Business summary
Georgia Capital plc (LSE:CGEO) is an investment company in Georgia. It focuses on capital light, larger scale opportunities in Georgia. The businesses they invest in should have the potential to reach at least GEL (Georgian Lari) 300 million equity value in a 3-5 years period. As investments mature they aim to monetize them through exits. Georgia Capital is actively involved in managing their portfolio businesses. They influence strategy and business plan of their businesses and set exit options prior to making an investment.
Prior to 2018 Georgia Capital was part of Become Georgia. On the 29th of May 2018 Become Georgia was split up into Bank of Georgia (LSE:BGEO) and Georgia Capital. As a result of the split Georgia Capital is not subject to the banking regulatory regime. This allows them to be more flexible when allocating capital.
Their investment portfolio is made up of the following businesses:
Bank of Georgia
Bank of Georgia is a publicly traded bank that is listed on the London stock exchange under ticker symbol BGEO. Georgia Capital has a 20.6% ownership stake in the bank. This stake represents 20.9% of the overall portfolio.
Bank of Georgia and TBC Bank (LSE:TBCG) together have a duopoly on the banking sector in the country. Combined market share stands at 70%+.
The table below shows BGEO’s market share for both loans and deposits. As we can see market share has been stable and even slightly increasing.
The table below shows a few important metrics of the bank. Again we see stable performance. It is worth noting that the non performing loans coverage ratio adjusted for discounted value of collateral is comfortably above 100% for each year.
In the following table we once again see the stability of the bank. Given the high liquidity ratios and conservative leverage I don’t think the bank is at risk of a wipe out.
At time of writing BGEO is trading at ~5 times earnings, 1.7 P/B with a dividend yield of 4.5% and a market cap of 1.3 billion GBP. Dividends have been paid consistently for the past 5 years with the only exception being 2020.
Water Utility
The water utility business provides water and waste water services to 1.4 million residents and 30.000 legal entities in Tbilisi. It is a regulated monopoly. Additionally it operates two hydro power plants with a capacity of 149MW. The electricity they produce is in large parts for own consumption.
In December 2021 CGEO sold an 80% stake in the business for US$ 180 million. The proceeds of the sale were used to buy back shares, deleveraging and lending to portfolio businesses.
The remaining 20% stake represent 5.4% of the portfolio.
Georgia Healthcare Group
Georgia Healthcare Group (GHG) has the following businesses under their umbrella:
Retail (pharmacy)
The retail part of GHG consists of multiple pharmacy chains. The largest being pharmadepot with 248 stores in Georgia. Their other other pharmacy is GPC with 105 locations in Georgia and 6 in Armenia. GPC is targeting the middle and high consumer segment whereas pharmadepot is focused on the lower to middle consumer segment.
Apart from the two owned pharmacy chains the retail business also has two franchise agreements. The first being with The Body Shop, a cosmetics company. They operate 5 stores in Georgia and 2 in Armenia. Additionally there are 300 shop in shop models in GPC and pharmadepot pharmacies. The second franchise agreement is with Afflelou, an optics retailer from France. Currently this franchise only operates 1 store in Georgia. According to the company’s own estimates the pharmacies have 35% market share in Georgia.
The table below shows the steady increase in revenue and net profit for the overall retail business.
The business aims to grow to 280-330 pharmadepot pharmacies in the next 5 years and to upgrade 80-100 GPC pharmacies to a new format they’ve developed. Additionally they aim to expand internationally into Armenia and Azerbaijan.
CGEO has a 77% stake in the retail business, however that will increase to 100% by 2027. The buy-out will be executed in annual trances at a 5.25 EV/EBITDA multiple. This current stake represents 23.7% of the overall portfolio.
Hospitals
The hospital segment of GHG consists of EVEX Hospitals which is the largest hospital chain in Georgia. The business operates 16 referral hospitals, 7 of which are located in Tbilisi. The hospitals together have 2524 referral beds and are split up into 2 clusters. Cluster 1 are commercial hospitals in Tbilisi and other large cities. The company estimates that cluster 1 has a high growth potential. Cluster 2 are smaller regional hospitals with a moderate growth potential.
2026 targets of the business are the following: EBITDA CAGR 10%+, EBITDA to operating cash 85%+ (70% in q1 2022) and finally ROIC of 13%+ (9.2% in 2021).
The hospital business is wholly owned and represents 15.1% of CGEO’s portfolio.
Insurance
The insurance is comprised of a property and casualty insurance (P&C) business called Aldagi and a medical insurer that is owned though GHG directly. Aldagi is the market leader in Georgia with a 26% P&C market share.
The table below shows the premiums written, profit and ROAE of Aldagi.
The P&C insurance market in Georgia has a very low insurance penetration of only 1.4%. This shows there is still a large runway for growth. Motor insurance is the largest sector with 35% share of the total market followed by property at 22%.
The health insurance business has a 22.5% market share based on FY21 net insurance premiums. At 31 December 2021 the business had 165.000 clients and made 3.8 million GEL in FY 2021. The health insurer is a feeder for the polyclinics, hospitals and pharmacies.
The insurance business is wholly owned by Georgia Capital and represents 8.9% of the total portfolio.
Clinics and Diagnostics
The clinics segments consists of EVEX Clinics who operate 34 clinics, 19 of which are community clinics. The remaining 15 are polyclinics. The polyclinics offer dental and aesthetics services. The community clinics offer inpatient and ER services. Both type of clinics offer laboratory services, consultations, diagnostics, manipulation/procedures and day care. The community clinics have 353 beds and the 34 clinics combined have 595,000 registered patients. The clinics business has a 21% market share in registered patients according to the company’s own estimates.
The goals going forward are to reach double digit revenue CAGR, EBITDA of GEL 30 million+ and ROIC 13.0%+ (6.9% in 2021) by 2026.
Continuing with the diagnostics business, Megalabs. This business was launched in 2019 and is now the largest diagnostics laboratory in the Caucasus region. The lab is equipped with state-of-the-art equipment and offers clinical and pathology tests. Some of these tests are offered for the first time in the region.
EVEX Clinics and Megalabs are wholly owned by CGEO and this stake represents 4.1% in the total portfolio.
The renewable energy business operates three hydro and wind power plants. The two hydro power plants are the 50MW Mestiachala HPP and the 20MW Hydrolea HPP. The wind power plant is the 21MW Qartli WPP. Additionally the business is also developing 2 hydro plants and 2 wind farms. When finished these 4 new plants have a capacity of 172MW. One of the new HPP has a targeted commissioning date in H1 2024. The dates for the other three plants are yet to be announced. The business has long-term power purchase agreements (PPA’s) with the government. In 2021 75% of the electricity sold by the business was sold through these PPA’s and the PPA’s are fixed in USD.
The renewable energy business is wholly owned and represents 6.1% of the portfolio.
The education business focuses on private schools. They have majority stakes in 4 schools: British-Georgian Academy and British International School of Tbilisi (70% stake), Buckswood International School (80% stake) and the Green School (80%-90% ownership).
The schools combined have a capacity for 5650 students and the goal is to increase this in the future.
The education business represents 5.7% of the portfolio.
Other portfolio businesses
Smaller businesses in the portfolio are clustered together in “other portfolio businesses“ by CGEO. This is comprised of housing development, hospitality and commercial real estate, beverages, auto services and digital services businesses. A short description of each:
Housing development
Georgia Real Estate develops affordable housing. Four projects are currently under construction and are expected to be finished in a few years.
Hospitality and commercial real estate
This segment has commercial real estate and 2 hotels. The hotels have 273 rooms and the real estate has a book value of US$13.3 million as of 31 December 2021.
Beverages
The beverage business produces wines and beers. In 2021 the wine business sold 9.4 million bottles, of which 87% was exported to 17 different countries. The beer business brews various brands of beer. It has a 10 year exclusive deal with Heineken to produce and sell Heineken brands in Georgia. In 2020 and 2021 the beer business was EBITDA positive.
Auto services
The auto services business includes a periodic technical inspection business, a car services and parts business and a secondary car trading business. In 2021 347.251 cars were serviced by the business.
Digital services
This consists of a 60% equity stake in Redberry, a digital marketing agency.
All “other portfolio businesses“ combined make up 10% of the portfolio.
Macro environment in Georgia
Georgia is a market economy with a GDP per capita of 4931.80 USD. Unemployment stands at 15.6%, inflation is 9.8% and the interest rate is 11%.
The country has been part of the EU’s Free Trade Area since 2014. Since gaining independence the country has focused on liberalizing the economy. This includes simplifying the tax system, promoting private enterprises and privatizing state owned assets. As a result of the reforms Georgia now ranks 7th in the world bank’s ease of doing business rankings. Given these reforms and the focus on a free market economy I am not worried about nationalization.
Georgia has a complicated relationship with Russia. In 2008 they had a war on Georgian soil and Russia continues to occupy parts of the country. I don’t think this will cause trouble going forward given that the Russian military is currently otherwise occupied. Also, during the war in 2008 and thus during the financial crisis, Georgian GDP grew 2.3%. In the following years 2009 and 2010 GDP growth was -3.8% and 6.3% respectively. I think this shows remarkable resilience.
Finances at the holdco level
NAV over the past few years
The NAV per share has not seen impressive growth over the past few years as can be seen below. However I don’t think that this accurately represents the growth in intrinsic value of the portfolio. Since Bank of Georgia is publicly traded and around 20% of the portfolio, fluctuations in its share price can drastically change NAV. In 2018 shares were trading at a peak of roughly 23 GBP, by July of 2020 shares were below 8 GBP. There was no underlying change in fundamentals that justified this collapse in stock price. Similarly, GHG used to be publicly traded before it got fully acquired by CGEO. It’s stock price fell from north of 200 GBP in 2018 to south of 100 GBP in 2020. Again I don’t think that the fundamentals justify this decrease.
Debt
There are US$ 300 million senior unsecured notes outstanding that are due 9 March 2024. The notes carry interest of 6.125% and are payable semi annually. In October 2022 CGEO bought back US$ 65 million notes bringing the outstanding amount down to US$ 300 million from US$ 365 million. In q3 CGEO had US$ 233 million in liquidity. I don’t think that they will struggle to make the payment given their current liquidity and their ability to quickly raise capital. They can do this either by selling assets (obviously this would be unfavorable) or by collecting dividends. In the first three quarters of 2022 the business has received roughly US$ 26 million in dividends from their portfolio businesses. Also they have full control over the cash flow of their portfolio businesses, so raising capital should not be an issue. A refinancing doesn’t seem impossible either although that is conjecture on my part. The notes are trading at 95 cents on the dollar.
Managment and valuation
Management
Georgia Capital’s CEO is Irakli Gilauri. From 2004 to 2018 he was CEO of Bank of Georgia. During his time there he compounded book value at 14.4% and shareholders enjoyed an annual return of 30.5% including dividends. The CEO takes no salary and instead takes his entire compensation in stock options that vest over a multi year period.
Senior executives have both bought and sold shares in the open market. The CEO still owns 4.6% of the shares outstanding and the total insider ownership is above 10%. All in all I do think incentives are aligned with shareholders.
Valuation
CGEO provides a NAV-calculator on their website. On there they provide valuations for each portfolio business with LTM multiples. Taking their valuation at face value we are looking at a NAV per share of 19.25 GBP. However I don’t think that takes into account a large enough margin of error. So for their private businesses I have applied a (admittedly rather arbitrary) 20% discount. For their “other portfolio businesses“ I have applied a 50% discount. In my opinion the larger discount for “other portfolio businesses“ is justified because they are lower quality assets. Doing this we reach a NAV per share of 15.80 GBP. At time of writing Georgia Capital is trading at 7.35 GBP or a 53.4% discount to my estimate of NAV or a 61.8% discount to reported NAV.
Georgia Capital is actively focused on narrowing the gap between share price and NAV. In the past it has done so through share buy backs. Evidently that has not worked so far. Given that management is still focused on decreasing the discount to NAV, I do expect more buy backs in the future.
If/when NAV per share shows a steady record of compounding at double digit rates, it should draw more attention to the stock. Management is aiming to 10x NAV in 10 years. This seems too ambitious to me, however it is not entirely impossible.
It is unlikely that shares will ever trade at NAV, however assuming a 20% discount would imply a stock price of ~12.65 GBP based on my estimate of NAV. Based on this I believe Georgia Capital represents an attractive investment opportunity even absent any increase in NAV.
Risks
One of the main risk is currency. The GEL is a volatile currency. In the past there have been periods of depreciation. Recently the Lari has gained value against the GBP, however some depreciation should be expected.
Russia also remains a risk. Parts of Georgia have been occupied since 2008, however given that both Georgia and CGEO have been relatively unaffected by this I don’t think it will be a problem going forward.
There is no guarantee that NAV will grow in the future. 20% of the portfolio is still in a publicly traded business. The stock price of BoG could collapse regardless of fundamentals. This will negatively effect NAV. Furthermore many of the portfolio businesses have yet to show a long term track record of growth. Given the current discount to NAV I believe it can still be a good investment regardless of the possible lack of growth.
Further Reading
Disclaimer: I hold a material investment in the issuer's securities. This article does NOT constitute advise to buy/sell any of the securities mentioned in the article.
Nice post. I am also a shareholder and agree with your analysis. I wonder how you rank it in your portfolio ie. what do you think is your best position?
I also follow the Muehlhan situation. Interesting. Do you have a view on how its unfolding?