. At standalone level, the Company is engaged in managing its subsidiaries i.e. Capital Alliance Limited (CAL) which is an authorized primary dealer of government securities, Capital Alliance Partners Limited, which provides advisory services on debt placements, equity raising, mergers and acquisitions and corporate restructurings, Capital Alliance Investments Limited involved in asset management and private wealth management, Capital Alliance Securities (Pvt) Limited involved in stock broking, and Finnovation (Pvt) Limited which provides IT solutions for group entities and third parties.
For the financial year ended March 31, 2019, CALH on a stand-alone basis reported a net loss of LKR 39 Mn, on a total asset base of LKR 2.2 Bn, vis-à-vis a net profit of LKR 761 Mn on a total asset base of LKR 2.3 Bn during the previous fiscal. For the 9M ended December 31, 2019, CALH reported a stand-alone net loss of LKR 5 Mn on a total asset base of LKR 1.7 Bn.
For the financial year ended March 31, 2019, CALH reported a consolidated net loss of LKR 45 Mn, on a total asset base of LKR 13.1 Bn, vis-à-vis a net profit of LKR 970 Mn on a total asset base of LKR 12.8 Bn during the previous fiscal.
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