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Edited Transcript of CGEO.L earnings conference call or presentation 22-Oct-19 1:00pm GMT

Full Year 2019 Georgia Capital PLC Earnings Call

Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Georgia Capital PLC earnings conference call or presentation Tuesday, October 22, 2019 at 1:00:00pm GMT

TEXT version of Transcript


Corporate Participants


* Giorgi Alpaidze

Georgia Capital PLC - CFO

* Irakli Gilauri

Georgia Capital PLC - Chairman & CEO




Operator [1]


Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter and 9 Month 2019 Analyst/Investor Call. (Operator Instructions) I must advise you, this conference is being recorded today, the 22nd of October 2019.

Now I'd like to hand the conference over to your speaker today, Irakli Gilauri. Please go ahead.


Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [2]


Thank you. Thank you, everybody, for attending the Q3 trading update. Today, I will talk about the macro GCAP performance in terms of the NAV development and capital allocations.

Giorgi, our CFO, will talk about the performance of our portfolio companies and devaluation. In the end, I will wrap up, and we will have a Q&A session as always.

So let me start with some macro overview. We had a -- an upgrade from S&P from BB to -- BB- to BB which is -- we think that in -- considering the development in the region and globally, we are getting upgrades is a very good news.

We also had a -- and the upgrade was mainly related to this resilience of Georgian economy to the negative external shocks and is also related to the institutional development of the state institutions.

We had a very good growth also in terms of the GDP. We had a 5% growth number. We are looking at for 8 months in 2019. That's kind of a -- statistics we have so far.

The 5% growth is ahead of our internal estimate, which was 4.5% GDP growth. We are also pleased with the development of current account deficit, which tracks substantially below 5% in first half 2019. And this number last year was more than at 8% level. So nearly halving the current account deficit in first half and also the export and import numbers, including the tourist numbers telling us that we should expect the current account deficit to be even lower in second half, and we may end up with 3.5% to 4% current account deficit in the second half of the year. GDP was at 6.2% of GDP -- sorry, the FDA was at 6.2% of GDP. And on the other side, the tourist number, despite the Russian ban on the flights, it was in Q3, still up. It went up nearly 4% increasing tourist numbers. And what we are pleased was that EU visitors are growing from the U.S., nearly 20% growth we had from EU. And we expected these numbers to grow as more airlines are starting to have a direct flight. The government of Georgia just signed the agreement with the Ryanair to have a direct flight with a number of EU cities.

So we are quite bullish on growth of the tourists going forward, especially on the back of this ban where we are observing the growth numbers, it's very good.

Now on -- the inflation has picked up to 6.5%. And even, the whole inflation is around 2%, still the headline inflation is getting high, and it seems like the -- lari weakness has imported some inflation. And National Bank is alerted about that and they were mainly focusing on inflation before. And there now are estimates which we did the analysis of why the Georgian lari is weak. It's actually fundamentally the balance sheet of this country is stronger. We have more FX inflows than outflows. And basically, the -- we should actually have the appreciated lari, but because of the National Bank's improvisation efforts, that in a way they have supplied the -- oversupplied the lari, and they didn't do a proper sterilization. So in our opinion, the lari weakness is temporary because of the National Bank's oversupply -- of lari oversupply. And we think that there's opportunity to sterilize and get the currency actually in a -- to appreciate going forward, especially when we saw the monetary policy as the National Bank announced 100 bps increase of the financing rate, which should affect the lari positively.

So basically, the Georgia -- to summarize the macro picture, Georgia is looking stronger, the gross numbers are looking stronger than we expected. And especially, it's good that the -- in the context of global growth slowdown, which is the -- IMF is forecasting, Georgia is performing in the right direction.

Now let me try to -- let me summarize our GCAP performance in terms of the NAV and the overall cash flow, and as you know the cash flow generation of our portfolio companies -- portfolio company level as well as at GCAP level is our one of the most big priorities what we are watching. And we are pleased to say that our portfolio companies generated -- the operating cash flow is up by 67% in 9 months and 45% in Q3.

We are pleased that our utility and energy business is growing very nicely on the back of the energy market deregulation as well as efficiency gains what it has. We are also very pleased with the performance of our beverages business, which has -- recording a positive momentum in terms of the EBITDA and operating cash flow generation. We are also pleased on energy side, generating cash flow.

So we think that the -- we think that this cash flow growth momentum will increase in Q4 and going forward. So we are very pleased with that cash flow formation.

Now in terms of the NAV. With 9 months, our NAV is up 13%, and it was driven by GEL 72 million increase in the value of the listed assets. And GEL 138 million of value creation on private asset side.

We also had a gain of 5.8 percentage point uplift in NAV per share due to the GEL 90 million share buyback what we just did in 9 months.

So because of this increase of the -- mainly increase in the value creation in the private asset side and program, which was the share buyback program, we have recorded 13% NAV growth in 9 months. However, in Q3, our NAV is down by 7.2%. As you know that it is mainly driven by 9 percentage point decline in the value of the listed asset. As you saw that the Bank of Georgia and GHG share price didn't perform well in Q3. However, we have offsetted this with the value creation on private side, which is what we've put in our 2 percentage point NAV increase. And please bear in mind that in Q1 and Q3, we don't do a full-blown evaluation exercise. It will be done in Q4 out of the -- for second half -- when we have our second half results. So we should expect more value creation to come in Q -- on private side in Q4.

Also in Q3, we had the buyback program, which also positively impacted our NAV by 1 percentage point. So due to the good performance on the private side -- private business side and the buyback program, it has offsetted the listed asset value decline.

Now in terms of the private headline numbers, private portfolio asset, the value creation for Q3 was GEL 37 million. In 9 months, it was GEL 140 million.

Now in terms of the firepower, we have more than GEL 430 million of cash and the loans available on our balance sheet as of the 30th September 2019. We have also the good cash flow from the loans, which we have issued to our portfolio companies. 190 -- nearly GEL 190 million of loans have been repaid in 9 months. And nearly GEL 100 million was repaid in Q3. So we have a -- our loan portfolio, which we keep at the GCAP level which is, in a way, we say bridge loans for our projects are actually performing very well, and we've been financing at local bank level, this -- these loans or the operating performance of the company has been strong and they've been repaying this.

Now in terms of the capital allocations. As you know that our -- the way we are analyzing our investments if you look at the -- what we call the 360-degree analysis. And before we invest, we analyze that what discount we can buy to GCAP shares, where our listed assets are trading and where the investment opportunities -- where we are investing in new opportunity, what kind of value creation we can bring from this investment. In lieu of this discount on the availability of the GCAP share price level is in a way -- and where our listed assets are.

So if you look at this metric, we still made quite a big investment, around GEL 266 million of capital we have allocated in 9 months. We also brought in around GEL 85 million of dividends from our investment. So basically, the net was -- net capital allocation was around GEL 170 million -- GEL 175 million.

So basically, let me summarize this allocations which was done in 9 months of this GEL 266 million gross capital allocations. So we did a bolt-on acquisition in beer business. We did also the -- and we bought the oldest brand, beer brand, which actually helps very much to generate a positive cash flow for our beer business.

We also made a small acquisition in the car service. As you know, we are not very -- we like the car service industry as it is growing and it's fragmented and we see the opportunity is big. But before we will be breaking the capital amounts for this segment, we would like to try to manage a smaller business to understand the business segment well. And therefore, we made only -- nearly GEL 4 million investment in car services. We are -- this is in a way our learning platform.

We also did the acquisition in terms of the digital services and how we are going to experiment and test what we want to -- whether there are some opportunities available in the digital world in Georgia. This was a small bet around GEL 2.8 million, this was -- we have allocated in 9 months. So towards the Q3, we had, kind of, bigger allocations, we bought the Alaverdi winery 100% liquid interest there for GEL 16 million. It's a 244 hectares of vineyard. And now we brought the total vineyard portfolio in our wine business to more than 700 hectares.

We are the single largest vineyard owner in this country. We are also building 300 hectares -- on 300 hectare of land we are building the vineyard portfolio. So right now, we have a -- we own the 3 wineries: the Teliani, Kindzmarauli and the Alaverdi. And we are pretty bullish on the Georgian wine. And especially, the prices which we are buying the vineyards, we think it's very attractive, these periods between 4 to 5 years. So if we will see the opportunities -- more opportunities to consolidate the vineyards, we would take this opportunity. For us, as you know, we need to enter the affordable valuations.

I guess what is most probably the best news in terms of the capital allocation, capital deployment was the education. We've been talking about that for some time. And we have been very picky, and we think that we are disciplined to enter the education segment in a very disciplined one -- manner in a very affordable valuations.

We have allocated GEL 40 million, and we bought 3 schools. We bought the British-Georgian Academy. We have actually, at the -- we had a visitor at the Investor Day, and who was (inaudible) at the Investor Day. If you remember that school, we think that it is one of the -- not we think, it is the top school in this country. And BGA, the British-Georgian Academy is considered to be one of the blue-chip of the blue-chip of this -- in the education segment.

We also bought the 80% equity interest in Buckswood, which is another British school, which operates in elite level. And we think that this school is really in that mid-level segment.

We also bought the 80% equity interest in Green School, which operates in affordable segment with a very strong brand equity. And we think that each of this school is a leader in each of the segment.

So the acquisitions varied between 5.6 EV EBITDA to 6.4, with the acquisitions, and we think that this is kind of a good entry point for us.

What is probably most noticeable that we will not be -- we will have an independent partner in the education business, and we will not be creating the education holding company going forward. And we will be operating the partnerships with our new partner -- with the existing partner what we have, and we will be forming new partnerships going forward.

I want to summarize that our education pipeline and education business is very strong. We are in parallel talks, I can tell you one number, with 14 different schools in Georgia. And we are, obviously -- we want to pick the best ones to consolidate further.

Now let me talk about the hospitality business where we allocated GEL 79 million hospitality and commercial real estate was allocated GEL 70 million of capital. Of this, GEL 31 million was the in-kind contribution because it is, in a way, reallocation from the housing business, which created a stock of the commercial real estate. We basically allocated from housing business is GEL 48 million from housing into the commercial real estate.

Why we want to show you this allocation is basically for us, this is a catch, we could have sold it and cashed it out. This GEL 48 million, which is -- we think that it's a very liquid stock there. And I think that before we were not showing these reallocations, in-kind reallocation of real estate from one business into another. We weren't showing it to the investors, but I think it's worth mentioning because this is a conscious decision, what we made. We did not sell this commercial real estate assets, which were part of the housing business, and we decided to keep it. And I think it deserves for -- that our investors know what kind of decision we made. So going forward, we'll be showing this capital reallocations of in-kind, so that you also are aware what decisions we are making in terms of not selling some of the assets what we have on our balance sheet.

And in the end, which is probably out of the education investment, another great investment which we did is, we bought our share and reinvested in Georgia Capital shares.

I'm not sure which one is better, education or investing in Georgia Capital shares. But I think against that outer investing education, investing in our shares was a very good decision.

So we have spent GEL 90 million in buying our shares. And with this one we finished our buyback program and we started another one with $20 million buyback program we have started. And hopefully, we will buy GCAP shares cheaply.

So here I will stop, and I will let Giorgi to talk about the portfolio company performance and valuations.


Giorgi Alpaidze, Georgia Capital PLC - CFO [3]


Thank you, Irakli. Hello, everyone. We updated the valuation of our portfolio companies as of the end of September.

So to start with the list of investments, they continue to be carried at the closing share prices on London Stock Exchange as of September 30. And if you look at over the 9 month period since January 1, GHG and Bank of Georgia values are up by GEL 72 million over 9 months. Over the third quarter, their values were down by GEL 174 million.

For the private portfolio, valuations were consistently performing with the previous periods. There was no change in the peer groups used for the valuations.

As it relates to the multiples used, to summarize briefly, the Water Utility multiple remains the same as in the first half of 2019. The P&C market pool was down from 9.1 to 8.7 in terms of the PE. Wine multiple, the EV EBITDA multiple was down from 9.9 to 9.6. And the beer revenue multiple was up from 2.1 revenue times to 2.2. Lastly, the PTI, the service business that we have within the car services, multiple there was up from 10.1 to 10.4.

In terms of the portfolio businesses, I will start with the late-stage businesses. Starting from the Water Utility, where the business had a strong revenue growth, coupled with the strong operating cash flow and the EBITDA growth both in the third quarter and over 9 months.

Revenue growth in the third quarter was 12.7%, and it was primarily driven by the increased electricity sales, which actually tripled year-over-year in the third quarter to GEL 6.4 million. And that represents the third quarter revenue in the electricity as much revenue as the total revenues were in electricity in 9 month of 2018.

The sales itself of electricity were up by 94% on the back of the increased generation and the continued savings in self-consumption of the business and the average selling price was up by 70% on the back of the electricity market deregulation which became effective at the beginning of May 2019.

Going down to CapEx, CapEx was down significantly year-over-year in the third quarter. It was down by 42% following the completion of the pre-regulation obligations in the first half of 2019.

To summarize, last 12 months EBITDA was up by GEL 5 million in Water Utility business, while net debt increased by only GEL 4 million in the third quarter. As a result, and since the multiple remained flat in 9 times, we had GEL 34 million value creation from Water Utility business in the third quarter, which brought the total value creation in this business over the 9 months to GEL 63 million in 2019.

Jumping into the Housing Development business. As we had previously said, the revenue recognition of the largest-ever Digomi residential project started in the third quarter. This sales revenue was recognized in line with the construction progress, which stood at 20% at the end of the third quarter.

The business showed about $14 million worth of the inventory, representing a little over 13,000 square meters sold, which was about 60% of the total available space. As a result, the operating cash flow was positive, at close to GEL 7 million in the third quarter.

The second page of the Digomi project is -- will further increase the inventory levels, and it will add about 47,000 total sellable area in the coming months.

As Irakli mentioned earlier, we had GEL 31 million income dividend from Housing Development business during the third quarter of 2019.

Property and casualty insurance business. Last 12 months, net profit increased by GEL 600,000 to GEL 18.4 million and due to the fee multiple decrease from 9.1 to 8.7, we had about GEL 1.6 million decrease in fair value as of the end of Q3.

Now going into the early-stage businesses. In the renewables, to start with an update on the Mestiachala hydro power plant, depending on the negotiations with the insurance company, 30 megawatt Mestiachala hydro power plant, the first phase, is expected to return online by the end of 2019, while the remaining 20 megawatt is expected to come back online by the end of 2020. Again, depending on the negotiations with the insurance company.

In the third quarter, we recognized revenues of estimated reimbursement for business interruption of GEL 7.4 million. Renewable energy continues to be valued at cost within our NAV statement.

In hospitals, in commercial real estate, the commercial real estate portfolio was expanded because of the in-kind dividends that was received from the housing business of -- by GEL 31 million gross yield that the business earns on their lease portfolio stood at 10.4% in the third quarter. The existing one hotel that is operational, Ramada Encore, the utilization picked up there from 65% in the third quarter 2018 to 71% in the third quarter of 2019.

As an update Gudauri Hotel, which is a hotel in the ski resort of Georgia, is on track to be launched by the end of this 2019.

The business also has 3 hotels, Ramada Melikishvili, Kempinski, and Ramada Kutaisi in the active construction phase and expects to launch them over the next few months.

This business continues to be valued at NAV, there was about GEL 4 million increase related to the FX movement given that this is a FX-linked business.

Going into Beverages. Starting with wine, where the export sales were up by 25% in the third quarter. It drove about 18% increase in the revenues.

Operating cash flow increased significantly from the negative GEL 3.4 million a year ago to a positive GEL 1.4 million in the third quarter.

The business valuation increased by GEL 16 million because of the Alaverdi acquisition that was done earlier in September.

There was a slight offset of GEL 1.4 million impact on the EV EBITDA because of the decrease in the multiple, as mentioned earlier.

And to recap, the Kindzmarauli and Alaverdi winery are still trade at cost in devaluations.

In beer, the business benefited from the full scale launch of new brands, Heineken, Amstel, Krusovice, Kazbegi and Kayaki, a very popular light beer that was launched in Georgia, and which is the first local brand positioned in the upper mainstream segment in the country.

Revenues were up by 52% in the third quarter versus the previous year. The business benefited from a continued turnaround task. It was the first quarter when beer business had a positive EBITDA, which was GEL 1 million in the third quarter, and the operating cash flow was positive at GEL 2.2 million.

This business continued -- the business was valued at 2x revenue multiple and there was no change in the fair value besides the GEL 4 million capital allocation for working capital financing during the quarter.

Lastly, I will talk about the Periodic Inspection business. In this business, they continued to gain market share, and which is about 36% market share in the third quarter.

It generated GEL 1.4 million EBITDA in the third quarter. Bringing total EBITDA generation to GEL 2 million in the first 9 months.

EBITDA margin increased to 35% during the third quarter. And in terms of the valuation, the increase in the valuation multiple from 10.1 to 10.4, resulted in additional GEL 1.6 million value creation.

With that, I will hand it back to Irakli.


Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [4]


Thanks, Giorgi. So let me summarize what we're talking about. So macro is strong. We have a 5% EBITDA growth against our expectation of 4.5%.

The -- as the lari is translating into the inflation, we are expecting the tighter monetary policy, which would result in strengthening the GEL.

We are also observing a very strong external balance sheet, growth of the exports and the growth of the tourist.

Therefore, we are expecting this GDP growth to be driven by the external balance sheet of the country. And on pickup, specific basis -- we see a very strong cash flow generation of our portfolio companies, which result in 67% growth in the operating cash flow of our aggregate portfolio companies.

We are seeing the -- NAV per share is going up. It's nearly 13%. This is in terms of the -- mainly driven by the growth of the value of the private assets. What we have as well as the buyback is contributing nicely to EBITDA share growth.

And going forward, we -- as I mentioned, we have a very strong pipeline deal flow, not only in education business but across the board. And we are very picky in terms of the growth price. We will be allocating our capital, and we want to stay disciplined in this allocation. And our 360-degree analysis is a very, very important before we allocate any cash.

So now let's open the floor for Q&A. Operator, can you please?


Questions and Answers


Operator [1]


(Operator Instructions) There are no questions at the moment. So I'll hand back to you.


Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [2]


Thank you, operator. And thanks, everybody, for attending the call. I guess our message was very clear. No questions at this stage. But please keep in touch directly, so that we will be -- if you have some questions, we'll be addressing them. And Giorgi and I will be sojourning starting from Thursday and Friday in London, and then we'll be in New York and Boston. And let us know if we -- if you want to have a meeting and catch up.

Thank you very much. And please stay tuned for the second half results. Bye-bye.


Operator [3]


Thank you. That does conclude the conference for today. Thank you for participating, and you may now disconnect.