Attracting attention: Economic growth and steadily rising incomes could boost activity

Over the past decade, Papua New Guinea has witnessed substantial evolution of the Port Moresby Stock Exchange (POMSoX), which opened its doors in 1999 and has been posting gains in recent years. According to the stock exchange’s official statistics, market capitalisation more than doubled in 2010, reaching PGK109.5bn ($52.1bn), up from PGK50.1bn ($23.8bn) at the end of 2009. However, this figure shrank by some 21.7% to PGK85.7bn ($40.8bn) in 2011, underscoring the continued volatility of this growing market.

WIDESPREAD GROWTH: The country’s capital markets have benefitted from a series of large-scale developments in the energy and mining sectors over the past five years – around half of the 20 firms currently listed on POMSoX are mining or energy companies. The remainder carry out business in a wide variety of sectors, including financial services, trading and transport. PNG is also home to an active primary market for shortterm treasury bills (T-bills) and inscribed stock and Bank of Papua New Guinea (BPNG) bills (C-bills), the majority of which are bought and held by the nation’s commercial banks and financial institutions. Growth is expected in all of these areas in the coming years. While the outlook is generally positive, PNG’s capital markets face a number of challenges. Market activity on POMSoX remains relatively low. In 2011 the exchange averaged 4830 transactions over the course of the year, according to official statistics. With this in mind, a lack of liquidity is perhaps the most pressing issue currently facing the market. “Getting liquidity from the street into the exchange is a major challenge,” said Jonathan Gage, the market risk manager at Kina Securities, a leading broker and fund manager, and a founding member of POMSoX. Since 2009 the exchange has attracted only three new initial public offerings (IPOs), all undertaken by BSP Capital, the largest broker in PNG. Other challenges include a lack of awareness about the benefits of investment among the population; law and order issues in Port Moresby, the capital, as well as in many of the country’s rural areas; a lack of reliable, up-to-date statistics on large swathes of the economy; and ongoing capacity concerns at the Securities Commission of PNG (SCPNG), which regulates the country’s capital markets (see analysis). Additionally, during the first half of 2012 PNG was in the midst of a period of political turbulence, which had the potential to negatively impact the country’s capital markets in the short to medium term.

RAISING AWARENESS: However, POMSoX and the government of PNG are working to address these issues. In an effort to increase awareness of the exchange among potential market players POMSoX operates an investment awareness and education programme with the long-term goal of educating the public as to the benefits of investment in the share market. Additionally, the government is working with the exchange to set up a secondary bond market, which, if successful, would likely deepen the market substantially. Finally, POMSoX has made a concerted effort to market PNG at foreign trade fairs and conferences in recent years to attract additional foreign investment onto the exchange. “Taking into account PNG’s solid fundamentals and the steadily increasing interest in long-term financial planning among the general population, we expect the exchange to grow for the foreseeable future,” Vincent Ivosa, the company secretary and listing manager at POMSoX, told OBG.

THE EXCHANGE: The history of POMSoX can be traced back to 1994, when the government launched a steering committee to look into establishing a stock exchange in PNG. By 1996 the steering committee – which included representatives of BPNG, the Department of Finance, the Registrar of Companies and McIntosh Securities, a leading Australian equity house, had secured development funding for the exchange from the central bank. In 1997 the Securities Act and the Companies Act were approved by Parliament. In January 1998 POMSoX was incorporated as a private company. The exchange was founded and is owned by Kina Securities and BSP Capital, which is the stockbroking and funds management arm of Bank of South Pacific (BSP), the country’s largest financial institution.

REGULATION: SCPNG, which was established in March 1998, has a mandate to regulate all aspects of the equities exchange in line with the Securities Act of 1997 and the Takeovers Code of 1998. These serve as the primary legislative documents for the sector. Certain aspects of the Companies Act of 1997 – specifically those that relate to public stock offerings and company prospectuses – also fall under the SCPNG’s purview. The commission has been a member of the Madridbased International Organisation of Securities Commissions since it was founded in 1998. Government-issued securities, savings and loan societies, and superannuation funds are regulated by the BPNG (the central bank) and the Department of Treasury.

BY THE NUMBERS: As of early 2012 there were 20 firms listed on POMSoX. Of these, just one, BSP, offers a debt listing in addition to the standard security instrument. Around half of the companies on POMSoX are also listed on exchanges overseas. Newcrest Mining, for example, which is the single largest firm on POMSoX in terms of market capitalisation, is also listed on the Australian Securities Exchange (ASX), the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX). Meanwhile, New Britain Palm Oil (NBPO) also trades on the London Stock Exchange (LSE), whilst Steamships Trading is dual-listed on the ASX and InterOil trades on the NYSE. With this in mind, a substantial percentage of market activity takes place overseas.

Local stocks have performed well in recent years, although a rocky 2011 for regional bourses affected POMSoX as well. The Kina Securities Index (KSi) rose 49.5% in 2009 and continued to grow, albeit at a much lower rate (9%) 2010, before retreating 22.2% in 2011. This was roughly in line with other regional exchanges. Japan’s Nikkei index fell 17% in 2011, for example, while Hong Kong’s Hang Seng index dropped more than 20%.

BEGINNINGS: POMSoX launched in 1999 with four listings with a combined market capitalisation of PGK3bn ($1.43bn). By 2005, market capitalisation increased to PGK18bn ($8.57bn), and at the end of 2011 total market capitalisation had reached PGK87.5bn ($41.6bn). This represents a 20% drop from the end of the previous year, when market capitalisation stood at PGK109.5bn ($52.1bn), according to official POMSoX data. Despite this recent downturn, both the 2010 and 2011 figures represent substantial increases over previous years. At the end of 2009, for example, market capitalisation stood at PGK50.1bn ($23.8bn), and at the end of 2008 it was just PGK29.4bn ($14bn).

POMSoX grew substantially in the first seven years of trading. The KSi, which tracks the entire exchange, rose from 1000 in 2000 to 7500 in 2007, just before the global financial crisis. In 2007 alone the market grew by some 32%. In the months following the downturn in 2008 the KSi dropped to around 4000, but by the end of that year it was already on its way back up. It has continued rising since, with the dramatic expansion of the exchange primarily a reflection of increased economic activity in the mining and energy sectors.

TRADING & TURNOVER: In 2011 there were 4830 equity transactions on POMSoX, down 17.4% from 2010 according to official statistics. The 2011 figure is equal to a turnover volume of 34m shares, valued at PGK135m ($64.2m) in total, down in volume from 56m shares in 2010, but nearly double the 2009 value of PGK71m ($33.8m). Average daily turnover in 2011 was worth PGK689,000 ($327,895), up 50.5% from PGK275,000 ($130,873) the previous year. There were nine trades per day on average in 2011, down from 24 in both 2009 and 2010, according to POMSoX figures.

The 2008 international financial downturn had a short-term negative impact on the exchange, pushing down volumes across the board. In the long run, however, PNG has remained fairly well insulated against the turmoil affecting markets in the US and Europe. Incidentally, in 2008 shares listed solely in PNG outperformed dual-listed stocks by a large margin. As of the end of February 2012, the KSi was at 6255.44, up substantially from 5781.39 at the end of 2011, though down from 7430.43 at the end of 2010 and 6816.26 at the end of 2009. If the rising trend seen in the first two months of the year continues, the index should be on its way back up to – and even beyond – 2010 figures.

MAJOR PLAYERS: As of early 2012 two licensed stockbrokers, namely Kina Securities and BSP Capital, served POMSoX. Founded in 1985, Kina Securities is one of the largest non-bank financial services companies in PNG. It is active in a variety of areas, including fund, trust and pension management and administration, lending and deposits, stockbroking and corporate advisory. The company has facilitated the listing of a number of new entrants on POMSoX, including the PNG-based mining firm Highlands Pacific; City Pharmacy, a locally incorporated retail and wholesale pharmaceuticals distributor and supermarket operator; and Oil Search, the country’s largest oil and gas producer. The firm also oversees the KSi and the Kina Securities Home Index (KSHi), which is made up exclusively of domestic firms and is dominated by a handful of local players.

BSP Capital, formerly known as Capital Stockbrokers, was acquired by BSP in 2005 and remains a wholly owned subsidiary of PNG’s largest bank. The firm is responsible for 80% of daily trades on POMSoX and is also active in fund management and corporate advisory work. “So far two stockbrokers has been adequate,” said Ivosa. “That said, we are prepared to license more in the future as the market continues to grow.”

INCREASED ACTIVITY: Although the bourse’s market capitalisation has grown substantially over the past couple of years, POMSoX faces a number of challenges. The exchange is dominated by a handful of large companies, while many of the other listings are decidedly small-cap. Similarly, while some companies trade on a regular basis, others remain mostly inactive for large periods of time. A substantial percentage of daily trading takes place offshore, among securities that are dual-listed on foreign exchanges.

POMSoX’s administration is working to address these issues by increasing trading activity, deepening the market and encouraging new listings. “Major energy projects have created a lot of interest in PNG from international investors and companies,” said Ivosa. “We encourage these companies to list on POMSoX.”

The exchange is also working with the government to launch a secondary bond market, which could lead to a jump in market activity in the long term. To ensure there is a ready pool of investors for an expanded market, POMSoX offers regular workshops and education programmes across the country, with the two-fold goal of attracting new companies to list and encouraging people to invest. “Most PNG citizens are not familiar with the stock market,” said Ivosa. “Over the past 10 years we have educated around 15,000 people about the benefits of participation in capital markets.”

LEADING LISTINGS: A small number of major multinational and domestic companies dominate trading on POMSoX, including Newcrest Mining, NBPO, Oil Search, BSP, InterOil and Credit Corporation. Newcrest Mining, an Australian company, is the largest gold producer in the Asia-Pacific region and the fourth-largest gold producer in the world in terms of market capitalisation. When it listed in PNG in September 2010, it boosted overall market capitalisation on POMSoX by PGK62bn ($29.5bn) and became the largest company on the exchange. In addition to trading on the NYSE, in early March 2012 Newcrest began trading on the TSX, a major destination for mining companies. In 2011 the company posted worldwide annual statutory profits of $908m. As of late June 2012, Newcrest was trading at PGK52 ($24.70), down from PGK90 ($42.80) when the firm was first listed in September 2010 and a high of just over PGK100 ($47.60) in late 2010.

PNG-based NBPO is the first agricultural firm listed on the exchange. As of mid-2010 the company, which is the world’s largest producer of sustainable palm oil, was responsible for more than 16% of global crude palm oil supply. Dual-listed on the LSE, NBPO has been active on POMSoX since 2001. The firm is controlled by Kulim (Malaysia), a Malaysia-based plantation development and investment firm. As of late June 2012 NBPO’s shares were trading at PGK24 ($11.40), up substantially from 2001 when the company entered the market at PGK4 ($1.90) per share.

PNG’s largest oil and gas producer, Oil Search, is duallisted on POMSoX and the ASX. In 2011 the local energy company, which has been active in PNG since 1929, posted net profit after tax of $202.5m, up 9% from the previous year. As of late June 2012, the Oil Search’s shares were trading at PGK13 ($6.19), up from just over PGK3 ($1.43) when the firm was first listed in 1999, but down from a peak of nearly PGK16 ($7.61) in early 2010.

InterOil, a Canadian energy firm that trades on both POMSoX and the NYSE, is another significant player listed on the bourse. The company reported a net profit of $17.7m in 2011, up substantially from a net loss of $44.5m the previous year. The company is a major energy player in PNG – it holds petroleum licences for around 1.57m ha of land in the country and operates an oil refinery, as well as commercial and retail distribution facilities. Additionally, as of early 2012 InterOil was in the process of accepting bids from international operators to assist the firm in developing a potentially largescale LNG project in the country. Since listing, InterOil’s shares on POMSoX have ranged between lows of PGK12 ($5.71) and a peak of approximately PGK160 ($76.14).

BSP, the largest commercial bank in PNG, has been listed on the exchange since 2003. The bank is the only company on the exchange to offer both a standard security and a debt instrument. In 2011 the bank posted pre-tax profits of PGK466.2m ($221.7m), up 15.9% from PGK402.1m ($191.3m) the previous year. As of late June 2012 shares were trading at around PGK8 ($3.81).

The majority of the rest of the companies listed on POMSoX generally trade at less than PGK5 ($2.38), and in many cases less than PGK1 ($0.48).

IPOS: Only two firms launched IPOs on the exchange in 2010-11, after two slightly busier years in 2008-09. The latest firm to enter the market is Kina Petroleum, which raised some $12.2m when it listed simultaneously on POMSoX and the ASX in December 2011. The company, which was founded in 2009, is working to build a portfolio of oil and gas concessions in PNG. It owns four six-year onshore petroleum-prospecting licences and has partnered with Talisman and Horizon Oil on two of its projects, which are currently under development. The Kina Petroleum listing was initially priced at PGK0.47 ($0.22). Since listing the share price has almost doubled to PGK0.80 ($0.38).

Kina Petroleum was the sole IPO in PNG in 2011. Similarly, Newcrest Mining was POMSoX’s only new listing in 2010. The New Guinea Islands Produce Company, a leading local cocoa processing and exporting firm, was one of four companies to list on the exchange in 2009, along with BSP Subordinated Notes, New Guinea Energy and mining outfit Coppermoly. In 2008 the bourse welcomed Kina Asset Management, a subsidiary of Kina Securities, and Metal Storm, an Australian defence technology company.

OFF-MARKET ACTIVITY: In addition to POMSoX, PNG is home to a thriving short-term primary bond market. Government-backed T-bills are offered on a semi-regular basis, while C-bills are issued weekly. These instruments are popular among PNG’s commercial banks, which are currently holding large amounts of liquidity and, consequently, have been on the lookout for new investment opportunities in recent years (see Banking chapter). The central bank uses the C-bills to remove excess liquidity from the financial system. “Bank profitability is way up right now,” said Aaron Batten, an economist with the Asian Development Bank (ADB) in PNG. “Banks are buying C-bills and other government debt instruments as soon as they are listed. These products are always oversubscribed.”

While issuing short-term debt has become an important monetary tool for the government, the authorities are simultaneously working to both broaden and deepen the market. At the moment, almost all C-bill and T-bill issuances are purchased by the country’s commercial banks and held until maturity. The government is working with POMSoX and the ADB to develop a secondary market for these instruments, which has the potential to boost capital markets activity in PNG. “A number of recent assessments have shown that developing a secondary trade market in government securities would help to improve PNG’s international credit rating and raise the attractiveness of PNG as a destination for foreign investment,” the ADB’s Batten told the local press in January 2012.

Currently the minimum purchase for the BPNG-issued T-bills and inscribed stock is PGK100,000 ($47,590). New initiatives are being considered, with a view to encouraging investment activity among local investors in particular, by dropping the minimum investment requirement to well below the current limit.

OUTLOOK: PNG’s is a small but developing bourse with inevitable growing pains, which may be linked in part to region-wide problems. The lack of liquidity is perhaps the biggest impediment to future growth at the exchange in the coming years. Market authorities are working alongside the government to address this issue. Creation of a secondary bond market, for example, may help expand trading activity, bringing more investors to the market and supporting commercial banks by providing an outlet for their excess liquidity.

In addition to POMSoX’s ongoing investor education programme, the exchange is looking to identify companies for future listing. As of mid-April 2012 there were two interested companies seeking to list on the exchange, and a number of other firms are well positioned to potentially list in the coming years. Stateowned entities controlled by the government-owned Independent Public Business Corporation represent a major potential source of new listings in the future. These include the flag-carrier Air Niugini, the national postal operator Post PNG, the compulsory motor insurer Motor Vehicles Insurance, the National Development Bank, PNG Ports, PNG Power, the Water PNG and PNG Telikom.

PNG’s burgeoning middle class will likely play an increasingly important role in the financial sector over the next decade. The country’s banks are working to develop new products and services with this in mind. Taking into account POMSoX’s efforts to boost market activity, PNG’s rapidly expanding economy and an expected rise in financial awareness among the population in the coming years, its capital markets are expected to post steadily rising returns for the future.