Credit Corporation (CCP) commenced business in 1978 as a general finance company. CCP specialises in providing a range of financial products, including chattel mortgage, lease finance, variable rate contracts and insurance premium funding, and it also offers attractive investment facilities. In addition, CCP manages and owns a portfolio of prime real estate assets.
The general slowdown across the region impacted profitability in FY 2015. Core business operating profit from finance, property and dividend revenues totalled PGK75.8m ($25.9m), compared to PGK82.5m ($28.2m) in FY 2014. Group total assets were PGK1.16bn ($396m) at the end of FY 2015. This was a small increase from the previous corresponding period. Shareholders’ equity reached PGK743.7m ($253.9m), an increase of PGK24.5m ($8.4m). This represents a net asset backing per share of PGK2.36 ($0.81).
Significant drivers of the core operating profitability are fair value adjustments to its Bank South Pacific (BSP) shareholding and its investment properties. BSP’s share price increased from PGK7.14 ($2.44) to PGK7.50 ($2.56), resulting in a positive adjustment of PGK14m ($4.8m). Investment properties also saw an uptick resulting in a positive adjustment of PGK18.6m ($6.4m).
The domestic economy continued to face challenges as it adjusted to a lower commodity pricing environment in 2015. During the year we also saw additional challenges with the temporary closure of Ok Tedi mine and reduced coffee production due to serious drought conditions in the Highlands provinces. Low commodity prices meant low revenue for PNG and reduced foreign capital inflow. Cyclone-affected countries in Fiji and Vanuatu and a general slowdown in PNG impacted profitability.
The executive rental market in Port Moresby has plateaued, leading to reduced occupancy rates throughout the year. However, Credit House achieved a profit before tax of PGK7.82m ($2.7m) in FY 2015. This was attributed to the delay in timing of the relocation of existing tenants from the building. The company is now focused on improving these levels with new furnishings and a new layout. Likewise, Era Dorina posted an operating profit of PGK12.31m ($4.2m) in FY 2015, compared to PGK15.2m ($5.2m) in 2014. The reduction was a result of a write-down of PGK8m ($2.7m) during the year. Ela Makana Developments changed its name to Era Matana with ongoing construction; we anticipate the project to be completed in the third quarter of 2016. The board is actively monitoring the operational environment in anticipation of any adverse impacts on its property business.
The challenges faced in FY 2014 continued in FY 2015 as the PNG economy adjusted to the softening of the mining and petroleum sectors. The country also faced additional challenges during the year with the closure of OK Tedi mine, severe drought in the Highlands Region, a lack of foreign exchange and the inability of the government to pay its commitments on time. Therefore, 2015 was a tough year for the finance company.
We anticipate a continued slowdown in the domestic economy in 2016. However, the re-opening of the Ok Tedi mine and the anticipation of foreign exchange inflows from liquefied natural gas (LNG) exports will assist in returning the domestic economy to a more favourable status. We also expect the Papua LNG project to have a positive impact on the performance of CCP in 2017; hence our ”buy” rating. Our 12-month price target is PGK1.97 ($0.67) using the residual income method. The company is currently trading at a 19% discount to our price target above. The total shareholder return anticipated for the stock is 26.1% during the year. This includes a dividend yield of 7.1%.