Georgia Capital — Nearing deleveraging target

Georgia Capital (LSE: CGEO)

Last close As at 21/05/2024

GBP10.20

4.00 (0.39%)

Market capitalisation

GBP410m

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Research: Investment Companies

Georgia Capital — Nearing deleveraging target

Georgia Capital’s (GCAP’s) NAV per share total return in Q422 was 14.9% in Georgian lari (GEL) terms (8.5% in sterling), bringing the full year return to 4.0% (33.2% in sterling terms due to the significant appreciation of GEL). The portfolio value uplift in the quarter was mainly driven by the strong share price performance of Bank of Georgia (BoG), up 31% in sterling terms. This allowed GCAP to bring holding leverage closer to its target level, while maintaining a good liquidity position (up 14% y-o-y in US dollar terms). Meanwhile, GCAP shares continue to trade at a wide discount to NAV, currently 61%, based on GCAP’s ‘live’ NAV estimate, implying that the value of BoG shares and the put option on the water utility business is currently higher than GCAP’s market capitalisation.

Milosz Papst

Written by

Milosz Papst

Director, Financials

Investment Companies

Georgia Capital

Nearing deleveraging target

Investment companies
Private equity

8 March 2023

Price

832p

Market cap

£358m

NAV*

£903m

NAV per share*

2,012p

Discount to NAV

66.0%

*At end-December 2022.

Yield

N/A

Ordinary shares outstanding*

43.0m

Code/ISIN

CGEO/GB00BF4HYV08

Primary exchange

LSE Premium

AIC sector

N/A

52-week high/low

840p

479p

2,012p

1,292p

*As at end-December 2022.

Gearing

Net gearing at 31 December 2022

13.5%

Fund objective

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

Bull points

The majority of the portfolio is 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 total return in Q422 was 14.9% in Georgian lari (GEL) terms (8.5% in sterling), bringing the full year return to 4.0% (33.2% in sterling terms due to the significant appreciation of GEL). The portfolio value uplift in the quarter was mainly driven by the strong share price performance of Bank of Georgia (BoG), up 31% in sterling terms. This allowed GCAP to bring holding leverage closer to its target level, while maintaining a good liquidity position (up 14% y-o-y in US dollar terms). Meanwhile, GCAP shares continue to trade at a wide discount to NAV, currently 61%, based on GCAP’s ‘live’ NAV estimate, implying that the value of BoG shares and the put option on the water utility business is currently higher than GCAP's market capitalisation.

NAV per share development in Q422

Source: GCAP. Note: *Includes liquidity management, foreign exchange effects and other.

GCAP executes its deleveraging strategy

Amid the high interest rate environment, GCAP is focusing on deleveraging, both at the holding level and in the underlying portfolio. It is targeting net capital commitments (NCC) as a percentage of portfolio value of 15% by 2025, which stood at 21.1% at end December 2022 after decreasing by 3.3pp during the quarter. The reduction was driven predominantly by a higher portfolio valuation, while NCC were broadly flat. At the current portfolio valuation, GCAP calculates that it needs to decrease NCC by US$72m (from the current US$250m) to reach its target. This could be funded by disposals of some of its subscale businesses, as well as income from regular dividends paid by its portfolio holdings. GCAP expects to receive GEL150–160m (US$57–61m) in dividends in 2023, which is 22–30% higher than in 2022 (including a BoG share buyback as an alternative to a standard dividend).

As at end December 2022, GCAP’s debt at the holding level comprised US$300m 6.125% Eurobonds, of which US$51m were held in treasury. While GCAP aims to reduce holding-level debt to zero within three to four years, it intends to refinance US$150–200m of the bonds (which mature in Q124). Meanwhile, GCAP’s liquid resources increased by 13.8% q-o-q to US$152.4m following repayment of the US$80m loan issued to the renewable energy business.

Portfolio update

There was a 2.0% y-o-y increase in the aggregate revenues of GCAP’s private portfolio companies and a 1.3% y-o-y increase in EBITDA in Q422. This was despite lower y-o-y results from hospitals, and clinics and diagnostics businesses. Excluding these (which make up 17% of the portfolio as at end-2022, see Exhibit 1), the remaining private companies (52% of the portfolio) recorded an aggregate 8% increase in revenues and a 24% y-o-y increase in EBITDA in Q422. On a full-year basis, the aggregated revenues of private portfolio companies increased by 7.6% y-o-y and aggregated EBITDA decreased by 5.5% y-o-y – respectively a 13.2% and 11.9% increase excluding healthcare services.

Exhibit 1: GCAP’s portfolio at end-December 2022

Exhibit 2: Revaluation of carried portfolio in Q422*

Source: GCAP

Source: GCAP. Note: *Calculated as ‘value creation’ (as reported by the company) divided by carrying value at end-September 2022.

Exhibit 1: GCAP’s portfolio at end-December 2022

Source: GCAP

Exhibit 2: Revaluation of carried portfolio in Q422*

Source: GCAP. Note: *Calculated as ‘value creation’ (as reported by the company) divided by carrying value at end-September 2022.

BoG’s share price rally was the main driver of GCAP’s NAV increase and it has reported strong FY22 results, with a 56% y-o-y increase in adjusted net profit to GEL1,132m, translating into a strong ROE of 32.4% (FY21: 25.8%). The loan portfolio increased by 4.3% y-o-y to GEL16,862m, with BoG retaining its 36% market share in gross loans (up 0.4pp y-o-y). Loan portfolio quality is good, with non-performing loans (NPLs) at 2.7% of gross loans and a 129% NPL coverage ratio (FY21: 2.4% and 148%, respectively). During the year, BoG distributed a GEL84m interim dividend and the board will recommend to the 2023 AGM (to be held in May 2023) a final dividend of GEL267m (bringing the total dividend to GEL351m, up 91% y-o-y). On top of that, BoG completed a GEL113m share buyback programme in December 2022, which it intends to further increase by up to GEL148m.

The pharmacy business (23% of portfolio) remains the largest private business in GCAP’s portfolio. Its Q422 results were 3.3% lower y-o-y at the top line and 9.2% at the EBITDA level, bringing full year revenue to GEL790m and EBITDA to GEL77m (1.0% y-o-y growth each). The business continues to expand, with 24 pharmacies and five franchise stores added to the chain over the course of 2022, and now has 372 pharmacies and 12 franchise stores, representing 35% of the Georgian market, according to GCAP, and the expansion costs weigh on margins. At the same time, the transfer of the hospitals’ procurement department from the pharmacy business to the hospitals business (completed in December 2022), reduced the revenues of the pharmacy business. Despite flat results, the business was revaluated by 7% on the back of multiples expansion.

The hospitals business (14% of portfolio) posted a y-o-y decrease in Q422 and FY22 revenue and EBITDA. This is because hospitals have not been able to fully ramp up occupancy following the suspension of COVID contracts by the government in Q122 (end-2022 occupancy rate of 69.6%, down 17.6pp y-o-y). The results were further affected by the temporary closure of the Iashvili Hospital due to mandatory renovation, as well as a lack of revenues from the Traumatology Hospital, which was sold in April 2022. Q422 revenues and EBITDA were down 14.9% and 29% year-on-year, respectively. When adjusted for missing revenues from the above-mentioned two hospitals, revenue was down 7.7% and EBITDA up 3.5% y-o-y. Meanwhile, the valuation of the business was flat q-o-q despite lower results, which reflects the expected positive impact from the roll-out of a Diagnosis Related Group financing system, which is expected to better reflect inflation and other price pressures.

The insurance business (9% of portfolio) posted a 6% y-o-y increase in net premiums earned in Q422 (up 9% y-o-y in FY22), which was mainly driven by growth in the credit life, agricultural and border motor third-party liability insurance lines in the P&C segment, as well as higher prices of insurance policies in the medical segment. Net income in the business grew 15.4% y-o-y in Q422 and 11.7% y-o-y in FY22.

Given the current discount to NAV, GCAP is limiting its investments to share buybacks and its investment stage businesses (renewable energy and education) under its 360-degree framework (see our previous note for details). In September 2022, GCAP completed its US$25m share buyback programme (started in August 2021), with 3.1m shares (c 6.4% of issued capital) repurchased and cancelled. Management states that after achieving the target NCC ratio, it may increase the scale of buybacks, and we believe that until then GCAP will focus on divesting subscale businesses and small-scale buybacks.

Potential transfer to standard listing

GCAP intends to move from the LSE premium listing to a standard listing. The transfer will be proposed to shareholders, with voting concluding on 10 March and results announced at the AGM on 14 March. If accepted, the standard listing should commence on 13 April.

According to GCAP’s management, the change in listing should provide the company with more flexibility in investment decisions, as it currently needs shareholder approval for any transaction representing a volume of more than 25% of its market capitalisation. Given GCAP’s current discount to NAV, this limit translates to just 9.7% of portfolio value. Management also points to cost reduction, which will support reaching its target ratio of opex to NAV of 0.75% (FY22: 1.40% of average NAV).


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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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.

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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.

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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 2023 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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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