Georgia Capital — NAV per share stable in local currency in Q222

Georgia Capital (LSE: CGEO)

Last close As at 18/06/2024

GBP8.73

−17.00 (−1.91%)

Market capitalisation

GBP368m

More on this equity

Research: Investment Companies

Georgia Capital — NAV per share stable in local currency in Q222

Georgia Capital’s (GCAP’s) NAV per share in Georgian lari total return (TR) terms remained broadly stable in Q222 (a 0.2% increase) after absorbing the impact from lower public market multiples and higher discount rates in Q122 (when NAV per share declined by 16.5% in TR terms). Having said that, the continued appreciation of the Georgian lari against sterling (driven by the strong local economy) resulted in a solid 14.4% NAV TR in sterling terms in Q222 (-2.1% in H122). We also note that the share price of Bank of Georgia recouped some of the Q122 losses in Q222 and rose further by 61% after end-June 2022 (well above 2021 levels), which brought GCAP’s ‘live’ NAV estimate to £17.41 at 24 August. This now implies a 61% discount to NAV, well ahead of other listed private equity companies.

Milosz Papst

Written by

Milosz Papst

Director, Financials

Investment Companies

Georgia Capital

NAV per share stable in local currency in Q222

Investment companies
Private equity

25 August 2022

Price

684p

Market cap

£307m

NAV

£654m

NAV per share*

1,478p

Discount to NAV

53.7%

*At end-June 2022.

Yield

0.0%

Ordinary shares outstanding*

44.2m

Code/ISIN

CGEO/GB00BF4HYV08

Primary exchange

LSE Premium

AIC sector

N/A

52-week high/low

725p

459p

1,507p

1,248p

*As at end-June 2022

Gearing

Net gearing at 30 June 2022

17.8%

Fund objective

Georgia Capital focuses on scalable private equity opportunities in Georgia. These opportunities have the potential to reach at least GEL300m equity value over the next three to five years and the company can monetise investments through exits as investments mature.

Bull points

Majority of portfolio exposed to resilient and well-established businesses.

Successful disposal of the water utility business reinforces confidence in GCAP’s exit capabilities and portfolio valuations.

Regular dividend income from several portfolio companies.

Bear points

High discount to NAV limits GCAP’s activity in terms of new investments.

A concentrated portfolio exposed to a frontier economy is inherently higher risk.

GCAP has just started building its track record of investment realisations.

Analysts

Milosz Papst

+44 (0)20 3077 5700

Michal Mordel

+44 (0)20 3077 5700

Georgia Capital is a research client of Edison Investment Research Limited

Georgia Capital’s (GCAP’s) NAV per share in Georgian lari total return (TR) terms remained broadly stable in Q222 (a 0.2% increase) after absorbing the impact from lower public market multiples and higher discount rates in Q122 (when NAV per share declined by 16.5% in TR terms). Having said that, the continued appreciation of the Georgian lari against sterling (driven by the strong local economy) resulted in a solid 14.4% NAV TR in sterling terms in Q222 (-2.1% in H122). We also note that the share price of Bank of Georgia recouped some of the Q122 losses in Q222 and rose further by 61% after end-June 2022 (well above 2021 levels), which brought GCAP’s ‘live’ NAV estimate to £17.41 at 24 August. This now implies a 61% discount to NAV, well ahead of other listed private equity companies.

Revaluation of carried portfolio in Q222*

Source: GCAP. Note: *Calculated as ‘value creation’ (as reported by the company) divided by carrying value at end-March 2022. Share in the portfolio at end-June 2022 shown in brackets on the X axis.

Why consider Georgia Capital now?

GCAP provides diversified exposure to Georgia, mostly through resilient, market-leading businesses in sectors like healthcare, pharmacy, financials, renewable energy and education. This portfolio (of which 90% is valued externally) is available at a wide discount to carrying value and we note that the combined value of its Bank of Georgia stake and the remaining stake in the water utility business (valued based on the put option) alone equal c 81% of GCAP’s market cap.

The Georgian economy exhibits extremely strong momentum (despite weaker global macro conditions), with real GDP growth of 10.5% y-o-y in H122 (after 10.4% in 2021). This is fuelled by, among other things, solid external demand (merchandise exports were up 35% y-o-y in H122), a surge in remittances by 65% y-o-y in H122 and a rebound in tourism arrivals to 80.6% of 2019 level in July 2022, including the migration effect, according to Galt & Taggart research. Georgia’s solid economic prospects are illustrated by the World Bank’s GDP forecasts (released in June 2022) for 5.0%+ growth in 2022–24. Local forecasters expect even higher real GDP growth in 2022, with the National Bank of Georgia recently raising its forecast from 4% to 9%, while Galt & Taggart and TBC Capital forecast 9.2% and 10.6%, respectively. This is supported by, among other factors, the inflow of migrants from Russia, Ukraine and Belarus following the outbreak of the war. TBC Capital estimates that 75,000 have arrived so far and that c 30,000 will stay permanently.

Post-pandemic normalisation in healthcare in Q222

Hospitals and diagnostics returning to pre-COVID-19 operations

The aggregate revenues of GCAP’s private portfolio companies increased by 4.6% y-o-y in Q222, while aggregate EBITDA was down 20.0% y-o-y (or by c GEL15m). However, we note that this was largely driven by the expiry of COVID-19 government contracts (with hospitals EBITDA excluding IFRS 16 down to GEL13m from GEL20m in Q221) and the lower results of the diagnostics business amid a lower number of COVID-19 cases (resulting in a minor EBITDA loss for the diagnostics segment in Q222 vs a GEL2.5m profit in Q221). GCAP’s management expects the results of these businesses to rebound in the coming quarters as they transition to the post-pandemic mode of operations, with July and August occupancy of its hospitals already at pre-COVID-19 levels. GCAP’s CEO believes that the EBITDA margin of the hospitals business should recover to pre-COVID-19 levels in the next few quarters (Q222 margin excluding IFRS 16 stood at 18.3% vs Q219 margin of c 25.4%). Still, the carrying values of the hospitals and clinics & diagnostics businesses were reduced by c 9% and 19% vs end-March 2022, respectively.

Retail (pharmacy) continues to expand its store chain

Another major driver of the fall in private portfolio earnings was the retail (pharmacy) business, which posted declines of 3.5% and 11.4% y-o-y in Q222 revenues and EBITDA, respectively. This was mainly related to pricing adjustments resulting from the Georgian lari’s appreciation against foreign currencies (Q222 same-store sales decline at -1.6%), as well as cost inflation and higher operating expenses associated with the addition of 33 pharmacies over the 12 months to end-June 2022 (in line with GCAP’s strategy focused on the expansion of capital-light portfolio companies; see our previous note for details). GCAP’s management highlighted that the business should be able to pass on at least some of the cost inflation at some stage to its customers. The carrying value of the business was marked up by 2%, assisted by the positive outlook for the business coming from a combination of chain expansion and strength of the Georgian economy.

Bank of Georgia’s annualised ROAE at 32.8% in Q222

On 16 August 2022, Bank of Georgia reported a strong 36.3% y-o-y increase in net profit in Q222 to GEL275m, translating into an annualised return on average equity (ROAE) of 32.8%. The bank’s loan book increased by 10.2% y-o-y (17.8% on a constant currency basis) and deposits grew by 8.3% y-o-y (16.0% on a constant currency basis). Bank of Georgia’s non-performing loan (NPL) ratio increased slightly to 2.6% at end-June 2022 compared to 2.4% at end-2021. The bank retained a solid capital position with a CET-1 ratio of 14.0% (vs the regulatory requirement of 11.7%) and a liquidity coverage ratio of 113.5%.

Other major holdings posting good results

GCAP’s P&C insurance business performed well, assisted by an increase in earned premiums (especially in the credit life and agricultural insurance lines) and an improved combined ratio of 79.6% (vs 80.2% in Q221), while the results of the medical insurance business were flat year-on-year. In turn, the overall insurance business posted revenue and net income rises of 9.3% and 9.0% y-o-y in Q222, respectively. Overall, the P&C business was revalued upwards by c 8%, implying a valuation multiple of 11.0x vs 10.6x at end-March 2022.

GCAP’s education business maintained strong momentum with sales and EBITDA up 28.9% and 19.9% y-o-y in Q222, respectively, assisted by higher capacity utilisation at 96.5% versus 91.2% in Q221 (excluding the capacity expansion in the affordable segment in Q321), strong enrolment (with record-high intake for first graders for September, above expectations) and an increase in fee per learner. Consequently, its valuation increased by c 12%.

The revenue and EBITDA of the renewable business were down 7.6% and 5.9% y-o-y, respectively, in Georgian lari terms, but this was due to the Georgian lari’s appreciation versus the US dollar (the business’s functional currency is the latter). Its carrying value was raised by 5.1% in Q222.

GCAP’s leverage continues to fall

GCAP’s net capital commitment (NCC) ratio, introduced recently as part of its strategic deleveraging process (see our previous note for details), declined slightly to 27.0% at end-June 2022 versus 28.2% at end-March 2022 (and the over the cycle target of 15%), primarily assisted by foreign exchange, as its portfolio is denominated in Georgian lari, while most of its debt (US$365m six-year Eurobonds maturing in March 2024) is denominated in US dollars. After end-June 2022, the ratio improved further due to (1) the above-mentioned increase in the share price of Bank of Georgia, (2) continued strengthening of Georgian lari and (3) a US$7m expected reduction in guarantees on the debt of GCAP’s beer business.

At end-June 2022, GCAP’s liquid assets stood at US$234m, with US$123m in cash, US$104m in marketable securities and a US$8m dividend receivable from Bank of Georgia. We note that this fully covers its planned renewable energy and education investments (US$54.2m), announced buybacks yet to be executed (US$4.3m) and the contingency/liquidity buffer assumed by GCAP (US$50m). We understand that the NCC does not account for the US$95.4m shareholder loan GCAP will provide to Georgia Global Utilities (see our January 2022 note for details) to refinance the portion of the Green Eurobond attributable to the renewable energy business in August 2022, as it is only considered bridge financing until the business can raise new long-term debt funding.

On 23 June 2022, Moody’s upgraded GCAP’s corporate family rating to B1 from B2 with a stable outlook. Meanwhile, S&P Global Ratings reaffirmed its B+ long-term issuer rating on 3 June (upgraded from B in February 2022) but revised its outlook from stable to negative. This reflects the possibility of a downgrade over the subsequent six to nine months if macroeconomic conditions in Georgia deteriorate, which could have an impact on GCAP’s leverage and liquidity and in turn the refinancing risk associated with its 2024 bonds. We believe that the risk may be at least partially mitigated by the extensive experience of GCAP’s team in accessing the debt capital markets, which also covers the period under BGEO (before it was split into GCAP and Bank of Georgia in May 2018).

GCAP’s year-to-date dividend income stands at GEL34.4m with a further GEL55–66m expected until end-2022, bringing the FY22 figure to GELL90–100m (compared to GEL74.4m in FY21 and GEL72.9m in FY19). The company continued to execute NAV-accretive share repurchases, buying back 0.8m shares (for US$6.3m) in Q222 and a further c 0.5m (for US$3.6m) after end-June 2022. Since buybacks were launched in August 2021, it repurchased 3.0m shares representing c 6% of its share capital. GCAP has extended the timeframe for its buyback and cancellation programme until end-2022.

General disclaimer and copyright

This report has been commissioned by Georgia Capital and prepared and issued by Edison, in consideration of a fee payable by Georgia Capital. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Georgia Capital and prepared and issued by Edison, in consideration of a fee payable by Georgia Capital. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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