Georgia Capital PLC (CGEO) Earnings Call Transcript & Summary

[Audio Gap] we are showing remittances, which have been like most reliable source of FX inflows even during the pandemic. In terms of exports, so we see -- we had some surprises in our export diversification. Last year, share of China increased significantly and became second market for our goods export. And this year, China share increased to 16%, making the first country and the first market for our exports. We believe this was on the back of a free trade agreement signed in 2018. So we believe that further export diversification will increase resilience of our country towards some regional shocks. You can see also imports, which is increasing quite nicely and exceeding 2019 levels as well as tourism revenues. According to some flash October estimate, tourism revenues in October was 53% of 2019 levels. And here, also, we are looking at company turnovers, which are highly correlated to the monthly GDP estimates and fiscal expenditure, which is expansionary still compared to 2019 levels. And now let me move to the exchange rate development, which was another kind of surprise in our region. And so Georgian GEL is one of the top performing currency in our region since 2020 January. GEL appreciated by 3.6% against the U.S. dollar year-to-date and by 8.6% compared to year-to-date loss. So from the external side, of course, robust FX inflows, which I have already talked significantly affected the trends of the exchange rate movement. From the domestic side, we should mention tight inventory policy as National Bank of Georgia increased the ROIC to curb inflation expectations and tight monetary policy lead interest rate differential between local and foreign currency loans for wait. And it, of course, affects foreign currency lending and support FX liquidity. So you can also see real effective exchange rates, those trends kind of reverse. So it is on track to reach the long-term trend. And also, we think that the new regulation from National Bank of Georgia to support GEL deposit larisation will have its impact and to have its impact on the demand on GEL. On the next slide, I want to talk a bit more about the inflation as it is hot topic not for -- not only for Georgia but on a global level. Price pressures picking up faster than it was previously expected, soaring energy prices as well as supply side shortages like managing with demand -- increasing demand and high saving rates. So there are different factors affecting global price pressures. First of all, we should mention storing energy prices, both gas and oil prices increased significantly. In addition, the semiconductor -- shortages of semiconductors. These tiny chips seems to have outsized impact on the global factories. During the lockdowns and after the lockdowns, demand in electronics increased sharply. And with rise on chip price -- and it's really prices on chips to increase significantly. And of course -- and as well as gap between the order and receiving the chips increased. Like on average, it was 12, 13 weeks from ordering to delivery. And now it increased to 20 -- more than 20 weeks. So this creates shortages in the primary market. And of course, it affects the prices on the secondary market. Another important factor for driving global inflation is food prices, and it is especially painful for emerging markets where food makes a large chunk of consumer basket. We should also mention rate pressures due to the economic activity and the high inflation expectations and also in some markets, we see labor shortages like in U.S., where people are resistant to get back to work after the lockdowns and stimulus checks. So this will have additional pressure on life productivity gain like the wage growth. And one more factor to be highlighted is the new stringent tools for greener future, which leads some polluting factories and mines to close. And also, increased prices for carbon emission allowance and to accelerate the shipping costs. So all of these global factors affected our inflation. And despite the exchange rate depreciation, in practice, inflation has a significant -- the most significant contribution in our inflation. So we had some domestic factors like the administrative prices when the utility prices -- utility subsidies were included in inflation calculation. So now there is an expectation that from March when this utility subsidy impact to be eliminated, inflation should start to pull. And if -- in which you will see inflation to be more persistent and -- to be more persistent, and we should expect some rate hike in order to prevent price stability as demand is very strong and no more counterbalance supply shortages. And lastly, I want to highlight our debt level. So last year, in order to combat the crisis and prevent most vulnerable, government -- so the government [indiscernible] on our funding, which, of course, affected our debt level. In parallel with GDP contraction and exchange rate depreciation, debt level increased to 60% of gross domestic product. And now according to the draft budget law, debt flow is expected to decline significantly by 8 percentage points. And also according to our fiscal rule, overall balance is projected to 3% savings in 2023. So this was a brief overview from my side. So you can find more charts in our extended presentation. And of course, your questions will be much appreciated during the Q&A session. Thank you.

Thank you, [indiscernible].

Thank you. Let me continue. We'll take the questions in the end, including the macro. So let me talk about the Q3 results of our portfolio companies first. Looking at the aggregated revenue, we had a strong quarter. Our Q3 rate of revenue went up nearly 25% year-over-year. We obviously compared to pre-pandemic levels as well. We want to make sure that we are well ahead of 2019 numbers as well. So the -- nearly 35% growth of the revenue we had in Q3 compared to 2019. The 9 months results are also very solid, 26% growth in 9 months year-over-year and compared to 2019, 36% growth. EBITDA grew even faster. Aggregated EBITDA, in Q3, it grew 27% year-over-year and compared to 2019, it grew 32% to GEL 109 million. And then you're looking at 9 months numbers, we had a 45% growth of EBITDA in 9 months, year-over-year, and we had a 50% growth nearly to GEL 300 million, record high for 9 months as well. If you're looking at our operating cash. Operating cash in terms of Q3 was mostly a record high, GEL 137 million, which went up 24% and nearly 3x compared 2019. However, 9 months results is a little bit down, and this is due to a result of the working capital needs as the revenue is growing. We need more working capital. And we had a 77% growth in operating cash compared 2019 in 9 months this year. So cash balance is at GEL 392 million of our aggregated cash balance of our portfolio companies, 2.1x of the 2019 -- end of 2019 results. And as you know, in 2020, we have embarked on cash accumulation strategy, which grew pretty rapidly the cash. In terms of the GCAP, cash balance is also very strong, more than GEL 400 million of cash, which sits on our balance sheet. If you look at the portfolio companies on health care side, we had a very strong growth, 48% -- 49% growth in 9 months and 48% growth in quarterly results to GEL 105 million, all-time high revenue in Q3, and nearly GEL 300 million revenue in 9 months results. EBITDA also grew impressively, 78% is up in 9 months compared to 2019 is up 36%. Q3 also very strong growth, 28% loss in Q3 and 45% growth 2019 numbers. We had also a very strong growth in pharmacy retail. So we had -- as you see, we had a 20 -- nearly 30% growth in 9 months results and 32% growth in quarter results against 2019. EBITDA is also up in Q3 by nearly 25% year-over-year. And you see that EBITDA for 9 months is up 7% against last year and it's up nearly 17% compared to 2019. Impressive growth for water utility business. We had in Q3, we had a 58% growth year-over-year of our revenue and 35% growth against 2019. Also, strong growth we had with regards to 9 months. We grew 54% revenue in 9 months this year to GEL 152 million, and EBITDA was also record high growth, record high in the absolute amounts. In 9 months, we had GEL 97 million of EBITDA, which is up nearly 92% year-over-year, and it's impressively up at nearly [Audio Gap] see such a strong growth in 9 months results as well as quarterly results. So water utility business is doing very well. On the insurance side, we had a little decline in profitability due to the fact that last year, there was COVID and there was not much for the claims. So that resulted in a higher profit last year. This year, we get back to kind of more normal situation when we have claims that accelerate compared to very low base last year what we had. Renewable energy also is a little bit weak results what we have here because of the generation are down compared to last year. But overall, strong results for generation. We see strong inflows of the -- strong flows of the water, and also wind results are very good in Q4, so we expect even more improved results in Q4 for renewable energy. Education is doing well with the 9 months EBITDA is up 25%. On quarter result, there's not much to say because in Q3, there's holidays, as you know, and we don't really accrue the revenues when there is no education in the -- when there's times when students are having time off. Now on NAV per share development, I will start by highlighting that in 9 months, we are -- sorry, in Q3, we have a NAV up nearly 10% to GEL 59.77. And if you compare like pandemic levels where it was GEL 30 NAV per share where in March 2020 with the pandemic headwind, as you know, we have marked-down NAV considerably. And it was at GEL 30 and nearly basically double this in 1.5 years, and we are very glad with that results. I also want to mention about controllable NAV, which basically excludes the listed assets, what we have in the Bank of Georgia. So in 9 months -- in 3 months, its controllable NAV is up nearly 9%. But if you compare to March 2020, when pandemic hit, basically, is up 2.5x controllable energy, so considerable growth in energy. Now I will let Giorgi to take over the NAV discussion and the valuation. And in the end, I will wrap up, and we will open for the Q&A. Giorgi?

Sure. Thank you, Irakli. So in terms of the NAV per share movements in the third quarter, our NAV per share was up by almost 10% in -- and that's in lari terms. In pound terms, it was up by 13.7%. To break out what made -- what contributed to the growth of this NAV per share, we had a Bank of Georgia's share price increase during the quarter. That contributed to about 2.6% NAV per share growth. We also had the value creation that happened within our large portfolio companies contributing around 7%. And in the investment stage, we had a decrease of 0.4%, largely driven by the renewable energy that Irakli discussed earlier. And then another item that I would highlight was the buybacks. As you know, we restarted the buybacks in the middle of August 3 months ago. During the third quarter, we bought back about 354,000 shares that resulted, all of which were canceled, that resulted in 0.4% increase to our NAV per share given the discount where we were buying these shares back. Since the quarter end, I would also highlight that we have bought around 300 shares as well in the fourth quarter that will be reflected in the fourth quarter. Moving on to the 9-month results. Our NAV per share growth in the 9 months, in lari terms, stands at 24%. But in pound terms, it's 31% because of the lari appreciation against the dollar and British pound since the beginning of the year. Within that 24%, again, Bank of Georgia contributed 5% almost, and then about 19% came on the large portfolio companies contribution. Investment stage companies were 1.4%. This is for the 9 months. That reflects the value creation in both renewable energy and the education business. And then the buybacks contribution was 0.5%. Now over to the portfolio value development in the third quarter. I would highlight that, as you know, in the first quarter and the third quarter, we performed valuations internally, which are based on the similar methodology that is deployed by our external valuation of experts for the large portfolio companies. In the third quarter, our portfolio value increased by more than GEL 200 million, where the key driver was Bank of Georgia in the listed assets and in the large portfolio of companies, water utility, where we had the GEL 72 million additional value created. And then it was health care business with GEL 38 million and the retail pharmacy with another GEL 37 million. That's the third quarter. Over the 9 months, the portfolio growth has been more than GEL 500 million, which again, was spread across our listed asset, Bank of Georgia, and the large portfolio companies predominantly. And then the value creation was split as follows: health care business has delivered about 27% of the overall growth, which is GEL 152 million; the water utility is another GEL 149 million over the 9 months; followed by Bank of Georgia value creation of GEL 110 million; and then retail pharmacy by GEL 65 million. If we look at top 3 assets, they contributed about 73% of the total portfolio value growth in the 9 months. If we move to the next slide here, you see the snapshot of how the assets were valued within our third quarter financial statements and how the different assets are spread out within the overall asset portfolio. So 65% of our portfolio is the large portfolio companies, 18% is listed Bank of Georgia, 10% is investment stage and 7% is the other portfolio. In terms of the multiples, we continue to use our Bank of Georgia London Stock Exchange reference price for the valuation. In the large portfolio companies, the similar methodology was consistently applied. You would see that in our health care services business, which is now our largest valued, largest private portfolio asset at GEL 724 million, it was valued at 10.5x EBITDA. Water utility was second largest at GEL 620 million, at 9x EBITDA multiple; and then followed by retail health care pharmacy, that was a 9.2x EBITDA, and it made up about 18% or GEL 618 million of the value. Over the next few slides, we will look at how the value was created in large portfolio companies that we have. Starting with the health Care services, the LTM EBITDA growth that you saw in the previous slides resulted in the increased enterprise value of GEL 43 million, which was then offset slightly by GEL 5 million net debt growth in this business, which was largely due to the, as you know, the dividends that the GHG business has paid during the quarter, which was about exactly actually GEL 25 million in the third quarter. As a result, our overall value creation in this business was GEL 38 million, excluding the dividends that were paid. Multiple remained broadly the same. It was at 10.5x, slightly down, 10.6x, from the end of June. On the next business, we have retail pharmacy business, where the market will also decrease slightly from 9.3x to 9.3x -- 9.2x. However, the EBITDA growth here, also very strong, resulted in the increased enterprise value by GEL 38 million. And the business also had a very strong operating cash flow generation and the increased cash balance resulted in the lower net debt. And therefore, the equity value growth was 38 plus 4 and about GEL 42.5 million, where the share attributable to GCAP was GEL 37.2 million. So overall, this business was valued at GEL 618 million in the third quarter. Then we have the water utility business, where the very strong performance, both in the EBITDA growth and in the operating cash flow generation resulted in the aggregate value creation of almost GEL 72 million, split the operating performance growth in the EBITDA, which was more than 10% resulted in GEL 45 million, additional enterprise -- addition to the enterprise value. That was also combined with the net debt decrease by GEL 26 million. So that's how the value breakdown came out, notwithstanding that the multiple went down from 9.3x to 9x during the quarter. Then we have the P&C insurance and within the P&C insurance business, we had another strong quarter, which resulted in the growth in the LTM net income from GEL 17 million to GEL 18 million, and that additional GEL 1 million generated about GEL 10 million additional value in this business while the multiple remained the same. Next, we have our normal leverage and the liquidity profile overview. Again, our market value leverage, which is our portfolio and net debt divided by the portfolio value continued to improve. And since the last quarter, it improved by 200 basis points. So now it's down to 25.4%, well below our 30% targeted threshold for the LTV ratio. Our liquidity continues to be very strong. We have $133 million, where about $83 million is in marketable securities and the cash and then the remaining $51 million is the loans issued to our portfolio of companies. Lastly, on the dividends. During the quarter, we received GEL 30 million worth of dividends that was from the GHG businesses and the renewable energy. That brings the overall 9-month dividend to about GEL 45 million. And through the end of this year, we expect that our total dividends will be around GEL 75 million. That also includes dividends from Bank of Georgia that we received about 2 weeks ago in the amount of almost GEL 15 million. That's it from my perspective. Irakli, back to you.

Thank you, Giorgi. Thanks. To wrap up before we start the Q&A, just to summarize, we had a very robust operating performance, robust EBITDA generation and growth as well as net operating cash growth, all record high numbers in terms of revenue, EBITDA and net operating cash. As a result, NAV grew nearly double digit in Q3, impressive growth there as well. Dividend flow, as you see, as Giorgi was talking, has resumed, we received GEL 30 million dividends and we see -- we expect GEL 75 million dividends this year. We are -- we think that this renegotiated term on the buyout of the minorities in retail pharmacy sells well in terms of the price as well as continuous partnership with minorities who are the key people managing our pharmacy business, and we are clear that we have prolonged this relationship and partnership. Also, the -- we continue to sell the subscale businesses, another $10 million of [ sell-in ]. In terms of the outlook, as you saw that the Georgia government has recently introduced the green pass, which expects that the COVID vaccination to increase and hopefully the -- all the restrictions will pull away. But the restrictions are not very strict, to be honest. But still, whatever remains, we will seek out opportunities to improve the -- further improve operating performance by our portfolio companies, and we will focus on our strategic priorities of realizing value of the large investment as well as selling the subscale businesses. Now in terms of the Q&A, I will ask my colleagues, I will ask Shako to tell us the questions that we have. Please raise your hand to ask the question as well as you can provide us [indiscernible] you can send us a message. We have with me, as you know, Giorgi, our CFO, and we have Nik, CEO of GHG and my deputy. So if we have questions on health care, Nik will be addressing those questions.

Thank you, Irakli. We have a question from [ Olive Bakio ]. What makes you not repurchase of more of your own shares to create the value that very interesting trading at discount for a very long time?

Yes. Basically, we want to balance this -- as you know, we are buying back shares, not in very big quantities, but we are buying and we are creating the value that way. What we want to do is balance the leverage and balance the buyback. And that would be kind of our way forward. We believe that a sudden decrease of the -- or sharp decrease in share price of GCAP during the pandemic was a result of the high leverage, what we had done our holdco, and that we don't want to happen again. And therefore, we want to decrease our leverage ratio over time. And that's why we are not as aggressive as we should be in a way. If we did not have the leverage, obviously, it would be way more aggressive in buybacks.

Thank you, Irakli. The next question is from [ Giorgi Sotto ]. How does therefore the whole education business segment compares to the premium segment margin-wise? Is the main revenue there coming from the government?

Yes. To start from the end, there is no revenue coming from the government. It's all private individuals are paying education for their children. And it's not like -- it's like the GHG. Basically, the government is not involved here at all in revenue formation. In terms of the margin, affordable is around 35% EBITDA margin and higher-end is between 40 -- 45, probably higher-end. But it's about 40, and affordable is around 35. That's kind of the difference. And less infrastructure spend, obviously, than the high-end. ROIC, at the end of the day, is higher on affordable, and that's why we like it and that's why we want to grow much faster in the affordable segment.

The next question is also from [ Giorgi ]. I wonder where this fund management business, fixed income fund, fits within GCAP? Does it still deviate from GCAP's expertise?

Basically, our expertise is investing in Georgia. In order to invest in Georgia, you need to understand the macro not only Georgia, but also in the region. If you don't understand the regional macro, you won't understand, for sure, the Georgia macro. Because Georgia is a small open economy and that regional developments have big impact. So we have a knowledge of the regional macro, and we should -- why not monetize that knowledge also. So basically, that's kind of -- in a way, it is our bread and butter to know the Georgian -- sorry, the regional macro. That's where we are kind of monetizing this.

Thank you. The next is, any update on the strategic divestment of the portfolio frame that was discussed previously?

We don't have an update. I mean if we have an update, it will be kind of -- more kind of real -- we will update on the result of the development. We cannot update you with the process, unfortunately.

Thank you. The next question is, why do you think the share buyback has not closed the discount yet?

I don't know, maybe it's a question more to you, but we are -- what we do -- what we can do at the end of the day, we can operate our portfolio companies, grow, develop, then invest, buy back some things. And the end of the day, market is the -- our owner of our stock. So in the end market is deciding what -- where the share price is going to trade, where this plays at a high discount. But I hope that will be fixed by the market again.

Thank you, Irakli. The next question is which of the businesses do you think will be the most [ go ] candidate for trade sale realization?

You see we have -- since we have announced our intention, we've been approached by a number of parties in different -- for different companies. So to be honest, I don't know where we're going to end up, which assets -- actually, it was good with priorities. We want to sell because we want to see different opportunities and different interest for different assets and vis-a-vis appetite of the investors to enter -- to invest in different assets in our portfolio companies. So I think it's very hard to say right now which one we would realize, to be honest. As where we sit right now and discussions we have with different parties on different assets, it's very difficult for me to say. We try what we realize.

Thank you, Irakli. [Operator Instructions] The next question is from [ Steven Gorelick ]. What is the target level of leverage on the political level after which you would be able to increase returning cash to shareholders?

We want to come back with you on this update. We are preparing this for Investor Day, which we want to hold in a couple of months' time and where we want to give you a more comprehensive update on these leverage targets. We'd definitely want to decrease. At what level, we'll come back to that. But right now, we are around 25%, which if you look at the kind of the companies with our structure is quite high end, we'll see -- higher.

Thank you, Irakli. The next question is from [ Matthew ]. Regarding your fixed income business, you mentioned the desire to increase the fund size to GEL 250 million. From what region are the underlying investors and the main means of assets under management distribution?

Right now, we have a -- 50%-plus is probably -- 50% on institutional and 50% individuals. We think that wealth management individuals will be -- wealth management clients, basically, would be interested to invest in this fund because this is clearly a very attractive risk reward proposition. Dollar income, we target high single digit, and the portfolio is mainly the sovereign risk. We do take some local currency risk, but only 20% of the total portfolio. So rate is being close to 0. Right now for gross management plans, we think it's an attractive asset class, especially with the track record, which we have demonstrated so far. So let's see. We will keep you updated on the developments of the assets under management as we go. But we think it will be a robust demand for the most -- [ a lot of times ].

Thank you. The next question is from [ Mark Webster ]. How do you view political stability in relation to recent regional elections?

I know we have -- I mean Georgian politics is not as usual. So -- I mean that's what we are. I will not say it's been as usual, but that's kind of the Georgian politics that -- right now, we, at least, we have a very clear results. And that's what we are.

Thank you. The next question is, can the economy keep growing so fast? The consumer seems to be doing well with strong wage growth. But at the same point, does very high inflation not putting too much pressure on consumer and business sentiment?

You see, the high growth at 12% growth we have now because it won't continue next year, for sure. But are we going to have a 5%-plus growth next year? Most likely, yes. Maybe even high single digit because it's still on low base. Inflation is some -- a lot is imported. So we hope that -- I mean what we are projecting next year is to stabilize and really come off from the very high level where we are right now. I think the important part is also the lari is extremely stable. And this inflation is mainly a result of the past devaluations what has happened and it's kind of it's correcting now. Now also, we are pretty bullish on the economic growth because. But we see -- demand needs to still pick up because tourists has not recovered. I, mean, tourists recovered like 40% of 2019 levels. So without this tourist growth, we are growing that fast. Next year, tourists will come for sure. I mean the trust coming down. Potentially, even vaccination rate is lower, may not grow like vaccination rate of the 80%. But with infections rate and vaccination rate that we have and new drugs coming up, I think that next year, the tourists going back to 100% is highly likely, and that would give you a big, big growth push. Especially the lari further strengthening on the back of that, it's very highly likely because of the tourists that does make a lot of currency. So I think so. I mean we are pretty bullish to growing growth next year, double-digit probably not, 5%-plus, for sure. That's what we think. But we will update you on that as well as we will move closer to the year-end and the beginning of the next year.

Thank you, Irakli. The next question is, are there any Georgia Capital businesses that will be substantial beneficiaries of a pickup in tourism?

I think that we will have -- I mean across the board, actually, we will have a good benefit. I think water utility business and energy business will be a direct beneficiaries as more energy will be consumed and more water will be needed as more Georgia tourists will come. But I think that also health care will benefit somehow, maybe not bigger quantities, but it will for sure. Beverage businesses will benefit for sure as wine and beer will be more -- more beer and wine will be concerned for holidays. I think that COVID decelerating or coming down will affect a lot of the education business. Because right now, what we have that new inflow of the learners is not as robust as it used to be because it is a very high risk of on and off. It's on and off, basically, in terms of the education, the new staff, et cetera, and parents think that why we should pay for the education when they all be educated from a distance. So I think at this point, I think we expect a lot of demand for education to grow. Even with the COVID situation, it's not bad. It's actually good growth we have, but I think that it will be kind of we think. So we have a question about [indiscernible] 100% owned by the -- CGEO-owned. No, it's not owned by CGEO. We're just borrowing the platform. It's just that.

Thank you, Irakli. We have a couple of questions in the chat panel as well. How soon will debt be down far enough that a more realistic level of buybacks can begin?

That's why I already mentioned that we want this -- we will be holding the Investor Day where we will be kind of updating you on that developments.

Thank you. The next question is, can you please talk a little bit more about the properties sold? Do you plan to sell more in the future? Also, how should we assess the overall cost of investment when we have internal management? That is the follow-up question.

More will be sold especially on -- both on commercial real estate, real estate. And we will be selling the -- some housing business as well. We will be selling. We are -- we have a strong demand -- actually, demand been growing for the hotels which we have built. As you know, we are also divesting from the hotel business. And we are, to be honest, in the rush because as tourists picks up, we think that this demand will be even stronger. So we are kind of, in a way, waiting mode on the hotel side.

Thank you. The next question is -- congratulations to your progress. Is your former goal of 100x equals to 100, why still realistic?

It is more realistic with the share price than it was before. So thanks for the question. I think that growing the 10x the 100 pounds was more difficult than growing 10x the 6 pounds.

Thank you. The next question is how do you balance the risk of having mostly dollar-denominated debt at attractive rates versus the risk of currency devaluation?

Well, that's why we want to balance the debt and the buyback more carefully. We want to be more risk averse on the debt side as well as -- and that kind of pandemic show that we have to be more watchful, especially when we have a foreign currency debt. And that's kind of the main reason why we are not jumping into the big buybacks and we are balancing this moderate buybacks and the deleverage.

Thank you. The next question are management's fees shared between CGEO and [ Aldentia ]?

The performance fee is all CGEO's management fee. I think we pay some bps on the -- I don't remember what we pay, but we pay some bps on this -- from their services on the management side. It's not a lot.

Thank you. We don't have any open questions for now.

Thanks a lot for your interest and your time as well in our earnings call. We are glad with the results. We want to thank our management teams in our portfolio companies that delivered great results, and we expect to a very strong Q4 as well and a full year. So stay tuned. Thanks again, and see you soon.