With the First Capital Treasuries’ (FCT) Initial Public Offering opening on Monday the 6th of December, Lanka Business Online (LBO) spoke to Anjelo Simmons, the Chief Dealer at FCT to find out what makes the company a unique investment opportunity. Given the ongoing positive momentum centred around the Colombo Stock Exchange (CSE) and propelled by renewed investor interest, First Capital Holdings PLC (FCH), a member of the Janashakthi Group and the parent company of FCT, look to have timed their IPO perfectly in response to market demand.
Q – It is not every day the public gets to invest in a company that deals in investment instruments. Can you tell us how investing in a primary dealer can be beneficial for someone?
A – Currently, First Capital Holdings PLC is the only listed investment institution in the country. Therefore, it is true that rarely does the public get the opportunity to invest into a Company that deals in various classes of assets.
The current landscape of the Primary Dealer (PD) industry is such that it is limited to just 10 institutions and the industry is highly regulated with close supervision by Central Bank of Sri Lanka. There are acute entry barriers in the industry which requires both a high level of knowledge and capital. Therefore, opportunities are limited and exclusive in securing ownership, especially of a stand-alone non-bank PD. Additionally, there are abundant opportunities for Primary Dealers who exclusively deal in Government Securities as it is considered the largest and most liquid asset class of the country approximately at LKR 8.5 Tn. High interest rate volatility, growth in tradable Government Securities and an increase in secondary market trading activity have enabled PDs to capitalise on them and deliver above average returns creating value for its stakeholders. FCT has proven this in the past, by recording a 5-year average ROE of 29% and maintaining a 10-year Dividend pay-out of 50%.
It is also noteworthy that the introduction of Central Counter Party clearing, which removes the limitations and restrictions in the existing system, will create a surge in secondary market transaction volumes. That too will create opportunity for growth in profitability of the Company.
The industry has also been revolutionized with the introduction of Digital Documentation, E-Signatures and Video Verification for Account Opening which creates a higher level of accessibility that will drive the growth of the industry.
Q – What is the unique sales proposition that the FCT IPO offers to the prospective investor?
A – In short, Strength, Stability and Trust!
Historically, Primary Dealers have maintained a higher Dividend Pay-out (DPO) to shareholders as the requirement to retain capital is less. At FCT, we have maintained an average DPO of 50% over the past 10 years as indicated earlier. Therefore, there’s room for investors to benefit from a higher dividend yield over the medium to long term.
FCT is the oldest non-banking PD in operation, dealing in Government Securities for over 3 decades, and the non-banking PD with the highest credit rating of [SL] ‘A’ with a stable outlook by ICRA Lanka. FCT is also the only standalone PD with the largest capital base of over LKR 4 Bn which is higher than the minimum capital requirement of LKR 2 Bn by 2022 and LKR 2.5 Bn by 2023 required by CBSL. We operate with the largest asset base of over LKR 24 Bn and have recorded the highest revenue as of 31st March 2021 amongst Non-Bank PDs.
FCT was the first PD to raise subordinated debt and obtain a listing on the CSE by way of a Debenture Issue in 2015, as a result of which we have already complied with the listing rules of the CSE, a testament to our transparency and good governance. In 2020/21, FCT was able to raise the highest amount of debt in primary auctions among PDs, at approximately 18%. We also take pride in our long-standing shareholders, one of them being the Employee Trust Fund Board, which is our 2nd largest shareholder since 1999.
We adhere to our group strategy of ‘Performance First’ and have brought about change in the industry with the introduction of Online Account Opening and accessibility through the First Capital Online Customer Portal. We will continue the current strategic direction that has served us, and strengthen FCT’s position as a leading standalone Primary Dealer in Primary Auctions and to be amongst the top three in the secondary market.
Q – Many Sri Lankans outside the industry got interested in Primary dealers when the so-called ‘bond scam’ came to light, which may have left a wrong impression in people’s minds about PDs. What is your take on this, and do you think investor confidence is affected by it?
A – Yes, the unfortunate circumstances surrounding that incident did cast a bad light on the industry. However, the silver lining in the dark cloud was that, people became more aware of the role played by PDs in the financial markets which heightened awareness of the Government Securities market. As a company with an untarnished reputation FCT was able to capitalise on this awareness to build on our client base, among other things. The industry is all about timing the market and understanding market cycles and we at FCT make our calls based on our industry knowledge, and based on our research which is highly treasured across the industry.
The incident also prompted the regulator to streamline best practices in the industry and to introduce strict codes of conduct for PDs and people employed by them, which has resulted in increased transparency across the industry. Within FCT, we have a rigorous internal risk and compliance framework that we must adhere to, and we have investment committees where our MD, CEO and Directors who are well respected experts in the field of Finance and Economics sit on, to ensure compliance. Therefore, the investment decisions we make are extensively discussed and well calculated, and we do what we do knowing we will be held accountable.
First Capital also enjoys a continued positive relationship with the Central Bank of Sri Lanka due to our internal best practices, rigorous controls, and governance standards.
Q – FCT is already listed in the CSE and also has a strong capital base as mentioned by you. What is the thinking behind FCT going for an Equity IPO in this backdrop?
A – As mentioned before, we operate in the largest segment of the local capital market and the one that is growing rapidly. The listing is a part of First Capital Group’s strategy to broad base FCT’s ownership, building a more credible and widespread brand name. Looked at together with the Government’s economic growth and GDP expansion agenda, there is immense potential for growth in the PD industry and we must be ready to take advantage of these opportunities.
We must also remember that being a listed entity creates more opportunities for the company to bring in more liquidity. Because a listing enables the Company to return to the market at any given time to raise additional capital utilizing multiple avenues available for a listed entity on the CSE, subject to the receipt of relevant regulatory approvals. PDs can leverage about 10 times their capital; so, having this alternative avenue is important for FCT increase its capital base.
The lacklustre IPO pipeline received a massive boost because of last year’s budget proposals that incentivized companies to be listed on the Colombo Stock Exchange. As of September, five equity IPOs and a few debt IPOs have taken place and the CSE raised about LKR 75 billion capital from both debt and equity IPOs invigorating the market. Not many companies were ready to complete the listing process in 12 months, but we included this as part of our corporate strategy and were able to work towards obtaining the listing. This listing also gives an opportunity for our stakeholders; our loyal customers, staff and other business partners, to benefit from the performance of the company which they have supported loyally thus far, making them true partners of our endeavours.