Georgia Capital PLC CGEO
April 16, 2020 - 6:19pm EST by
2020 2021
Price: 4.78 EPS 0 0
Shares Out. (in M): 36 P/E 0 0
Market Cap (in $M): 174 P/FCF 0 0
Net Debt (in $M): 140 EBIT 0 0
TEV (in $M): 314 TEV/EBIT 0 0

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Georgia Capital is a holding company listed in London that owns a mix of publicly listed and private assets in the country of Georgia. It was spun-out of Bank of Georgia in 2018. Despite the label as a frontier country, and a somewhat acrimonious relationship with its neighbor Russia, Georgia is well-governed and an attractivedestination for investment. Georgia Capital owns high-quality and growing businesses fundamental to the country, CEO Irakli Gilauri has a strong track record of value creation and disclosures are strong. The stock is at a discount of over 40% of NAV after adjusting for (1) currently depressed share prices of the holding company’s two large public holdings, (2) a 15% discount applied to private holdings and (3) current foreign exchange. We foresee a 34% IRR over 5 years assuming a 20% NAV discount
Quick Highlights on Country of Georgia
While a small country of just 3.7 million people and $16 billion of GDP, Georgia has followed a path of impressive free-market, capital-friendly reforms ever since independence from Russia in 1991. It has generally been able tproduce strong GDP growth while containing inflation. Here are a few highlights:
  • The Liberty Act (2014) enshrines constitutional limits on the fiscal deficit at 3%, public debt to GDP at 60% and public expenditures at 30% of GDP.
  • The country is consistently ranked in the Top 10 “Ease of Doing Business” report by the World Bank. In 2020 it ranked 7th, just behind the US.
  • The Heritage Foundation also ranks the country at 16th just behind Estonia on its “Economic Freedom Index.”
  • Business Bribery risks have been ranked on-par with Japan and in the world Top 30 by Trace International.
  • Real GDP growth has averaged about 4.7% since 2011, just behind Turkey at 5.5% in the region.
  • Inflation has averaged approximately 3.8% since 2009.
  • Unemployment was below 12.7% in 2018.
  • The fiscal deficit has averaged minus 2.5% since 2015 and public debt is at approximately 40% of GDP.
  • FDI has been important to the economy at about 10.4% of GDP the last 5 years.
  • Tourism has also grown to nearly 19% of GDP in 2019.
  • Georgia’s current account has averaged a deficit of approximately 10% of GDP the last 5 years (and less than 3% through Q3 2019).
Asset Highlights
The company’s two large public holdings, Bank of Georgia (LSE: BGEO) and Georgia Healthcare (LSE: GHG)are approximately 40% of total portfolio value. These two businesses are both large, systemically important institutions with meaningful competitive advantages. Here are a few highlights of these and other holdings:
Bank of Georgia (21% of NAV)
  • Bank of Georgia, along with TBC Bank Group (LSE: BGEO), are the two duopoly banks in Georgia. The two banks collectively hold approximately 74% of loans and 75% of deposits and those shares have generally been rising since 2005.
  • Since 2010, Bank of Georgia has produced an average ROE of approximately 20% despite generally falling net interest margins during that period and modest leverage. During the last 5 years, the bank has compounded net interest income at 18%, gross loans at 22% and deposits at 24%.
  • Bank of Georgia is currently trading at 0.83x tangible book value and shares are down approximately 45% since late February. Obviously, these are trailing figures, but for reference, Bank of Georgia is currently trading at 4x trailing net earnings and at a yield of7.3% on the previously announced, but subsequently cancelled dividend.
  • In March, a 3-month bank grace period on principal and interest for retail loans was agreed upon by most banks and it was announced that approximately 6.5% of Bank of Georgia’s gross loans were to the tourism sector. The company also announced it was not recommending a previously announced dividend until the extent of the virus impact was more fully known. It also recently announced a GEL 400 mm general provision (3.3% of lending book) to be taken in Q1.
    • Assuming the GEL 400 mm incremental provision is approximately adequate for virus-related provisions, the bank seems unlikely to need additional equity capital. It has canceled the dividend and in Q4 2019 generated nearly GEL 752 mm of run-rate operating income before cost of risk (which totaled GEL 108 mm in 2019). If risk-weighted assets were to grow 10% in 2020 (a high expectation), the Tier 1 capital requirement would be approximately GEL 1.56 billion (at a 10.2% minimum capital ratio after recent regulatory relief). Tier 1 Capital at 12.31.19 was GEL 1.89 billion. The bank could absorb a further GEL 580 mm of either income declines or provisions before requiring additional capital.
    • Additional risks in the short term include currency and funding. In the retail loan book 36% of loans are exposed to FX, while 42% of the corporate book is exposed to FX. These borrowers will deserve careful attention in what has now been a period of Lari weakness. Funding seems reasonably-well positioned with GEL 316 mm in 2020 loan maturities and an undrawn GEL 320 mm facility with development banks. GEL 2.1 billion or about 6.5% of the bank's liabilities are due to credit institutions. 50% of all liabilities are time deposits.
    • While not 0%, blow-up risk seems small at this stage of the pandemic. The more likely risk is that capital requirements post-virus will return to trend and limit dividends if loan growth returns to trend.
  • Long-term, Bank of Georgia is a very good asset to own. The rationale duopoly industry structure ought to lead to a strong ROE with modest leverage, and, when combined with attractive real GDP growth rates and an under-penetrated banking system, book value compounding over the next decade should be quite attractive.
 Georgia Healthcare (19% of NAV)
  • Georgia Healthcare is a dominant healthcare services company in Georgia. It owns the largest hospital operator (23% market share), pharmacy chain (32% market share) and health insurance provider (32% market share) in the country. It is also owns the largest diagnostic lab in the Caucasus. Hospital EBIT is about 39% of the business and Pharmacy is 54%. The other segments are all less than 5% of consolidated EBIT.
  • During the last 2 years, revenue grew by approximately 13.5% per year and pre-tax income grew 16.7%. This is despite significant growth expenditures on two major hospitals and the establishment of the  diagnostic lab. The performance of the company’s pharmacy business has been particularly strong. On the other hand, performance in the hospital sub-segment has been mediocre given utilization has not yet improved to the extent anticipated before the two large hospital investments and there have been changes to Universal Healthcare in the country.
  • Georgia Healthcare is trading at 1.2x tangible book value and 11x trailing earnings.
  • In late 2019, Georgia Capital launched a share exchange to acquire additional ownership of Georgia Healthcare. The company just announced a share exchange takeover for the remainder of Georgia Healthcare at the same exchange ratio.The transaction should be a material positive for Georgia Capital as it will now control the balance sheet and cash flows for the company. A successful takeover should serve to strengthen the holding company’s capital position (which is discussed later in the memo).
  • In March, Georgia Healthcare also decided against paying a previously declared dividend.
  • It seems Georgia Healthcare’s business is in satisfactory shape at the moment. The Pharmacy business remains open (and performing well) as a critical business. Georgia also chose to treat initial virus-related cases at state infectious disease facilities that don’t interfere with hospital operations. If the outbreak becomes more severe, Georgia Healthcare has agreed to isolate 4 hospitals for treatment. Fortunately, given where Georgia is in terms of its healthcare maturity, elective procedures are a relatively smaller proportion of procedures despite the company’s efforts to increase that proportion the last few years.
  • Long term, Georgia Healthcare is another great asset to own with significant competitive advantages. Recent changes to Universal Healthcare ought to reduce what had been a noticeable increase in poorly performing hospital supply, helping to further improve utilization at existing and newly built hospitals. The company is targeting a mid-teens EBITDA CAGR the next 5 years which ought to result in substantial earnings growth.
Other Assets
  • 23% of NAV - Georgia Capital owns the regulated monopoly water utility in the capital of Tbilisi. This is a high-quality asset that is beginning to enter a period of much-improved cash generation following years of modernization. The utility also owns a hydropower plant to self-produce electricity while also selling surplus capacity to the grid. EBITDA grew 14% in 2019, though that figure includes a tailwind from electricity production sold to third parties which should grow less going forward. Debt at the utility is 3.7x EBITDA and the asset is valued by Georgia Capital at 8.8x EV/EBITDA.
  • 12% of NAV - Georgia Capital operates a real estate and hospitality business. It owns commercial real estate and is developing a portfolio of hotels. Georgian tourism is a large component of GDP and is clearly one of the most impacted businesses in the current climate. Two hotels are now operational and represent 273 rooms of a 1,222 room pipeline.
  • 8% of NAV - Georgia Capital owns the leading P&C insurance provider in Georgia called Aldagi. The company controls approximately 29% of earned premiums in the country. Motor and property coverage are the two largest lines and account for 67% of premiums. Insurance penetration in Georgia is quite low and Aldagi has grown premiums in the low teens for years while maintaining attractive combined ratios of around 80%. ROE exceeded 30% in 2019 and Georgia Capital values the business at 9x net earnings.
  • 5% of NAV - Georgia Capital is developing a renewable energy business. Consumption in the country is growing at approximately 5% and the country is short production capacity. Luckily, the country is blessed with what some consider the best hydro potential per capita in the world. Georgia Capital is emerging as the leader in developing small hydro production. It also owns and is developing a wind portfolio. The company has been a buyer and developer of assets in this business. The next hydro plant is scheduled to commence operation in 2021 and the company sees a portfolio of 438 MWs by the end of 2023 (92 MWs of which are currently operational). The company recently bought the minority partner of the business and owns 100% of its assets. While the company has faced some delays in new projects (as may be expected), it seems the company has more than a decade of runway to grow this business.
  • Other assets include a housing development business (2% of NAV), a beverage business with multiple subsidiaries offering wine and beer (4% of NAV), a private education business (3% of NAV), an auto service business (1.2% of NAV) and a start-up digital incubator (less than 1% of NAV). Housing sales have been surprisingly strong in recent months despite the current macro issues. Perhaps the most attractive of these other assets is the educationbusinesswhich management is excited about. In five years, an estimated 20% of all students in Georgia (up from 10%) will be served by private educators. The company has brands at multiple price tiers and aims to build a GEL 70 mm EBITDA business by 2025. The beer business has been a challenge and one might properly call it a mistake. Capacity additions and operational issues in a crowded and competitive beer market have created issues for the business.
Holding Company
  • At current exchange rates, the company holds GEL 550 mm of net debt against an estimated GEL 1.76 billion portfolio value. The gross debt is a USD-denominated $300 mm bond due in 2024. This is offset to a large degree by debt instruments owned and cash and equivalents denominated in currencies other than Lari. Cash and liquid funds total GEL 235 mm and loans issued total GEL 169 mm. Net interest expense and operating costs at the holding company totaled GEL 41 mm in 2019 (though cash costs likely approximate GEL 30 mm). Cash and liquid funds at the holding company appear adequate to cover operations for multiple years. Two significant sources of holding company cash flow, dividends at Bank of Georgia and Georgia Healthcare are temporarily on hold, though the company’s water utility and insurance company should be sources of cash flow in 2020. Georgia Capital likely needs dividends from the large public holdings (in additional to cash flow from some private holdings) to fully repay the 2024 note in the case it needs to retire that debt at that time (though, less ideally, it could obviously consider asset sales between now and then). Fortunately, 2020 had already been planned to be a much lower investment year relative to 2019. Overall, the balance sheet at the holding company is in solid shape and should be much improved with the recently announced Georgia Healthcare acquisition.
Valuation and Return Potential
Shares currently trade at a discount to NAV of 40.5%. This substantially exceeds the average discount since the company became public of 24%. Moreover, the assumed NAV is comprised of severely depressed share prices for two of the company’s largest holdings, and we also assume a 15% discount to the remainder of the private portfolio. Given the nature of many of these assets, 15% seems reasonable on the whole. A recovery of public share prices and a modest narrowing of the discount would seem to suggest the potential for a double in the share price before considering growth in NAV.
While the brief history of Georgia Capital hasn’t shown meaningful NAV growth (mostly due to poor share performances of the two public holding and FX depreciation), prospects remain quite strong. Many of the businesses the company owns are leaders in critical pieces of the Georgian economy, which itself should continue to grow nicely (despite the current virus-related headwinds). With the possible exceptions of the beer business and the up-and-down nature of the housing development industry, growth prospects, on the whole, appear strong.
A business-by-business analysis of growth potential suggests a 34% compounding of NAV off recent virus-related lows the next five years. This assumes no major dilutive equity offering at the bank and, as an aside, this growth would represent a 20.4% annual NAV compounding from 12/31/19 valuations. A terminal multiple of 1.4x BV for Bank of Georgia and 10.5x EV/EBITDA for Georgia Healthcare are assumed. Just six months ago, emerging market multiples for banks were 1.0x (down from 1.5x the last 5 years). Hospitals and pharmacies in emerging markets were value at 13x and 20x six month ago. Combined with a 20% discount to NAV, 4% FX weakening per year and 1% dilution annually, a 34% IRR seems plausible.
Georgia Capital has historically repurchased meaningful shares at discounts to NAV. It appears the company is in a black-out period but in a recent management call the CEO called repurchases a “no-brainer” – it was just a question of when. It seems with the announcement of the Georgia Healthcare acquisition, the end of the black-out is within sight.
On the whole, valuation marks provided by management (and used is this report) may seem conservative, bugiven real interest rates in the country, are appropriate at this time. Interest rates in Georgia are at 9% (policy rate) following a recent period of increases and inflation is above a 3% target (at 6%). The Georgian 10-Year GEL bond yields 9.6%. Despite the currently elevated (pre-virus) inflation figures, the country seems to have managed inflation well enough as a growing frontier market the last several years. Any secular decline in local interest rates during the next decade should be a tailwind for valuation and NAV growth.
Management and Incentives
Georgia Capital is led by CEO Irakli Gilauri, the prior CEO and Chairman of Bank of Georgia. Mr. Gilauri is a fixture in the business community in Georgia and has led the development and expansion of multiple businesses. He played an instrumental role in building Bank of Georgia during a 14 year tenure at the company and helped developed the bank’s private equity business, which included the highly successful healthcare operation that became Georgia Healthcare. Mr. Gilauri became CFO of the bank in 2004 and CEO in 2006. At the time of spinout of Georgia Capital, Irakli had helped to oversee an 18.8% compounding in book value since he became CFO and a 14.4% compounding since he became CEO. More impressively, the total shareholder return including dividends during the period was 30.5%.
At Georgia Capital Mr. Gilauri is focused on compounding value per share during the next decade, using any and all tools at his disposal. He appears quite willing to consider buybacks (even though such repurchases may not be in his best personal short-term interests), to consider raising outside capital and to sell, as well as buy, assets. While one may view the “10x in 10 Year” slogan as fanciful, it certainly doesn’t lack ambition. And that ambition is what Mr. Gilauri is personally betting on given that he receives no cash salary and takes his entire compensation in shares of Georgia Capital. Along with other members of management and the board, he has been quite active in buying shares of the company on the open market since the spin. In the first 6 months following the spin, Mr. Gilauri spent approximately £2 million buying shares at £10.50. An owner of Georgia Capital is in the hands of a capablemotivated and well-incentivized CEO that understands valuecreation. Mr. Gilauri has a history of building critical and competitively advantaged businesses in a country with wonderful multi-decade opportunities but currently limited capital availability.
Operating costs of the whole of Georgia Capital are intended to be at most 2% of NAV per year with just a third taken in cash and the remainder in shares. Share incentives are subject to hurdles which have not yet been disclosed. It seems, on the whole, compensation is not excessive and is fairly-well aligned with outside
  • Russia. Russia has invaded Georgia in the past and continues to occupy parts of the country. In 2019 Russia also suspended flights to the country impacting inbound tourism. A large percentage of the country’s state-owned power generation is located in occupied territory. While there are always risks of Russia becoming more aggressive, it seems Russia now controls the most strategic and culturally relevant regions and may be focused on larger geo-political concerns.
  • One of the company’s largest assets is a bank in a frontier market. Banking is tough and can be unpredictable, particularly in environments like today. Any significant dilution because of difficult macro conditions would limit recovery in NAV for Georgia Capital.
  • The company does have some BS exposure to changes in FX. In the past, Georgia has experienced significant devaluations. Additionally, some business in the portfolio have income statement exposure to changes in FX.
  • NAV growth is expected, but has yet to be proven.
  • Competition in some of the businesses, despite such businesses’ leadership can occasionally cause issues. Recent performance of the company’s hospitals, some increasing competition in insurance, hotel supply and the beer business come to mind.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


  • Share price re-rating at publicly owned businesses
  • Closing of Georgia Healthcare transaction
  • Return to dividend paying environment at key subsidiaries
  • Share repurchases
  • Eventual transactions with privately owned businesses
  • Emerging market / Frontier market re-rating
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