Credit Corporation: Finance

THE COMPANY: Credit Corporation (CCP) began business in 1978 as a general finance company, and has grown to become one of Papua New Guinea’s most progressive institutions. CCP specialises in providing a range of financial products and services and, through its subsidiaries, it owns and manages a portfolio of prime real estate assets. Shareholders have received dividends each year since the incorporation of the company in 1978. CCP was listed on the Port Moresby Stock Exchange (POMSoX) in 2000. Assets and core operating profits have continued to grow. Over the past five years CCP’s year-on-year core operating profit growth averaged 19%, while total assets growth averaged 16%. CCP presently controls assets valued at over $424m and operates offices in PNG, Fiji, the Solomon Islands and Vanuatu. The company also has an equity investment portfolio, with holdings in other POMSoX-listed companies, including Bank South Pacific (BSP), City Pharmacy, Airlines PNG and Kina Asset Management. CCP reported strong growth in its group after-tax profits and core business operating profit in its full-year 2011 results. Robust revenue growth in property and finance were the main contributors. Core business operating profit increased 15.4% to PGK74.2m ($35.3m) from PGK69.2m ($32.9m) in 2010. After-tax cash operating profit was PGK57.99m ($27.6m), up 5.6% from 2010. A negative adjustment of PGK15.61m ($7.4m) was booked against profits to reflect CCP’s exposure to the BSP share price decline in 2011. As a result, group aftertax profits of PGK42.10m ($20m) were reported, up 34% from PGK29.5m ($14m) in 2010. The company’s capital adequacy ratio increased to 48%, up from 46% in 2010. That is well above the capital adequacy requirement of 12% under the central bank’s regulations. Excess capital allows CCP to expand its lending portfolio and internally fund its property developments. The cost-to-income ratio fell from 38.8% in 2010 to 31.6% in 2011, due to increases in interest income and rental revenue. CCP spent around $715,000 in 2011 on computerised systems that reduced processing costs. Return on assets and return on equity were 8.06% and 11.33%, respectively, similar to 2010. Parallel growth in CCP’s profits, assets and equity should continue over the next few years.

CCP’s property portfolio will be re-valued in the third quarter of 2012, a process that takes place every three years. Property values, especially in Port Moresby, have seen significant gains over the past four years, but the market has plateaued faster than anticipated, which may temper CCP’s revaluations. Construction has begun at Era Dorina’s Stage 5 development in Port Moresby, which consists of 20 one-bedroom apartments. They are expected to be completed by the end of 2012. Era Dorina and Credit House remain fully tenanted.

Interest income for the period grew 14% to $25.6m, reflecting increased lending in 2011. Lending growth over the past three years has been mostly due to the construction of the PNG liquefied natural gas (LNG) project. CCP loans are short term and account for around 15% of all loans to PNG LNG subcontractors and spinoff businesses. The majority of loans relate to transport, civil contracting, and professional and business services. CCP should maintain similar loan growth in 2012. Its short-term lending policy does require it to secure new contracts to sustain credit growth in the medium term. Lending in the Solomon Islands increased as the economy stabilised following the 2010 general elections, while financing volumes in Fiji and Vanuatu remained steady. Credit Corporation (Fiji) is now fully owned by CCP after a minor shareholding held by Colonial Fiji was purchased by CCP through a share swap. Vanuatu continued with similar growth to 2010.

DEVELOPMENT STRATEGY: CCP’s net tangible asset backing is $0.95 and it is trading at that price. The firm’s income stream is well weighted between lending, property and dividends. All three have a positive outlook and should help boost profits. The company is well capitalised and has positioned itself to benefit from PNG’s economic growth. CCP’s solid asset backing should continue to support its profit and share price growth.