Although still fledgling, Papua New Guinea’s capital markets have strong prospects for growth as the economy looks forward to significant foreign-currency inflows linked to the liquefied natural gas (LNG) project and the development of new resource projects. According to ANZ Bank’s projections for medium-term growth, PNG will require some $112bn in new investments by 2030. Though the equity market is dominated by plays on the country’s natural resources, reform of the regulatory framework and new strategies to attract both domestic and foreign investors should support growth over the medium term. Meanwhile, sustained domestic issuance by the sovereign has created a sizeable pool of outstanding government securities, which should eventually lead to the emergence of a secondary market in fixed-income securities.
Shallow Depths
With 20 listed equities and one convertible note, Port Moresby Stock Exchange ( POMSoX) remains a relatively shallow market, although larger than the Fiji-based South Pacific Stock Exchange which hosts 16 stocks and two convertible notes. Although the number of listed companies rose from eight in 1999 to 18 by 2008, it has plateaued at 20 since 2009, with as many de-listings as initial public offerings (IPO) since then (see analysis). The market’s total capitalisation of PGK57.05bn ($23.19bn) at the end of 2013, or 164.9% of GDP in 2013, does not accurately reflect the significance of the equity market to the wider economy, given the prevalence of dual-listed stocks that are traded on offshore exchanges.
With 13 such stocks accounting for 90.47% of market capitalisation in December 2013, trading remains driven by offshore fluctuations in trading price. Dual-listed stocks include nine firms that are listed on the Australian Stock Exchange (ASX), namely Newcrest Mining, Marengo Mining, Oil Search (OSH), Kina Petroleum, Coppermoly, Cue Energy Resources, New Guinea Energy, Indochine Mining and Niuminco Group. POMSoX also has one firm that is listed on the London Stock Exchange, New Britain Palm Oil (NBPOL), and one on the New York Stock Exchange, InterOil. Cue Energy holds a secondary listings in New Zealand, and Newcrest has had a listing on the Toronto Stock Exchange since 2012, along with Marengo since it re-domiciled its listing to Canada in January 2013.
Out of the 13 dual-listed stocks, 12 operate in the mining or oil and gas industries. “Share trading on POMSoX are driven by dual-listed mining and oil companies, mostly listed on ASX,” Llewellyn Muriki, senior advisor and equities dealer at brokerage BSP Capital, told OBG. “Therefore, share prices on POMSoX react to movements on the ASX with a one to two day time lag given the low levels of local liquidity.”
The performance of the Kina Securities Index (KSi) is also dominated by dual-listed stocks, with a 56.17% weight to Newcrest shares, 27.39% to OSH, 3.83% to InterOil, 3.62% to NBPOL and 5.6% to single-listed Bank South Pacific (BSP). In contrast, the Kina Securities Home Index (KSHi) tracks only single-listed stocks on POMSoX and more closely reflects developments in PNG’s domestic economy. However, over half of the index, 52.2%, is devoted to BSP, with 9.56% to finance and real estate firm Credit Corporation (CCP) and 2.86% to retailer City Pharmacy (CPL). Other traded single- listed stocks include Airlines PNG, fund manager Kina Asset Management (KAML), the New Guinea Islands Produce Company and mining company Highlands Pacific. The market also hosts stocks that are no longer actively traded, including the Steamships Trading Company, Indochine Mining and Niuminco. While the two indices were tested for three years and remain open to comment from the investment community, a new index has been under preparation by POMSoX since 2013, although its composition has not yet been made public by mid-2014. Meanwhile, a single convertible bond from BSP remains seldom traded, although plans are under way to launch a bond market for secondary trading in 2014 (see analysis).
Trading Infrastructure
While still largely a fledgling equity market, POMSoX has developed rapidly over began in 1994 when a Stock Exchange Steering Committee was established, comprised of the Department of Finance, Bank of PNG (BPNG), the Registrar of Companies and Australia-based McIntosh Securities. After Parliament passed both the Companies Act and the Securities Act in 1997, the central bank provided startup funding for the exchange, which commenced trading in June 1999, operating between 10.00am and 4.00pm every workday. Modelled on the Australian system, upon which the exchange’s listing and business rules are based, POMSoX acts as the frontline regulator, licensing brokers and overseeing intra-day trading. The Securities Commission of PNG (SCPNG), a statutory authority established in 1997 under the Ministry of Trade, Commerce and Industry’s (MTCI) Investment Promotion Authority (IPA), acts as regulator.
Meanwhile, BPNG conducts “fit and proper” tests on applicants for brokerage licences. Following BPNG’s divestment from the exchange in the early 2000s, offering its stake for sale to the two licensed brokers, BSP Capital ended up controlling 62.5% of the exchange, while Kina Securities holds 37.5%. The exchange, whose balance sheet was bolstered by PGK1.5m ($609,750) following the conversion of the preferred shares into equity in 2012, has completed significant upgrades to its trading and settlement infrastructure. Following the shift to a fully automated electronic settlement system under T+3 in 2012, POMSoX upgraded its OMX trading platform, similar to the old ASX platform SEATS, in 2013, which has reduced trading latencies. “The new POMSoX trading platform allows each individual workstation to connect to the market, rather than the existing situation of one station per desk,” said Muriki.
Brokers
The largest of the two brokers, BSP Capital, has been the brokering and fund management arm of locally owned BSP, following its acquisition of Capital Stockbrokers from NBPOL in 2005. The second, Kina Securities, is the stockbroking arm of Hong Kong-based Kina Group and also comprises PNG’s only listed fund management firm. While BSP Capital has a research desk, Kina Group produces updates through its fund management subsidiary. The two brokers have partnered with foreign investment banks and brokerages, with BSP Capital collaborating with France’s BNP Paribas for its investment banking and with New York-based Auerbach Grayson for equities. Kina Securities maintains relations with Credit Suisse and JP Morgan. BSP Capital estimates it commands 80-85% of average daily trades on POMSoX, although trading volumes remain low and the pool of active investors is limited. “There are approximately 10,000 trading accounts on POMSoX, of which around 50 accounts are for institutional investors,” said Muriki. Although the definition of active investors is relatively loose – defined as accounts that trade over PGK100,000 ($40,650) a quarter – trading is dominated by institutional investors, such as superannuation fund managers, banks, insurers and high-net-worth individuals, while over half of trades take place between two BSP accountholders, according to the PNG broker.
Performance
Skewed as it is to offshore, dual-listed stock movements, the market peaked in 2010, reaching a capitalisation of PGK109.3bn ($44.4bn), and it has trended downwards since, falling to PGK57.05bn ($23.19bn) by year-end 2013. The value of the KSi has dropped consistently since the peak, by 22.2% in 2011, 20.7% in 2012 and 14.9% in 2013, according to Kina Securities, driven particularly by the market’s largest player, Newcrest, which fell 40% in value in 2013. This was enough to negate the 30.6% appreciation in OSH shares over the year. NBPOL’s shares suffered from the fall-out of a failed attempt by core Malaysian investor Kulim to raise its shareholding from 50% to 70%, which saw the local share price fall 11.8% in 2013.
The narrower KSHi has proven much more resilient, falling only 1.86%, 9.5% and 2% in the three respective years. “Truly domestic companies had a pretty good year [in 2013],” Dominic Beange, an investment fund manager at Kina Funds Management, told local press in March 2014. The KSHi’s 2013 performance was driven by a 13.6% rise in the CCP price, a 22.2% rise in KAML’s stockprice and a 22.5% appreciation of CPL shares, although the 1.1% softening of BSP’s shares and 2.8% drop in Airlines PNG over the year dragged the home index down. Both indices thus performed broadly in line with other emerging markets, with the MSCI Emerging Market Index dropping 12% in 2013, while the Frontier Market Index rose 16%.
Meanwhile, the impact of the kina’s depreciation in 2013 on POMSoX was limited, given low foreign holdings onshore. “The kina’s depreciation has not had a significant impact on POMSoX since dual-listed stocks are mostly traded offshore, while local-listed stocks are traded only on POMSoX,” Muriki said.
Spot On Trading
As the market has trended downward, trading volumes have fallen, although the value of turnover has proven somewhat more resilient. Volumes fell from their peak of 102.87m shares traded in 2008 to 40.13m in 2010 and 14.14m in 2013, while the value of aggregate trades fell from PGK170.96m ($69.5m) to PGK56.13m ($22.81m) and PGK47.56m ($19.33m), respectively, according to data from the SCPNG. Although the market in 2013 saw a peak-trading day in September, where 8m CCP shares changed hands, the main volumes tend to occur from February to April. Indeed, the value of turnover jumped from PGK2.56m ($1.04m) in February 2013 to PGK4.68m ($1.9m) in March and PGK8.85m ($3.6m) in April, before slumping back to PGK2.61m ($1.06m) in May, according to SCPNG. Meanwhile, the volume of shares traded increased from 630,000 in each of the first two months of 2013 to 1.28m in March and 1.91m in April.
Pricing of stocks in an illiquid market remains challenging. Indeed, given that Newcrest “rarely trades on POMSoX,” the kina price is not “representative of the arbitrage price,” Kina Funds Management noted in July 2013. While offshore movements in stock prices take several days to be priced into POMSoX valuations, larger domestic institutional investors typically buy to hold, earning dividends of 6-7% annually from single-listed stocks. “For large institutional shareholders there is no real difference between listed and unlisted equity, given the lack of liquidity on the market,” Michael Block, Nambawan Super’s chief investment officer, told OBG.
Regulatory Reform
The exchange and the regulator have gradually streamlined some rules to promote trading in recent years, although more legislative reform is expected in 2014. The requirement for the SCPNG to approve any trade in excess of PGK250,000 ($101,625) at a fee of PGK250 ($101) per trade was lifted in late 2012 to promote trading. Although the SCPNG’s budget was doubled to PGK1m ($406,500) in 2013 and PGK2m ($813,000) in 2014, the commission had still only received the traditional PGK500,000 ($203,250) as of March 2014. With a limited staff, the SCPNG does not have access to real-time market data that would reveal bid-ask spreads and it therefore relies on a report from POMSoX at the day’s end.
The SCPNG has been a full member of the International Organisation of Securities Commissions since 2013 and should be strengthened further in 2014 through two key reforms. Following the amendment of the 1998 Takeover Code in August 2013, which allowed the SCPNG to block Kulim’s attempted takeover bid for an additional 20% stake in NBPOL, the commission has been empowered to administer a national interest test to any takeover bid for a publicly listed firm that has assets of over PGK5m ($2.03m). While still ambiguous pending the publication of a reserved industries list that will cap foreign direct investment in certain sectors, the amended rule significantly bolsters the SCPNG (see Trade & Investment chapter).
More comprehensive reform will come when a draft Securities Commission Act (SCA) is presented to Parliament in 2014. Although POMSoX, as the frontline regulator, maintains a fund worth roughly PGK600,000 ($243,900) to insure against counterparty defaults or misappropriation of funds, the bill would strengthen the SCPNG’s enforcement powers, allow it to make policy pronouncements and broaden its remit to key licensing functions to promote more competition among brokers. “The SCA, modelled on the Investment Promotion Act, that we hope to present to Parliament in 2014 would transfer broker licensing from POMSoX to the commission and would strengthen it as a regulator by having it report to the MTCI, rather than through the IPA,” James Joshua, a surveillance officer at the SCPNG, told OBG. There are also plans to prepare a new capital markets act to replace existing legislation from 1997 and cover securities, investment managers, fund managers and trustees. The new rules would also cover the regulation of convertible notes and government-inscribed stock, whose primary issuance is overseen by the Treasury and BPNG, as the issuing agent, in the absence of a regulated secondary market (see analysis). In 2015 the MTCI is also drafting a bill covering exchange-traded funds (ETFs).
New Supply
The exchange expects new IPOs in coming years to boost the supply of domestic stocks and diversify investable sectors to better reflect PNG’s economy. Of the two licensed brokers on the market, BSP Capital holds a commanding lead as underwriter of past IPOs, with Kina Securities having structured only three listings in the history of the exchange. The last such listing, underwritten by both brokers, was Kina Petroleum, raising $12.8m in 2011.
Management at POMSoX has significantly simplified listing rules to cater to smaller firms and to allow for depository receipts, a precondition for Marengo’s re-domiciling to Canada in January 2013. Firms, both foreign and domestic, looking to list on the local market are required to hold over PGK50m ($20.32m) in net tangible assets and show PGK10m ($4.06m) in profits over the previous three years. These requirements are still waved for companies already listed in Australia or New Zealand. Listing fees remain competitive by regional standards: a firm listing PGK55m ($22.36m) in stock pays PGK49,500 ($20,121) upon admission to POMSoX and PGK32,200 ($13,089) annually thereafter.
Although the two IPOs that took place in 2013 were compliance listings and thus were not traded in their first six months of listing, brokers expect government sales of minority stakes in several state-owned enterprises could add to the pipeline of IPOs (see analysis).
Institutional Investors
While it is necessary to diversify the supply of stocks, promoting greater liquidity among both domestic and international investors is also important. Given the narrow pool of domestic investors dominated by superannuation and landowner funds, the exchange has been driving outreach efforts in coordination with the two stockbrokers and BPNG. While most of the landowner funds linked to oil and gas projects are managed through the Mineral Resources Development Company, mining-related funds can be managed independently with cabinet approval. A number of these place their funds with asset managers, similarly to superannuation funds.
The three main asset managers are KAML, which manages Nambawan Super’s portfolio; BSP Capital; and PacWealth Capital, which took over management of the second-largest National Superannuation Fund’s PGK2.4bn ($975.6m) in assets in March 2012. The only listed asset manager on POMSoX, KAML saw its total assets increase 17.7% to PGK50.7m ($20.61m) in 2013, while its affiliated Kina Funds Management recorded PGK4bn ($1.63bn) in assets under management, giving it a commanding lead. In light of the depreciating kina, however, KAML rebalanced its portfolio towards domestic investments, with a 45:55 split between local and foreign investments, up from a 40:60 split in 2012.
New Markets
POMSoX does not offer remote membership, requiring foreign investors to place trading orders through one of the two brokers’ foreign correspondents, or by opening an account with PNG Registries and a local broker directly. Foreign investors have tended to trade offshore shares of dual-listed stocks, given the high withholding tax of 15% on interest income and 17% on equity and dividend proceeds.
Two global frontier market ETFs have been launched in recent years. The first, the Russell Frontier Index (RFI), launched in 2010, allocates a combined 4.1% weighting to the four largest dual-listed stocks, although the stocks are only eligible if they trade on another exchange where daily pricing is readily available. “The fact that both PNG equities and bonds remain outside any of the global indices is a clear indication of how isolated PNG is from the global financial markets,” Eric Kramer, CEO at PacWealth Capital, told OBG. Indeed, purely POMSoX-listed stocks are not eligible due to the lack of pricing data, according to RFI. The second fund, the Global X Next Emerging and Frontier ETF, was launched more recently in late 2013 and has exposure to large stocks like OSH and InterOil. A number of specialist frontier-market firms, including Auerbach Grayson, Leopard Capital and Cube Capital have channelled investment locally through BSP Capital, in both listed and unlisted equities. While both brokers have participated in international roadshows to drum up interest in local stocks, the next target is Australia’s superannuation fund industry, worth $1.69trn in 2013. Retirement funds from the South Pacific region are also being courted, with discussions with the Solomon Islands’ superannuation fund ongoing in 2014. Management at POMSoX expects the depreciated kina should prove an additional draw to global frontier market funds.
Broadening The Pool
In parallel to such efforts, authorities are also driving investor education locally in a bid to broaden the pool of domestic investors, both individual and institutional. The Treasury’s lowering of the investment threshold in primary bond auctions in 2013, from a minimum buy-in of PGK100,000 ($40,650) to PGK10,000 ($4065), aims to attract more retail savers to the money market. The exchange has also collaborated with the two brokers and BPNG to run roadshows for first-time investors in PNG, targeting landowner funds and potential retail investors. The group is also planning to introduce investment education courses in high schools and universities, targeting the next generation of investors. Richard Borysiewicz, BSP Capital’s general manger, told OBG, “What PNG needs, in my opinion, are wealth management products, improving financial literacy and a change in the licensing regime so that more financial institutions can enter the market to improve products and services.”
In March 2014, referring to the country’s numerous landowner groups, Geoff Mason, the general manager of POMSoX, told local press, “It’s like having a whole lot of small investor clubs around the country. They can get a good return by investing their pooled funds into the market.” Formalising the pool of landowner funds, estimated at over PGK2.5bn ($1.01bn) in 2013, and enfranchising a new generation of retail investors will be key to the fledgling exchange’s development. Meanwhile, the prospect of new legislation covering local ETFs, expected to pass Parliament in 2015, could pave the way for the launch of more passive investment instruments that could appeal to a broader public.
Alternative Funds
Given PNG companies’ limited access to equity and debt instruments, the scope for private equity and alternative funding sources is significant. Thus far, development finance partners like the International Finance Corporation (IFC) and the Asian Development Bank have been the two main private equity investors on the market. The two have taken equity stakes in key ventures, including telecoms operator Digicel. The IFC has been a regular investor in the three Kula Funds launched by Pacific Capital Partners – a subsidiary of global emerging market private equity firm Aureos Capital – and also launched its in-house IFC Asset Management Company in 2009, with $3bn under management, through which it invested in PNG Microfinance. While domestic investors like the two superannuation funds and banks hold significant stakes in unlisted equities, the potential for exits remains constrained. Nonetheless, the pipeline of IPOs on POMSoX could be driven by such exits in the coming years.
The government has also sought to encourage the use of unit trusts by property investors, albeit to lacklustre results. Trusts domiciled in PNG with over PGK10m ($4.06m) in funds and 80% of assets invested in property saw dividend payments exempted from tax several years ago, although unit trustees are still required to pay a 30% income tax. In 2012 the government relaxed the rules allowing unit trusts to invest offshore and extended the two-year reduction in stamp duty from 5% to 2% until January 2014. “The establishment of new trusts should deepen investment markets in PNG, provide greater scope for property investors to diversify risk and improve access to property investment for smaller investors,” according to the 2012 budget, although by the first quarter of 2014 asset managers reported only minimal interest in such trusts.
Outlook
While the equity market has performed uninspiringly in the past three years, the divergence of single-listed stocks, representing a more diversified cross-segment of PNG’s economy than resource-driven, dual-listed stocks, reflects the potential for growth. With the prospects of a second major LNG project and future mining deals, global investor appetite for frontier markets could broaden to PNG in the coming years.
Meanwhile, the strong growth in outstanding government bonds sold through primary auctions should generate enough momentum in PNG to launch a regulated secondary market in the near term. Legislative and regulatory reform will also be key to unlocking both markets’ potential by strengthening legal oversight, encouraging competition among providers of investor services and ultimately driving growth in liquidity.
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