Papua New Guinea has made strides in recent years to expand its capital markets and promote liquidity. However, the performance of the country’s stock exchange – which changed its name from the Port Moresby Stock Exchange to PNGX Markets (PNGX) in July 2019 – has been affected by a series of economic disruptions. The 7.5-magnitude earthquake that struck PNG in February 2018 contributed to a contraction in economic activity for most of the year, following steady growth in 2017. Extractive industries suffered extensive damage, but fears of a recession had dissipated by the end of 2018 as macroeconomic recovery led to an uptick in market activity for the last few months of the year.
Political unrest after the resignation of long-serving Prime Minister Peter O’Neill in May 2019 generated concern over future investment. However, the new government, led by Prime Minister James Marape, is now in a position to strengthen the national economy through the capital markets.
Investor Confidence
While PNG’s financial sector has a number of positive features, the sensitivity of the economy to commodity price fluctuations and external forces has weighed heavily on the market’s appeal in recent years. Similarly, while the companies listed on PNGX cover a mix of investment opportunities, market liquidity has been hindered by outdated infrastructure, a lack of foreign capital and low levels of financial literacy.
Despite these obstacles, PNG’s investment profile is beginning to develop. On the back of a series of macroeconomic policy reforms, as well as the issuance of the country’s first sovereign bond in September 2018, investors have shown their willingness to lend to the Pacific Island nation. “The successful launch of the dollar bond is a strong indication that investor confidence is growing,” Gheno Minia, general manager of BSP Capital (BCAP), the investment advisory arm of Bank South Pacific (BSP), told OBG. “In addition, the execution of new mineral projects and PNG’s hosting of the 2018 APEC summit have boosted investment appeal,” he added. However, while government bonds offer competitive yields, investors are essentially forced to hold bonds until maturity due to market illiquidity. To enhance the appeal of government bonds and boost trading activity, policymakers are looking at ways to develop a robust secondary market.
Structure & Oversight
Modelled closely on the Australian Stock Exchange (ASX), PNGX is small by international standards. The Securities Commission of PNG (SECOM) is charged with regulating the issuance of equity and debt securities on the primary market, and secondary trading on PNGX. SECOM is also responsible for approving PNGX’s listing and business rules, as well as monitoring daily trades on the exchange. PNGX is classified by SECOM as a self-regulatory organisation, meaning that it is able to set its own rules and standards for members. For its part, the Bank of PNG (BPNG) oversees the money markets and government-issued securities.
A series of regulatory reforms were introduced in 2015 – the Capital Markets Act (CMA), the Central Depositories Act and the Securities Commission Act. Alongside the creation of a comprehensive legal framework, a new development strategy is set to guide the industry forward. Following a financial health check conducted by the World Bank and the IMF that began in 2011, the government launched the Financial Sector Development Strategy (FSDS), which runs from 2018 until 2030. This complements the state’s four-year Medium-Term Fiscal and Debt Strategy, which also began in 2018.
The FSDS aims to drive the development of PNG’s financial sector, including the capital markets. The strategy is managed and overseen by the newly established Financial Services Council, which comprises the secretary of the Treasury, the governor of BPNG, the chairman of SECOM and the insurance commissioner. Although the FSDS charts a course for the financial sector as a whole, the development of PNG’s capital markets is one of the strategy’s four main objectives. In order to broaden the country’s financial markets, the FSDS aims to enable regular trading in government bonds by improving the efficiency of the primary market.
As of August 2019 there were two licensed brokerages permitted to trade on the exchange: BCAP and Kina Securities Limited (KSL), the holding company for Kina Bank. BCAP was established when its parent company, BSP, purchased Capital Stockbrokers in 2005. While BCAP no longer holds a stake in PNGX as of late 2018, the company is the leading stockbroker in PNG, accounting for 60-70% of daily PNGX trades.
In addition to its brokerage responsibilities, BCAP is a licensed investment manager for large, government-mandated clients, including superannuation funds, and savings and loan societies. KSL, a diversified financial services provider, listed on the ASX in 2015 through an IPO valued at $97m. Kina Wealth – also under Kina Bank – is PNG’s largest fund manager, with over PGK7bn ($2.1bn) under management as of August 2019.
Performance
A reduction in the backlog of foreign currency orders and a stronger mineral market saw share purchases remain stable throughout 2018 despite economic challenges, and total market capitalisation increased from $24.8bn in February 2018 to $25.1bn in February 2019.
The performance of PNGX is measured by two indices: the Kina Securities Index (KSI), which measures domestic and dual-listed shares (PNGX and ASX); and the Kina Securities Home Index (KSHI), which measures shares traded domestically. The KSI increased by 10.54 points in the first seven months of 2019, from 5101.08 points on the last business day of 2018 to 5111.62 points on August 1, 2019. The KSHI, meanwhile, climbed by 1148.33 points in the same period to close at 12,557.71, compared to 11,409.38 at the end of 2018.
Listed Companies
As of August 2019 there were 13 listed companies on PNGX. The latest to be listed was Kina Petroleum Corporation (KPC), in April 2019, following a scheme implementation agreement for Kina Petroleum shares. The oldest active shares belong to Steamships Trading, which first listed on the exchange in April 1999. Oil Search Holdings (OSH) followed soon after, listing in 2001. In the first seven months of 2019 the three largest year-to-date share price increases were recorded by KSL, Credit Corporation PNG (CCP) and BSP, up 26.8%, 18.5% and 9.8%, respectively. Newcrest Mining (NCM) increased by 1%, while three of the listed share prices remained unchanged and three – OSH, KPC and City Pharmacy – experienced a decrease compared to the beginning of 2019.
BSP has been trading since 2003 and is one of the most active stocks on the market. According to BSP’s final dividend announcement for 2018 and figures for the first quarter of 2019, the group achieved positive results in 2018 – despite challenging macroeconomic conditions – with a net profit after tax of PGK844m ($256m), representing an increase of PGK87m ($26.4m), or 10.3%, on 2017.
On the back of these promising results, BSP’s directors determined a final dividend payment of PGK1.10 ($0.33) for 2018 following an interim dividend payment of PGK0.36 ($0.11) in October 2018. The total dividend payment for 2018 reached PGK1.37 ($0.42) per share, up from PGK1.23 ($0.37) per share in 2017. With a share price of PGK10.76 ($3.26), the dividend equated to a yield of 12.7%, with a payout ratio of 75.8%. At the end of the first quarter of 2019 BSP recorded profit after tax of PGK218.8m ($66.4m), an increase of PGK16.9m ($5.1m), or 7.7%, on the same period of 2018.
FU Shan Investments – the main and founding shareholder of KSL – sold its 34.9% stake in KSL in June 2018. This effectively broadened the investor base and created greater market liquidity to absorb Kina’s shares. In the same month Kina announced the acquisition of ANZ PNG’s retail, commercial, and small and medium-sized enterprise banking businesses. KSL stated in its 2018 annual report that net interest income grew by 21% between 2017 and 2018, while revenue rose by 45% to reach PGK162m ($49.1m). Over the same period, foreign exchange income increased by 373% to PGK34.2m ($10.4m).
CCP, a finance, property and investment specialist, began business in 1978 and listed on PNGX in August 2000. According to its 2018 annual report, the group owns assets worth PGK1.43bn ($443.7m). In 2018 the firm achieved net profit of PGK98m ($29.7m), an increase of 33% compared to 2017. The firm saw earnings per share reach PGK0.32 ($0.10), 33% higher than in 2017. With a net asset backing of PGK2.76 ($0.84) per share and an interim dividend of PGK0.06 ($0.02) per share, CCP witnessed a 10.4% return on equity, which marks an increase of 94 basis points. CCP’s annual report noted a 6% return on assets and net interest income of PGK75m ($22.7m), up 30% compared to 2017.
A number of attributes contributed to the group’s financial success in 2018. Despite a challenging economic environment, property rentals increased by 36% to PGK33m ($10m), while overall occupancy rates rose from 32% to 76%. Over the year the domestic loan book expanded by 12%, and dividend income grew by 8% to PGK46m ($14m). Although CCP is faced with a number of domestic challenges, the group continued to deliver strong financial results. According to the group’s 2018 annual report, an investment of PGK1000 ($303.32) at the company’s inception would be worth at least PGK166,000 ($50,351) in the first quarter of 2019, representing a return of 18% per annum.
Trading
Consisting of government debt and corporate equities, PNG’s securities market remains fairly underdeveloped compared to the broader financial services sector. According to estimates by BPNG, government securities, upon issuance, amount to between 10-20% of GDP.
While primary market activity is significant in terms of transactions, secondary market activity is almost non-existent. The trading that does occur involves a few local companies that are listed on the ASX, which is a more liquid market. In the first quarter of 2019 the seven dual listings, including NCM and OSH, had a total market capitalisation of $1.6bn.
Government bonds are held almost entirely by PNG’s banks, as well as BPNG and superannuation funds. According to the most recent annual report published by the central bank, government debt securities issued in 2017 amounted to PGK17.2bn ($5.2m). This increased significantly towards the end of 2018, when the country successfully raised $500m after the inaugural issuance of a dollar-denominated sovereign bond in September.
According to BPNG’s “Monetary Policy Statement” published in March 2019, total public debt for 2019 is projected to reach PGK27.3bn ($8.3m) – equivalent to 30.8% of GDP – compared to 31.1% of GDP estimated in the 2018 budget. Of the total debt stock, PGK15.9bn ($4.2m) is domestic debt, while the remaining PGK11.4bn ($3.5m) is external debt.
New Acquisitions
Although PNGX is still relatively small by international standards, new leadership aims to reposition the exchange as a central pillar of PNG’s financial ecosystem. In November 2018 Australian firm Pacific Capital Markets Development entered into an agreement to acquire 62.5% of PNGX from BCAP, the country’s largest commercial lender. BCAP’s decision to sell its stake in PNGX was in accordance with the CMA, which prohibits stock exchange ownership by any listed companies.
With a series of strategic investments in the pipeline, the future of PNGX is now in the hands of two internationally recognised market specialists: Frank Dunphy, chairman of PNGX, and David Lawrence, former COO of the ASX. Working closely with SECOM and BPNG, Pacific Capital hopes to continue BCAP and KSL’s efforts to position the exchange as a cornerstone of PNG’s financial markets. The new leadership aims to improve investor protections, promote greater market liquidity and increase the number of financial professionals.
While trading activity on PNGX was limited in the first six months of 2019, PNG saw some significant acquisitions. In May 2019 Cobalt 27 Capital – a Canadian battery metals-focused investment vehicle – announced the acquisition of all the issued and outstanding shares of Australian firm Highlands Pacific, which is listed on both PNGX and the ASX.
As a result of this acquisition, Cobalt 27 holds an 8.56% joint-venture interest in the Ramu mine, a nickel and cobalt mine on the northern coast of PNG. The PNG government and landowners own a 6.44% share, while the Metallurgical Corporation of China holds the remaining 85%. In 2012 the company invested $2.1bn in the mine, making it China’s largest overseas mining investment at the time.
The latest acquisition came at an important juncture for the mine, which achieved record annual production of 35,355 tonnes of nickel and 3275 tonnes of cobalt in 2018. Once Cobalt 27 repays the construction and development loans accrued by Highlands Pacific, the firm’s ownership interest in the mine will increase to 11.3%.
According to a statement by Cobalt 27 in May 2019, the firm anticipates closing the PanAust buyback agreement – outlining the transfer of Highlands’ Frieda River joint-venture interest to PanAust – which will result in the return of around $9.4m of the base purchase price. Following the acquisition, Highlands’ common shares were suspended from trading on the ASX and PNGX.
Delistings
In January 2019 PNG Air – a domestic airline – was suspended from trading on PNGX due to failure to submit a periodic report on December 31, 2017. According to local media reports, PNG Air submitted a waiver request in May 2018 to PNGX under Listing Rule 4.6, due a delay in its 2017 audit report. PNG Air petitioned the registrar of companies for an extension to prepare its financial statements at the end of August 2018 and annual report at the end of September 2018.
PNGX granted the waiver on the condition that the company release its 2017 annual report by the end of August 2018. However, PNG Air also failed to meet the deadline, again citing the pending audit report. As of August 2019 PNG Air remained suspended from trading on the exchange.
The current lack of market depth has seen companies re-domicile in order to secure future capital requirements. Following a comprehensive review of its asset portfolio, Kina Petroleum announced to shareholders in early 2019 that it was re-domiciling the company to the British Virgin Islands. To execute the move, the firm entered into a agreement with KPC, a new holding company in the British Virgin Islands established for the sole purpose of acquiring Kina Petroleum. Under this scheme implementation agreement – following approval from shareholders and the courts – KPC acquired all of Kina Petroleum’s ordinary shares, while existing shareholders were given one share in KPC for every 30 shares held in Kina Petroleum, equating to a 30:1 share consolidation. Once the share transfer was completed in mid-April 2019 KPC was registered on the ASX and PNGX, and Kina Petroleum was delisted.
Richard Schroder, managing director of Kina Petroleum, told media in February 2019 that “future capital requirements will need to be met by raising funds in capital markets with greater market depth, as well as a more favourable disposition to exploration and pre-development operations in PNG.” As of June 2019 KPC had 1667 ordinary shares on offer on the ASX, trading at a 52-week low of $1.03 and a high of $1.33. While the shares were also listed on the PNGX, no stock movement had yet taken place.
Outlook
Although PNG does not yet have the scale to compete with larger markets, the rollout of new mineral projects offers vast potential for PNGX. PNG’s capital market structure has a number of positive features, but further focus is needed on strengthening corporate governance and disclosure practices. At the same time, the capacity of regulators – particularly SECOM – needs to be modified in order to efficiently regulate the local equity market. In the meantime the capital markets will continue to develop at a gradual pace. As the economy expands on the back of major new extractive projects, PNGX will serve as a solid platform to raise capital for both established companies and small businesses. In the years ahead, secondary market trading is also expected to escalate, which will serve to bolster both government and corporate debt issuance.
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