Bangkok--4 Dec--TRIS Rating
TRIS Rating has affirmed the company rating of Country Group Securities PLC (CGS) at “BBB-”. The outlook remains “negative”. The rating reflects CGS’s strong capital base and the recurring income stream from its strategic investment in MFC Asset Management PLC (MFC). These strengths are, however, offset by the transition risks and uncertainty surrounding the recent change in CGS’s key management positions, limited track record of the management team, and the company’s high operating expenses. In addition, the rating is constrained by the cyclical and volatile nature of the securities industry and the downward pressure on brokerage commission rates resulting from the full liberalization of brokerage fees in 2012. The market risk associated with the company’s proprietary trading efforts also affects the credit profile of the company. The “negative” outlook reflects the decline in CGS’s market share in securities brokerage. The outlook also takes into consideration the uncertainty from the business restructuring concerning the business scope of CGS and the business direction of the holding company.
Originally registered under the name Adkinson Enterprise Co., Ltd. in 1966, CGS is one of the oldest securities companies in Thailand. The most recent change in its shareholding structure occurred when the controlling shareholders changed from the Kewkacha family to the Taechaubol family in 2006. As of May 2014, the Taechaubol family held 18.3% of the company’s outstanding shares.
CGS changed its team of top executives in the last quarter of 2013. The change has adversely affected CGS’s business profile and financial performance. A team of executives and marketing staff left CGS late last year, taking some clients with them. CGS’s market share, in terms of securities brokerage volume, declined to 3.1% (ranked 12th in the industry) for the first 10 months of 2014. CGS’s market share used to be 5%-6% (ranked within the top five) before the management change. The decline in CGS’s market share will not immediately trigger a rating action. The rating assigned to CGS earlier already incorporated the short track record of the management team, in terms of its ability to sustain CGS’s market share. Any future credit rating action would depend on the ability of the management team to maintain the company’s overall competitive position and to deliver satisfactory financial results over the next one to two years.
CGS’s high operating expenses have put pressure on the company’s profitability. CGS’s pre-tax margin was 21% in 2013, compared with an industry average of 39%. For the first nine months of 2014, CGS’s smaller market share, coupled with the lower market trading volume, caused CGS’s pre-tax margin to drop to 15%. CGS reported a net profit of Bt122 million for the first nine months of 2014, compared with Bt380 million for the same period in 2013. CGS’s profitability might be more vulnerable to changes in the economy and competitive forces because of its high level of operating expenses.
CGS has some exposure to market risk from its proprietary trading activities. CGS engages in two types of proprietary trading: speculative day trading and equity investments held as medium- to long-term investments. As for the credit risk exposure, CGS’s margin loan portfolio stood at Bt574 million at the end of September 2014, representing 18% of its equity base and 1% of industry-wide margin lending.
In April 2014, CGS’s shareholders approved a business restructuring plan. Under the terms of the plan, a newly-established holding company will make a tender offer for the ordinary shares of CGS, in exchange for newly-issued shares of the holding company. If the tender offer is successful, CGS’s key lines of business, including investment banking and its investment division, would be divested to the holding company. CGS’s investment in MFC Asset Management PLC (MFC) would also be transferred to the holding company. CGS’s remaining business would be limited to securities and derivatives brokerage and providing related services.
In TRIS Rating’s view, CGS’s investment in MFC provides it with a relatively stable source of recurring income from fund management fees. CGS owns a 24.9% stake in MFC. Its share of MFC’s profits accounted for 21% of CGS’s pre-tax earnings in 2013. With the decline in CGS’s brokerage market share, the profits from MFC will be even more important to CGS’s financial performance. The business restructuring plan will narrow dramatically CGS’s business scope. As a result, CGS will have a less diversified mix of revenue sources and its credit profile will be impaired.
As of 30 September 2014, CGS’s shareholders’ equity was Bt3.2 billion. Its large capital base allows the company to handle large brokerage trading volume and serves as cushion against the credit risk of its margin loan portfolio and the market risk of its proprietary investment portfolio. CGS’s net capital ratio
(NCR) has been historically strong. It stood at 181% at the end of June 2014, much higher than the regulatory requirement of 7%.
Country Group Securities PLC (CGS)
Company Rating: BBB-Rating Outlook: Negative