JSC Georgia Capital

 

JSC Georgia Capital

 

Georgia | Investment Holding – Fixed Income

 

 

 

Background

 

 

 

Georgia Capital is an intermediate holding company primarily focused in Georgia. It holds investments in banking, healthcare, utilities, property development, and insurance among others. Georgia Capital was formed when the BGEO group demerged its banking arm (Bank of Georgia) and its investment arm (Georgia Capital) into separate entities. Georgia Capital has since been listed on the London Stock Exchange and has a current market capitalization of GEL 1.3bn.

 

 

·         Bank of Georgia (BoG) is the largest bank in Georgia with over 30% market share and a current market capitalization of GEL 3bn.

 

 

 

·         Georgia Healthcare Group (GHG) - The largest diversified healthcare provider in Georgia with 26.4% market share.

 

 

 

·         Georgian Global Utilities (GGU) - Water utility servicing ~40% of Georgia’s population in 3 cities where it enjoys a natural monopoly. It operates c. 2,700km of water supply and c 1,700km of wastewater pipeline network. Its renewable energy business owns three hydropower generation facilities with a total capacity of 149.3MW.

 

 

 

·         JSC m2 - Largest developer in Tbilisi with an 11% market share. Primarily focused in residential development and commercial property, its land bank stood at GEL 72.9m. m2 currently has two hotels under development, with a total capacity of 246 rooms, 1,202 apartments under construction and 10,244 commercial space under construction.

 

 

 

·         Aldagi is a provider of property and casualty insurance products in Georgia with a market share of 39%. Aldagi offers a broad range of insurance product lines for corporate and retail clients.

 

 

 

·         Teliani - A leading beverage producer and distributor, Teliani produces wine from its winery in East Georgia. Majority (~65% in 2017) of its’ production is exported to over 14 countries. Based on bottled wine sales, Teliani had market share of 35% in the premium segment. Additionally, Teliani has a five-year exclusive license with Heineken (including an option to further extend for five years).

 

 

 

Earnings Review

 

 

 

Georgia Capital’s topline grew 28% in 1Q18 aided by double digit growth in majority of its investments. The increase came despite GHG being classified under “discontinued operations” post the decision to reduce the Group’s stake to less than 50% during 2018. Adjusted for GHG, EBITDA grew 11% YoY with the margin at 15.5%. Consequently, the bottom line was 17% higher from 1Q17.

 

 

 

BoG: BoG reported an NIM of 7% in 1Q18 (2017: 7.3%) while its loan book grew 1% from end-2017 to GEL 7,792m. Retail loans, which dominate the loan book accounting for nearly 70%, grew 32.5%. BOG’s capital ratios were comfortably above minimum Basel III levels at 12.4% and 17.3% for Tier 1 and total capital adequacy ratios, respectively. BoG maintained its 32% dividend payout ratio in 2017 and paid GEL 3.1/share, up from GEL 2.6/share in 2016.

 

 

 

GHG: Revenue increased to GEL 208m from GEL 186m in 1Q17 while EBITDA grew 24% to GEL 31m. Both healthcare and pharma reported stable to higher EBITDA margins leading to overall EBITDA margin expanding to 15% from 13% in 1Q17. Ramp-up at its newly launched hospitals is expected to continue to aid the topline and margins at GHG during 2018. Georgia capital plans to reduce its current 57% stake in GHG to less than 50% during 2018. This follows the divestment of 7.2% stake in 2017 for USD 40m.

 

 

 

GGU: As expected, increased tariffs and water sales led to a 10% growth in the topline. Energy segment too reported a higher topline (+41% YoY) leading to a 13% growth in the company’s revenue. Overall EBITDA grew 1% YoY. Management forecasts GGu to report EBITDA of GEL 87m in 2018E and the margin to improve to 55%.

 

 

 

JSC m2: M2’s commercial segment reported higher occupancy rates (90%) and yields (10.3%) leading to higher GP from leases of GEL 345m (up 9% YoY) in 1Q18. This coupled with strong real estate sales (53 units sold for GEL 7.7m) aided the segment to report an impressive 72% growth in its EBITDA during the period. The company also launched its Ramada Encore Tbilisi hotel during the quarter.

 

 

 

Aldagi: Adalgi’s 1Q18 results were stable with higher client numbers and written policies. Its Net income was stable at GEL 4m during the period. Aldagi reported a healthy 72.4% combined ratio and its loss ratio stood at 40.8%. Aldagi also maintained its dividend payout at GEL 7m in 2017.

 

 

 

Teliani: Teliani’s topline grew to GEL 10m from GEL 3m in 1Q17 aided by the newly commenced beer operations. Volumes in both businesses grew with wine growing 31% YoY while beer grew 22% QoQ from 4Q17. EBITDA was however negative in 1Q18 as beer segment EBITDA was negative at GEL 3m. Management forecasts USD 1.7m in EBITDA in 2018E at a 4% margin for the company.

 

 

 

Gross debt outstanding at end-March 2018 totaled GEL 1,031m, majority of which comprises the USD 300m notes due 2024. The company also held a substantial amount of cash of GEL 529m at end-1Q18. We expect this to normalize over the coming quarters as the company repays the BGEO intercompany loan. Management has however agreed to hold a minimum liquid assets balance of at least USD 50m (~GEL 122m) at all times. Post the intercompany loan repayment, Georgia Capital has minimal short term maturities, aiding its liquidity profile. Any stake sale in GHG should further enhance its liquidity profile. The company’s reported net leverage was 5.0x at end-1Q18, which adjusted for GHG stake would have been 3.8x

 

 

 

Conclusion and recommendation

 

 

 

Georgia Capital is an intermediate holding company primarily focused in Georgia. It holds investments in banking, healthcare, utilities, property development, and insurance among others. Georgia Capital was formed when the BGEO group demerged its banking arm (Bank of Georgia) and its investment arm (Georgia Capital) into separate entities. Georgia Capital has since been listed on the London Stock Exchange and has a current market capitalization of GEL 1.3bn.

 

 

 

Georgia Capital’s topline grew 28% in 1Q18 aided by double digit growth in majority of its investments. The increase came despite GHG being classified under “discontinued operations” post the decision to reduce the Group’s stake to less than 50% during 2018. We view this as a positive as GHG had stated its intentions to delay its dividends for the next 2 year due to its capex plans. As such the divestment will free up capital that Georgia Capital could use in its high growth, dividend accretive investments. Adjusted for GHG, EBITDA grew 11% YoY with the margin at 15.5%. Consequently, the bottom line was 17% higher from 1Q17.

 

 

 

All of Georgia Capital’s investments reported good results in 1Q18. GHG was aided by ramp-up at its newly launched hospitals while GGU’s numbers reflected the higher tariffs implemented over the period. M2’s commercial and development segments reported higher earnings and the company also launched its Ramada Encore Tbilisi hotel during the quarter. Aldagi’s combined ratio was the best in the industry and Teliani’s numbers were boosted by its recently launched beer business.

 

 

 

Gross debt outstanding at end-March 2018 totaled GEL 1,031m, majority of which comprises the USD 300m notes due 2024. The company also held a substantial amount of cash of GEL 529m at end-1Q18. We expect this to normalize over the coming quarters as the company repays the BGEO intercompany loan. Management has however agreed to hold a minimum liquid assets balance of at least USD 50m (~GEL 122m) at all times. Post the intercompany loan repayment, Georgia Capital has minimal short term maturities, aiding its liquidity profile. Any stake sale in GHG should further enhance its liquidity profile. The company’s reported net leverage was 5.0x at end-1Q18, which adjusted for GHG stake would have been 3.8x.

 

 

 

We view Georgia Capital as a proxy to gain exposure to the Georgian economy given the company’s diversified investment holdings across major sectors. This is further supplemented by the lack of supply in the USD bond markets by Georgian issuers. At 94.9/7.2% we believe the 6.125% 2024 bond offers good value versus its other Georgian peers such as Georgian Rail 7.75% 2022 notes at 106.2/6% and Bank of Georgia 6% 2023 notes at 100.4/5.9%. Thus, we maintain our BUY recommendation on the bond.