Chief Executive Office's Report

Chief Executive Officer’s Report

Despite the continuation of tough market conditions in both Papua New Guinea (PNG) and the Solomon Islands, Credit Corporation (PNG) by solid results in 2017. Our finance businesses in PNG, Vanuatu and Fiji, recorded improved operating results in 2017 and the company’s key equity stake in Bank of South Pacific Limited (BSP) again delivered very good dividends as well as valuation gain given BSP share price appreciation. Our property business continued to see competitive pressure in Port Moresby and performed marginally lower than in 2016. The Core Operating Profit for Credit Corporation (PNG) Limited and its subsidiaries increased 14.4% to K75.4 million for the year ended 31st December 2017. This excludes the effects of valuation gains or losses.

In contrast, the Group’s Net Profit after Tax fell 25.6%  to K73.6 million for 2017. This result included a positive valuation gain of K18.6 million against the  value of the company’s shareholding in Bank South Pacific Limited and other listed companies, compared to a larger valuation gain in 2016 of K56.8 million.  A negative adjustment of K19.8 million was made as a result of a write-down in the fair value of investment properties, following a negative adjustment in 2016 of K22.1 million. Shareholder’s funds have continued to grow and were at K811.7 million, a rise of 3.1% over 2016, while total assets have grown to a record K1.358 billion at year end, a rise of 8.7% over 2016. Group Finance Receivables grew to K480.9 million by 31 December 2017, a very strong 21.6% increase from 2016 and reflecting growth in all markets, including PNG. Net asset backing per share had increased to K2.63 per share as at the end of 2017, compared  to K2.50 in 2016, underlining the strong financial position of the Group built up over the past 39 years.

2017 was a challenging year in terms of leadership change, with our Group Chief Executive  Officer (CEO) resigning in late 2017. However it is pleasing to report that well known and respected business leader, Mr Peter Aitsi has accepted  the position of Group CEO and joins us in April 2018. Mr Aitsi brings a unique set of management and leadership skills to the Group, gained during his tenure holding various senior management positions across a range of industries in PNG. Most recently Mr Aitsi has been Country Head for Newcrest Mining Limited

Credit House

Credit House faces strong  competition  in downtown Port Moresby from existing high-quality office blocks. The company  reported  a Net Profit after Tax  of K3.7 million for 2017, compared to K11.4 million in 2016. This included a loss on revaluation of K1.3 million, compared to a gain of K14.2 million in 2016. A building refurbishment program was accelerated through 2016 and 2017 given vacancies in Credit House, progressively updating  vacant  floor space  to  a  high standard to attract potential corporate tenants. That refurbishment program has now been completed, with occupancy levels rising to 60% as at the end  of 2017, with occupancy at a pleasing 83% by end of March 2018. We believe that Credit House is now well positioned to attract good quality corporate tenants and are hopeful of near total occupancy by the end of 2018.

ERA Dorina

Conditions remained  challenging  in 2017 with  a  flat market for executive rental units existing in Port Moresby. Era Dorina Limited recorded  a  Net  Loss  after Tax  of K6.8 million in 2017 (K9.2 million in 2016), including a negative fair value adjustment  of K16.7 million on the property (negative K19.5 million in 2016). This reflects the continuing challenge of new high quality residential accommodation in Port Moresby, and falling rental rates in the executive rental market.The  board  approved  an  amount  of K10.7 million to progressively fully refurbish a number of units in the older Stages 1 and 2, with this work commenced in early 2018. This capital commitment was seen as vital to ensure that the Era Dorina development retains its reputation as one of Port Moresby’s premier residential complexes. Occupancy fell slightly from 63% at the end of 2016 to 60% at the end of 2017. By March 2018, occupancy had increased  to  61%. Looking forward, occupancy  levels and company  performance  are  expected  to  improve as the unit refurbishment program completes  by mid- 2018, and refurbished apartments  become  available to rent. We believe Era Dorina continues to be attractive, especially to families, and expect more interest in 2018 as we continue our ongoing refurbishment plan.

ERA Matana

2017 was the  first full year in which Era Matana was available for  rent,  and  take  up  was  slower than  we had  hoped. Era Matana Limited recorded  a Net Loss after Tax of K6.4 million,  including a negative fair value adjustment  of K4.0 million.  Like Era Dorina, this reflects the competitive challenge from recently constructed accommodation targeting the executive rental market. Occupancy improved from 11% at the end of 2016, when the property was just completed, to 40% at the end of 2017. By March 2018, occupancy had increased to 57%, reflecting reduced  rental rates  and  increased  interest from our target executive rental market. We believe  this  property  will attract  higher  interest in 2018, reflecting the  high  quality and  very secure accommodation sought after by our target market.

Credit Corporation Industrial Limited

Credit Corporation Industrial Limited was incorporated in 2016 as the vehicle to purchase a block of industrial land at Gerehu, the industrial area of Port Moresby. The plan at the time was to develop an industrial building and diversify our property holdings. During 2017 geotechnical assessment of the site indicated less viable construction base than anticipated, and we put on hold construction plans pending further work. That work is currently underway to determine the business case of development, and if not appropriate we will consider other options including divestment.

Credit Corporation Finance Limited

In 2017, the challenging economic environment in PNG continued  from previous years, with softening  of the mining and  petroleum  sectors and  the  effects of the 2015 drought  in the  Highlands region still being  felt. Adding to the slowdown in the economy, elections were conducted  in 2017 which had  an adverse impact  on business in PNG. Many of our customers rely on both the mining sector and government  contracts and have found the going tough. The company  reported  a Net Profit after Tax  of K5.2 million in 2017, an increase of 525.6% from  K0.8 million  in 2016 reflecting a fall in provision expenses to K3.2 million following (abnormally high) provision expenses of K11.2 million in  2016. Net  receivables increased  by  12.2% to K251.4 million compared  to K224.0 million in 2016, and  provision for  doubtful  debts  fell  to  K12.4  million compared to 2016 of K13.7 million.

Non-performing  assets  have  largely been   contained for the  year,  however there  is continuing  difficulty of contractors in paying their commitments  on time and the further weakening of the PNG economy.  The arrears position will continue  to be  monitored  and  managed carefully.  We have a sound and adequately capitalised balance sheet with a net asset position of K106.9 million, which is a 3.6% increase on the 2016 figure of K103.2 million. Total Capital Adequacy Ratio was 35.2% at the end of 2017, compared to 33.2% in 2016.

In Timor-Leste, we have over the last two years worked hard to establish a branch of Credit Corporation Finance, which  operates  as  a  branch  of  our  PNG operation. Pleasingly, we had some traction in 2017 to fund our first loans, and we continue  to work with the regulator on raising deposits which would enable organic growth to accelerate. 2018 will again be a challenging year with the current level of economic activity in Papua New Guinea and a highly competitive  asset  finance  market. A  Business Development Manager was recruited in late 2017 and we are confident that we can maintain and increase our market  share  and  continue  to  maximize shareholder returns.

Credit Corporation  (FIJI) Limited

2017 proved to be another very successful year for our Fiji  business,  despite  the  challenges  presented  by an increasingly competitive asset finance market in Fiji. 2017 saw many sectors of the Fiji economy rebound from the damaging  effects of Cyclone Winston and  rebuilding efforts intensify. The company returned a record Operating Profit of K16.2 million for the year,  a 15% increase on the prior year’s result. Net Profit after Tax was K12.8 million in 2017, a 16% improvement over the 2016 result and exceeded budget expectations. Finance volumes were also at record levels, exceeding K113 million for the first time and as a consequence, the company’s net  finance receivables increased  to  K194 million as at 31 December 2017, 24% up on 2016. A fundamental change in business mix was evident, with 2017 seeing  a strong  increase in the  number  of new cars being financed given more favourable import duty concessions which came into play from 1 January 2017. The numbers of second hand vehicles being imported into the Fiji market and being financed fell significantly after a number of years of strong growth in this area. The company remains in a very strong financial position, with  total  assets  of K259.9 million and  shareholder’s funds of K59.6 million as at 31 December 2017. Capital Adequacy as at the end of 2017 was 26.3%, comfortably exceeding  regulatory minimum and  the  finance book remains well provisioned against any future shocks.

The Fiji economy is expected to grow for the 9th consecutive year in 2018 with growth of 3.6% forecast. Buoyant economic conditions should present good finance opportunities to allow for the continued growth of our business in this market. Elections ahead for Fiji in 2018 and it is to be hoped that the process is a smooth one allowing for a continuation of stable Government.

Credit Corporation  (SI) Limited

Credit Corporation (SI)  Limited enjoyed another profitable year in 2017, albeit lower than 2016. Operating Profit for 2017 was K3.0 million,  38% below 2016, and after a positive tax adjustment  of K580,000  Net Profit after Tax was K3.5 million, 5% below 2016. The business environment in the first half of 2017 was quite challenging resulting in low volumes of new business being captured but slowly picked up during the second half. Total new loans were K22 million for the full year, 10% less than 2016.As a result of the Solomon Islands Government’s  poor cash flow position, local contractors and service providers were not able to get their payments on time.  This has severely affected some of our key customers resulting in their loans being forced into the past 90 day’s threshold and increased provisions expenses in 2017. The business is well capitalised and  continues  to maintain a sound balance sheet.

Credit Corporation (VANUATU) Limited

2017 proved to be an exceptional financial year for our Vanuatu business. A strong operating profit of after tax of K5.4 million  was achieved for the year against budget of K2.2 million  and 314% up on the prior year’s result of K1.3 million. Rising business volumes were the main contributor to the improvement in bottom line result, with new finance of K32.1 million written against a budget of K18.0 million and K16.1 million in 2016. The company’s balance sheet  has experienced  strong growth, with total assets growing to K42.3 million as at the 31 December 2017 as compared to K20.2 million as at the end of 2016. Shareholder equity increased to K15.3 million at the end of 2017 from K12.8 million as the end of 2016. The company’s capital adequacy ratio was at a very comfortable 38.9% at year-end against a minimum prudential requirement of 8%.

An environment  of  high  liquidity and  therefore  low interest rates existed in Vanuatu through the year, allowing for an improved cost of funding for the business. The company has also been successful in broadening its deposit base and attracting term deposits from a number of new corporate and institutional depositors. The current Government has proven to be stable and their economic policies have gained market confidence and are attracting new investors into the country. Reconstruction and new infrastructure projects following on from Cyclone Pam in 2015 have offered the company a number of good finance opportunities. Prospects are good for the further growth of our Vanuatu business in 2018.

Outlook For 2018

The board of directors conducted a review of the Group’s medium term Strategic Plan, and this will be implemented over the coming few years. The Board resolved to focus especially on increasing market share in the  key PNG market for our finance company. Properties are being refurbished to retain Credit Corporation’s deserved reputation  as  a  reputable  landlord,  and  competitive rental rates in late 2017 and early 2018 have brought early success in improved occupancy.

The  outlook for the  Group across the  Pacific in 2018 seems more positive than in previous years, especially in PNG. In 2018 PNG will be host to business and political leaders across Asia and the Pacific at the prestigious APEC Forum. We wish the PNG government  well and expect this high profile event to not only showcase PNG and the Pacific, but also offer opportunities for our key activities in PNG. Exxon and Total have announced  the prospect of significant expansion of the LNG projects in PNG in coming years, and this would be a massive boost to local business and employment opportunities.

Another anniversary is upon us with Credit Corporation to celebrate  40 years in business in PNG in 2018. The company  has  a  come  a  long  way from  its  humble beginnings in 1978 operating from a shopfront in Badili, to  grow  into  the  multi-faceted, well respected  South Pacific-wide financial institution of today.

We thank all our stakeholders including clients, shareholders and staff across PNG and the South Pacific in helping make the company what it is today.