First Capital Equities Limited is a brokerage company in Pakistan. It is a subsidiary of First Capital Securities Corporation Ltd. FCSC is the holding company of the WorldCall/First Capital Group. The group has interest in a number of companies offering financial, insurance, media and real estate services.
It offers equity trading and equity research services, as well as corporate advisory services with a focus on purchase/sale transactions, private placement, structured financing, and other asset valuation transactions.
FCEL has developed high quality research expertise and its research department publishes periodic reports on various sectors of the industry in addition to daily updates and flashes. The company serves international, institutional, and individual clients.
First Capital Equities, formerly known as First Capital ABN Amro Equities, was established in 1994 and sold to FCSC in 1997. It was listed on Lahore Stock Exchange in 2001 and is a member of Karachi Stock Exchange. FCEL has a countrywide network of offices in Karachi, Lahore, Islamabad, Rawalpindi, Abbottabad, Peshawar, Dera Ismail Khan, Multan, Gujrat, Faisalabad and Hyderabad. FCEL has an affiliation with Auerbach Grayson, an international brokerage house based in USA with presence in about 100 different markets.
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FIRST CAPITAL SECURITIES CORPORATION LTD.
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Q1 '08 - Q1 '09
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Q1 '08 Q1 '09
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Brokerage income 142,843,674 67,806,122
Capital loss - net -149,822 -7,626,838
Income from placements 42,273,553 120,232,742
Other operating income 1,470,636 104,760,467
Loss on re measurement of investments
at fair value through profit or loss - net -1,445,013 -82,758,746
(Loss)/ profit after taxation 68,356,086 -41,351,453
Earnings per share (Basic & Diluted) 0.79 -0.48
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The brokerage income has decreased from Rs 142 million to Rs 67 million by 112%. There has also been a greater capital loss than last year from Rs 150 thousand to Rs 7 million. Income from placements has increased by 186%. Other operating income has increased drastically from Rs 1 million to Rs 105 million.
There has been a greater loss on re-measurement of income this year from Rs 1 million to Rs 82 million. All this has resulted in a loss after tax to Rs 41 million against profit after tax of Rs 68 million last year. The EPS has thus turned negative this year.
INDUSTRY OVERVIEWGlobal economy: The sub-prime mortgage crisis in America (August 2007) had a global impact and led to a worldwide recession. The recent rise in commodity prices also seems to have been at least partly due to financial factors, as commodities have increasingly emerged as an alternative asset class.
Recent financial market stress has also had an impact on foreign exchange markets. The resilience of the emerging and developing economies is due to globalization and exports given commodity price boom. Foreign direct investment and domestic investment in commodity-exporting countries has increased to a greater degree than during earlier booms. However these may experience inflation and reduced demand from developed countries due to the crisis.
PAKISTAN'S ECONOMY: Real GDP grew by 5.8% in 2007-08 as against 6.8% last year. The economy has shown great resilience against internal and external shocks of extraordinary nature. KSE-100 Index was volatile during the year due to political and economic pressures. The Index closed at 12,289 points on 30th June 2008 (down by 11% compared to last year).
However, in April 2008, KSE-100 had crossed 15,000 points. A lot of favourable events occurred: issuance of GDRs by the Lucky Cement, auction of 6 government securities, 5 new corporate TFCs listed on KSE and the NBFCs sector resulted in striking growth with boom in mutual fund industry. In the first three quarters of FY08, KSE performed well.
The average daily volume in the ready market stood at 242m versus that of 212m during FY07 and in futures market average daily volume was 53m compared to 59m in FY07. Average CFS or badla investment at KSE was Rs 52bn versus Rs 38bn, previously. During the year CFS MK II was also launched to improve the liquidity situation of the market.
Despite the exuberant performance of KSE in first three quarters of the year, Pakistan's capital markets suffered due to international financial crunch, deteriorated law and order situation, political instability, inflationary pressures, tightening monetary policy, capital flight, deteriorating rupee-dollar parity, foreign divestments in the last quarter of the year. Subsequent to the year-end, Board of Directors of KSE have imposed a floor on KSE-100 Index as it fell to record low of 9127 points.
PROFITABILITYThe brokerage income has increased from Rs 401 million to Rs 701 million - an increase of 62%. This was largely due to infrastructure development and widespread geographical presence. Quality services, broadening client base and provision of customized solutions have helped the management to provide high returns to the shareholders.
The company has added six new branches during the year. Affiliation with Auerbach Grayson (AGA) has also resulted in increase in brokerage income. There has been an increase in placement income from Rs 118 million to Rs 263 million - increase of Rs 145 million. This is due to additional investment in placements and rise in KIBOR rates.
The capital gains have increased significantly due to sale of WorldCall Telecom Limited shares to Oman Telecommunication Company. All this resulted in an unrealized gain of Rs 220 million. FCEL has sold its subsidiary EPSL (Equity Partners Securities Limited).
This company was incorporated in Dhaka, Bangladesh and listed on Chittagong Stock Exchange Limited and Dhaka Stock Exchange Limited. 61,000 shares (51% shareholdings) were sold for $11,000 due to deteriorating investment climate in Bangladesh. The performance of capital markets resulted in an unrealized loss of Rs 9 million. Operating expenses of the company have been increased by Rs 124 million (up by 47%).
Expanding operations, inflationary pressures and rise in cost of doing business have resulted in incline in expenses. Working capital requirements have increased due to increase in placements and trade receivables. The company has also increased its financial leverage resulting in a rise of Rs 217 million in finance cost (ie 62%). Prevailing stock market situation has resulted in increased trade receivables.
The increase in operating expense and finance cost has posted an adverse impact on Profit after Tax (PAT). PAT has decreased from Rs 354 million to Rs 293 million demonstrating a decline of 17%. Increase in finance cost has led the company to give late payment charges. The total equity and assets have increased by 23% and 90% respectively. This decline in PAT and increase in equity and assets are responsible for decline in return on equity and return on assets.
LIQUIDITYThe current ratio and revenue to expense ratio have declined over the time indicating a weak liquidity position for the company. The current maturities on long term liabilities have declined to zero. Liabilities against repurchase agreements have declined by 45%. However, the short-term borrowings have increased by 422% resulting in increase in the value of interest accrued by 367%.
The significant increases in current assets are as follows: trade debts increased by 924%, cash and bank balances by 131% and placements by 72%. The current assets have increased by 91% but this was exceeded by the increase in current liabilities which was by 132%.
This has finally resulted in a lower liquidity ratio compared to favourable liquidity ratios in the previous two years. Some clients have defaulted on loans provided by the major shareholder of the company ABN Amro but this amount in case of non-recovery will not affect the financial position of the company. Overall, the company does not face a liquidity risk.
DEBT MANAGEMENT AND RISK MANAGEMENTThe non-current liabilities consisted of only staff retirement benefits. These have peaked by 56% since last year. This has resulted in an overall increase in non-current liabilities of 27%. However the long term debt to equity ratio shows that this is insignificant compared to D/E or D/A ratios as current liabilities exceed the long-term liabilities by a humungous amount. The increases in current liabilities were discussed in the liquidity section.
The TIE ratio has decreased substantially due to a massive rise in finance costs by 161% and the smaller increase in EBIT/operating profit which has increased by 31%. Mark-up on short-term borrowings has seen a major increase from Rs 43 million to Rs 219 million (up by 409%). Mark-up on repurchase agreements and bank commission and charges have also increased by 46% and 79.5% respectively.
The increases in interest rates and higher dependence on short-term borrowing resulted in this trend. The company must reduce its financial costs to maintain a reasonable TIE ratio as the current situation shows that earnings may not be sufficient to meet the financial costs.
Foreign exchange risk and credit risk, are of utmost importance to manage. Out of total financial assets of Rs 6,167,389,382, only Rs 7,564,220 (0.129%) are exposed to foreign currency risk so hedging is not feasible. Out of total financial assets of Rs 6,043,617,605, only Rs 2,244,411 (0.04%) are exposed to credit risk. This is managed by monitoring debts, deposits of margins before execution of orders and obtaining adequate securities for placements/receivables.
INVESTOR EXPECTATIONSThe book value has increased over the time due to increase in equity, which outpaced the increase in number of shares outstanding. The increase in equity in FY07 was by 93% and in FY08 this was by 23% while the change in the number of shares issued was by 15% in FY07 and 60% in FY08. The EPS has remained fairly stable. PACRA has assigned the company A for long term and A1 for short term for its good and consistent financial performance. This is a good signal for the company as it will help attract investors.
Graph (taken from the website of Lahore Stock Exchange) shows current most prices on the left and is for the period Jul 2008 to September 2008. The stock price has increased in the Q1'09. The current price of the stock has increase to Rs 163.75 in November 2008 compared to Rs 153.55 in June 2008, which is also a positive omen.
FUTURE OUTLOOKThe company plans to pursue its strategy of increasing its retail, institutional and foreign sales and at the same time maintaining its risk exposure to established tolerable levels. Market share of the company has been increasing in line with the company's medium term targets and the same pattern is expected to prevail. Increase in CFS cap, allowance of short selling on future contracts and Value at Risk (VAR) regime are all expected to result in increased activity in the market and resultantly in increased earnings for the company.
Corporate earnings have improved and all macroeconomic indicators propose growth in the market place. The company is fully geared to reap all the associated benefits from such developments. Currently, FCEL is striving for consistent growth in the revenue and profitability of the Company by expanding brokerage operations through opening of new branches and controlling operating costs.
It is also completing and reviewing its options to expand in the areas of Real Estate Investment Trust, Commodity Brokerage and Investment Finance Services, in addition to reviewing the options of raising funds through issue of securities by way of listing on KSE and/or Dubai Stock Exchange subject to completion of necessary corporate and regulatory approvals where required. The diverse portfolio of the First Capital Group also serves as a positive stimulant for the company's growth in the future and the viability of the firm.
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FIRST CAPITAL EQUITIES LIMITED
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FY '02 - Q1 '09 (in millions of rupees)
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BALANCE SHEET FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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NON - CURRENT ASSETS
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Property and equipment 36.02 23.26 18.04 41.66 58.04 164.15 448.88
Stock exchange membership card and room 56.20 56.20 56.51 57.56 40.70 40.70 40.70
Investments - available for sale 0.00 0.00 7.10 7.06 6.87 33.16 121.77
Long term loan - Unsecured 0.00 0.00 0.00 0.00 10.19 10.19 0.00
Long term deposits and advances 2.15 1.46 2.24 2.17 7.14 80.64 3.44
Total 94.36 80.92 83.89 108.45 122.93 328.84 614.78
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CURRENT ASSETS 0.00 0.00 0.00 0.00 0.00 0.00 0.00
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Trade debts - Unsecured 31.09 129.85 227.41 294.32 572.75 219.27 2244.41
Investments 11.41 23.10 238.88 88.40 231.37 586.02 328.73
Advances, deposits, prepayments 18.74 37.20 68.53 49.23 134.05 967.25 1003.54
and other receivables
Advance income tax 0.00 0.00 29.59 33.56 35.63 37.90 42.65
Placements 0.00 0.00 0.00 225.00 677.64 1158.75 1997.43
Interest accrued 0.00 0.00 0.56 3.08 9.35 13.32 18.28
Cash and bank balances 58.22 27.73 111.62 91.72 240.37 145.27 334.96
Total 119.46 217.89 676.58 785.30 1901.18 3127.78 5970.00
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TOTAL ASSETS 213.83 298.81 760.47 893.75 2024.11 3456.61 6584.78
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EQUITY AND LIABILITIES 0.00 0.00 0.00 0.00 0.00 0.00 0.00
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Issued, subscribed and paid
up share capital 120.04 120.04 240.07 240.07 240.07 540.16 864.25
Share Premium 0.00 0.00 0.00 0.00 0.00 90.03 90.03
Unappropriated Profit 20.49 65.87 121.57 202.03 434.49 668.63 637.62
Total equity 140.52 185.90 361.64 442.10 674.56 1298.82 1591.90
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NON - CURRENT LIABILITIES 0.00 0.00 0.00 0.00 0.00 0.00 0.00
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Long term financing - Secured 0.00 0.00 0.00 0.00 8.28 3.24 0.00
Liabilities against assets subject to finance 0.04 0.04 0.57 0.79 0.11 0.00 0.00
deferred liabilities 3.55 4.99 5.15 6.52 0.00 0.00 0.00
Staff retirement benefits 0.00 0.00 0.00 0.00 8.97 14.05 21.94
Total 3.59 5.02 5.72 7.31 17.36 17.29 21.94
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CURRENT LIABILITIES 0.00 0.00 0.00 0.00 0.00 0.00 0.00
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Trade and other payables 31.05 95.34 316.97 237.33 582.42 421.95 426.12
Liabilities against repurchase agreements-Se 0.00 0.00 1.31 5.54 515.00 923.75 508.43
Short term borrowings - Secured 14.25 0.00 66.97 188.78 206.04 752.33 3924.15
Current portion of long term financing 0.00 0.00 0.00 0.00 5.04 5.04 0.00
Interest accrued 19.66 7.22 0.00 0.66 7.91 19.80 92.43
Current maturity of liabilities against 1.51 0.06 0.20 0.36 0.68 0.11 0.00
assets subject to finance lease
Provision for taxation 3.25 5.25 7.66 11.66 15.11 17.53 19.80
Total 69.71 107.88 393.11 444.34 1332.19 2140.51 4970.93
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TOTAL EQUITY & LIABILITIES 213.83 298.81 760.47 893.75 2024.11 3456.61 6584.78
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INCOME STATEMENT FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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INCOME
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Brokerage income 45.75 89.30 122.48 258.55 281.82 430.56 700.62
Capital (loss) / gain 4.49 10.60 61.10 47.59 0.87 (4.79) 100.32
Gain on sale of stock exchange - - - - 17.34 - -
membership card and room
Income on CFS placements - - - 18.36 3.51 6.70 0.14
Other operating income 11.99 12.06 5.14 42.98 76.02 154.46 306.81
62.24 111.97 188.72 367.47 379.55 586.93 1,107.90
Unrealized gain (loss) on 0.06 6.91 (12.07) (21.95) 144.25 219.73 (9.11)
re-measurement of investments
62.29 118.88 176.65 345.52 523.80 806.66 1,098.78
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EXPENDITURE - - - - - - -
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Operating expenses 53.11 69.52 109.87 189.64 190.23 262.83 387.64
Other charges 0.85 0.07 7.47 - - - -
Finance costs 2.85 0.96 2.37 45.43 68.92 135.80 353.76
56.81 70.56 119.71 235.06 259.15 398.64 741.41
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OPERATING PROFIT 5.48 48.32 59.31 155.88 333.57 543.83 711.14
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Share of (loss) / profit from - - 0.23 (0.03) - - -
subsidiary company
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PROFIT BEFORE TAXATION 5.48 48.32 57.17 110.42 264.65 408.02 357.37
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Taxation 0.23 2.94 1.46 29.97 31.99 53.84 64.29
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PROFIT AFTER TAXATION 5.25 45.38 55.71 80.45 232.66 354.18 293.09
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EPS 0.44 3.78 3.06 3.35 4.94 4.30 3.39
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FINANCIAL RATIOS FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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PROFITABILITY RATIOS
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PAT/revenues 8.43% 38.17% 31.54% 23.29% 44.42% 43.91% 26.67%
PBT/revenue 8.80% 40.65% 32.36% 31.96% 50.52% 50.58% 32.52%
Return on Assets 2.46% 15.19% 7.33% 9.00% 11.49% 10.25% 4.45%
Return on Equity 3.74% 24.41% 15.40% 18.20% 34.49% 27.27% 18.41%
LIQUIDITY RATIOS
Current Ratio 1.71 2.02 1.72 1.77 1.43 1.46 1.20
Revenue/Expense Ratio 1.10 1.68 1.48 1.47 2.02 2.02 1.48
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DEBT MANAGEMENT RATIOS
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Debt to Asset 34.28% 37.79% 52.44% 50.53% 66.67% 62.43% 75.82%
Debt to Equity Ratio 52.16% 60.73% 110.28% 102.16% 200.06% 166.14% 313.64%
Long Term Debt to Equity 2.56% 2.70% 1.58% 1.65% 2.57% 1.33% 1.38%
Times Interest Earned 2.92 51.29 26.01 4.43 5.84 5.00 3.01
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MARKET RATIOS
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Earning per share 0.44 3.78 3.06 3.35 4.94 4.30 3.39
Book value per share 11.71 15.49 19.89 18.42 14.32 25.99 31.85
No of Shares issued 12.00 12.00 18.19 24.01 47.09 49.98 49.98
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