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 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.
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.
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.