Georgia Capital PLC

LSE:CGEO

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by. And welcome to the first quarter 2020 analyst investor call. [Operator Instructions] I must advise you, the conference is being recorded today.I'd now like to hand the conference over to your first speaker today, Irakli Gilauri. Please go ahead.

[Irakli Gilauri, Chairman & CEO]

Thank you. Welcome everybody to our Q1 trading update. Today, we're going to talk about 5 topics. It's the situation in Georgia, the epidemic as well as macro, we will give you updates on our strategy, tuning up the strategy vis-a-vis to COVID in background, what we have, then we will talk about the NAV development in Q1. Giorgi, Our CFO, will talk about portfolio companies and performance of our portfolio companies. And in the end, I'll talk about the recommended final exchange offer for GHG.And let me start with the first topic on the COVID growth in the country. The country handled this so far extremely well, the virus situation. We have a little achievement to this excellent handling was due to the very early lockdown of the country. Within the 2 weeks from the first case, there was a full lockdown introduced, and that really helped to bring down the number of cases. In total, we only have 700 cases, of which active cases is only 250, and this is decreasing pretty rapidly. At the same time, we have a very low number of new cases. Today, we only had 1. And we have a kind of 2 regions which are isolated and mainly the cases are there. In large cities, we haven't had even a single case in past 1 week or so. So it seems like the country is getting -- would be getting to be normal pretty soon. We have a 6-stage plan of opening the economy, and we are actually ahead of the schedule. We are the only retail shops and the restaurants will be opened by the first week of June. And we are expecting the travel -- to travel within the country to be opened in the mid-June. And first tourist visitors, we are expecting on 1st of July.Here, the situation is the government is cautious again, and they have -- they are doing the top bilateral agreements with different countries where there will be checking in place. They help with the testing in place before coming to Georgia. But basically, the -- it seems like there will be a number of countries, which will be kind of a flow will be allowed from 1st of July. So the government is pretty optimistic in this regard. And we think that recovery of the economy will be much more faster and much more rapid than we initially thought.At the same time, I will introduce the policies, macro policies, and we have a GEL 3.5 billion of package, which is economic support to different sectors as well as the social aid. But I think most importantly is that Georgia government very early secured $3 billion of funding from IMF, from World Bank and other IFIs. $1.5 billion is for the government, for the state, and $1.5 billion is for the private sector. The IMF fund has already arrived, and we have more funding this coming -- in the coming months. So we think that the budget there, which is expected to go up to 8.5% will be covered comfortably. We are -- government announced the different sector helps like agriculture and agriculture and the tourist sector. The government also announced the real estate developers to be -- program for real estate developers to be announced this week. The -- also, there was a tax rate waivers for the property tax. Income tax has been certainly put to 0, if you are [indiscernible] in July per month and helping the income tax for the GEL 1,500. So that gives a big support to the corporates to reduce the OpEx, and that's obviously very helpful.Also, there were different form of subsidies to people who lost their jobs. There is a too high value of salary for people who lost their jobs during this COVID. This will be due to the COVID crisis basically. So we have a -- I think that what we are seeing right now is that our package what the government has put together is more kind of a -- defensive kind of package. But they announced also there will be some expansionary episodes will come towards the second half of the year. So in these regards, in terms of the GDP growth, the IMF is forecasting minus 4% for 2020 and plus 4% in 2021. Also, the forecast is that tourist revenues will obviously fall, but the exchange rate is pursued to be stable as we will have reduced imports and increased current account will be developed by IFI support.So vis-à-vis where Georgia Capital in this COVID situation is that we have announced that our #1 key goal is cash accumulation and cash reservation. This year, we will be doing very limited capital allocation, investments, and we are minimizing the coverage and OpEx with our portfolio companies. And across the portfolio government as well as GCAP. We are very much focusing on increasing the cash plan. At the same time, we are pretty focused on the opportunities which may arise. So we are working on it on one side. We are also mindful what opportunities we may have this year.So on development for -- with regards to our NAV, we have -- in terms of the value creations, we had a negative value creation obviously for our -- from our listed as well as private businesses. We had a negative value creation of GEL 370 million from decline of the share prices in Bank of Georgia and Georgia Healthcare Group. And with our private investment, we had a negative GEL 136 million. So in total portfolio, value was around GEL 100 million decrease, the value of the portfolio. At the same time, we had a widening of net debt due to the FX as well as some of the investments we made early in -- earlier this year. So our liquidity buffer, liquidity and loans issued stands at more than GEL 300 million, while the net debt is around GEL 659 million negative. So our NAV per share was decreased from 46% as a result of the portfolio value -- decrease in portfolio value as well as the decrease in net debt. Basically, our NAV per share has grown by -- has decreased by 35% from 46.8% to 35%. And this decrease is translated in twofolds, basically the weighted average decrease in NAV per share is around 22%, which is attributable to listed investment and 13% are attributable to our private investment. So that's how I break down these between the listed and private entities.In terms of the value creation, the breakdown is GEL 500 million, where basically, the -- as I said, is GEL 367 million and the composition of GEL 156 million (sic) [ GEL 136 million ] is across the operating performance is declining is only GEL 61 million and the rest is attributable to multiple changes. So as you know, our methodology is focused on the peer multiples and there is the value in capital market of our peers have increased and our multiples -- the multiples of our peers decreased. So in a way, we are marking to market our private investment and out of GEL 136 million, GEL 78 million was attributable to this multiple change.In terms of the cash flow generation, it is one of our key metrics which we are looking at, and that we are very much focusing how we are generating the -- how our portfolio companies are generating cash flow. We have a record high in Q1, our net operating cash flow is GEL 92 million, which is nearly 3x higher than in Q1 2019. In Q1 2019, it was only GEL 36 million. So if you look at the kind of breakdown between our early stage and late stage companies, basically, we are at 3.2, 3.3x increase in this value creation. So we are pretty pleased with the performance of the portfolio companies and it has generated. And we expect strong cash flow to be generated throughout the year. Even though we have this COVID around, we think that the cash generation will be strong.So on capital allocation, on investments in Q1, basically, we had investments of GEL 56 million, which mostly GEL 44 million attributable to buyout of the minorities from our energy asset around here so we have some buybacks as well done around GEL 5.7 million of buybacks within Q1, and dividends will just be around GEL 5 million from our energy business. We expect more dividends to flow from energy business, but as you know, we do not have -- we are collecting dividends from the energy.In terms of NAV per share, basically the breakdown is that we had -- as I mentioned in the beginning of the year, we had GEL 46.8 NAV per share. And list investments, the total investments, the NAV per share was decreased by GEL 9.8, and the private investment was decreased by GEL 3.6 per share. So that was the remaining kind of attributable losses in regards to NAV per share.Here, I will stop and let Giorgi talk about the portfolio comments.

[Giorgi Alpaidze, Chief Financial Officer]

Thank you, Irakli. Hello, everyone. I'm on Slide 18 of the presentation where we have the portfolio overview. And as you can see from this slide, the portfolio fair value decreased by 20% during the first quarter, where 36% decrease actually came from the decrease in the listed portfolio companies where we carry GHG and Bank of Georgia at their market prices. The private portfolio companies, as Irakli mentioned, are updated based on the comparable peer multiples' trading levels at the end of March. Here, you would see that the overall Water Utility multiple decreased from 8.8 to 8.5. P&C insurance multiple would decrease from 9x to 7.7, and I would also highlight the wine multiple decrease from 10 to 8.3. So we have seen material decreases in the multiples across some of the portfolio companies.Now let me jump into the performances of each portfolio companies and the valuations. I'm on Page 19 in the water utility business overview. Starting from their performance, the utility revenue in the first quarter was largely flat. However, energy revenue decreased primarily and solely because of the extraordinary lower precipitation at the Zhinvali hydro power plant, which is attached to this Water Utility business. This was the primary reason why the EBITDA was down by 10% during the quarter. However, cash flow generation from operations was very strong, and it was up from GEL 20 million to GEL 23.5 million or by 18% during the -- in the quarter. In terms of the valuation, as of March 31, the equity value has decreased to GEL 432 million, largely because of the increase in the net debt, driven by the impact of large depreciation against dollar.Moving to the next slide, in the Housing Development business. In the housing, the business continued to sell the existing inventory of the Digomi stage 1 and stage 2 inventory. During the quarter, they actually generated about GEL 11 million cash flow from operations, which is a significant increase from last year's first quarter when the cash flow generation was negative GEL 15 million. During the quarter, the business also introduced one-off 20% to 25% discounts on their apartment sales for the cash -- total cash sales only. So for those customers who were buying for all-cash, they received 20% to 25% discounts. In terms of the valuation, the valuation had a very small decrease from GEL 44 million to GEL 40 million based on the updated valuation. The construction management within this business continued to work as expected. During the COVID-19, the construction of the existing -- of the properties continued to work, and they were not stopped.On the next slide, we have the property and casualty insurance business. That is where our earned premiums were flat year-over-year. Expense ratio remained stable, however, increased in the loss ratio due to the increase in the claims. In the credit life insurance portfolio drove the increase in the loss ratio from 38% to 48%, which was the reason for the decrease in the net income. The multiple, as I mentioned earlier, decreased from 9 to 7.7. And therefore, the fair value of the equity has decreased to GEL 141 million at the end of March. I will highlight that even though there was a decrease in the net income, Alaverdi still continue to generate an ROE of more than 20% in the first quarter.Moving on to the Renewable Energy on Page 22. As you know, we acquired Hydrolea hydro power plants last year and the Qartli wind farm at the end of December. This was the first quarter when both of them were consolidated in the numbers. And as you can see, this business generated very strong revenues and the EBITDA growth year-over-year, where actually the performance of both Hydrolea and Qartli wind farm was in line with our investment case and the expectations, and Qartli wind farm had even a slightly better performance than expected. We should keep in mind that this business is still valued at cost. We have not done revaluation based on the peer group multiples, and we expect that to do during the year.Hospitality & Commercial Real Estate business. Here, as you know, we opened the Gudauri Lodge hotel at the end of December. The hotel was operational until mid-March, when the Gudauri Lodge and Kazbegi hotels were both closed due to the COVID-19 outbreak. At the same time, construction of the new hotels were put on hold. So in terms of the performance business, breakeven cash flow from the operations. However, in terms of the valuations, we looked at the valuation of the major assets in the portfolio. And we marked down the valuations of our existing operational and some pipeline hotels by about GEL 56 million during the quarter. So the valuations currently reflect this markdown in our net.Moving on to wine business on Page 24. Wine business continues to generate strong operating cash flows, which was up by 70% in the first quarter. At the same time, the export share in the total sales increased to 86% in the first quarter. There was a timing of 1 quarter that impacted the revenues, which in the last year was reflected in the first quarter, and we currently expect it to be reflected in the second quarter, which was the reason why revenue was down 12.5%. However, the average price of per bottle actually remained flat in dollar terms of $2.7. In terms of the valuation, the valuation multiple decreased from 10 to 8.3 which drove the decrease in the equity fair value from GEL 72 million to GEL 64 million at the end of the first quarter.Next, we have the beer business. In the beer business, during the first quarter, we saw that the sales picked up, especially in March when the -- when people were staying at home and they were stocking up on the beers, and that resulted, together with the organic growth of the business of 26.7% growth in revenues during the quarter. And the business generate -- EBITDA also improved by 45% and was negative GEL 1.7 million in the first quarter of 2020. In terms of the valuation, actually, beer was one of the few businesses where the multiples remained flat during the quarter. And we noted that we still value this business plays in the revenue multiple, and the multiple remained at 2.2. However, because of the increase in net debt driven by the FX movements, the valuation decreased from GEL 15 million to GEL 11 million in the first quarter.Next, we have the education business. And as you have seen from the presentation, we have now reclassified education from pipeline into the early stage businesses, given the scale that the business has achieved so far into the first quarter of 2020. In terms of the performance, revenues were up by almost 32% in the first quarter against the last year, and EBITDA was up by 26% to GEL 3 million, and the EBITDA margin was strong at 40%. Cash flow from operations was largely flat because the cash from the tuition usually comes in during the second and third quarters of the year. We still carry education business at cost on our book. So there has not been a reflection of the peer multiple levels. And we expect that to happen during the 2020.Next on Slide 27 is the last business I will talk about, which is the auto services, and that combines our periodic inspection business, Amboli and the Carfest businesses. In the first quarter, the business generated GEL 8.2 million revenues, which was up significantly versus last year. However, as you may recall, the PTI started full operations last year in March. So there was 2 additional months of operations in 2020. EBITDA was flat, which was affected by the lockdowns that started taking place in the mid to beginning of March. And in terms of the valuation of the business, the multiple decreased from 10.4 to 8.7, while the effects of the negative impact on the net debt, therefore, driving the fair value decrease from GEL 21 million to GEL 6 million in the first quarter.With that, I will hand it back to Irakli.

[Irakli Gilauri, Chairman & CEO]

Thank you, Giorgi. Let me talk about briefly on the recommended offer, which was announced this morning under the Rule 2.7. Basically, we have -- well what we have right now is that the ratio -- exchange ratio has been fixed at 5. 1 5 GHG shares to be changed for 1 Georgia Capital share. This also, at the same time, under the takeover cost in the sense that we are allowed to change this exchange ratio anymore. So that's kind of a final ratio which has been determined. And as you know, even the vendors of GHG are intending to recommend this offer. And at the same time, we have some management and independent directors, the irrevocable adaptation to participate in this exchange offer. In total, the independents and senior management hold 3.2% of GHG. So that's where we are in terms of the time line. In mid-June, Georgia Capital will be posting the circular prospectus and more documents. That's the time line in where we are. And Georgia Capital basically will make overall official offering in mid-June. In early July, we expect the GCAP AGM to be held, and hopefully, approve the transaction. And end of July and the in this level will also know results of the first closing. Basically, the way we take offer [indiscernible] is the offer will become unconditional when the 50% of the 30% minority shareholders will vote in favor. And other, it will become unconditional, also the listing requirements will be made. Therefore, there will be another 14 days for the second and the final closing. That's kind of the time line. We expect that closing will happen late July and the listing of GHG will happen in early August.So to wrap up, basically, our portfolio companies, mainly, we have a very defensive sectors in our portfolio. The level of resilience is quite high, for instance, water utility, energy, health care, education, beverages, insurance are basically quite resilient to this COVID situation. I would say medium resilient would be housing and digital and auto services. And obviously, pretty low resilience areas is in our hospitality and commercial real estate. That's kind of how our portfolio in one glance it looks like.And in the end, I might say that basically the -- we are well positioned in this COVID kind of situation with our portfolio companies. We are diligent in doing -- in terms of preserving and accumulating the cash, and we are pretty confident that our portfolio companies will be performing really, and we have seen the performance has been pretty good.So here, I will end our presentation, and we'll move to the Q&A session.

[Operator]

[Operator Instructions] Your first question today is from the line of Andrew Brudenell from Ashmore.

[Andrew J. Brudenell, Portfolio Manager]

Guys, I just have a question about asset monetization. I guess the theory here is, and as you lay out the presentation, you talked about kind of late stage, early stage pipeline. And unfortunately, the first attempt of this was the health care operations, which, as you've just outlined, are actually now coming back to us. So how do you, management and the Board, think about asset monetization? Obviously, it's frustrating what happened with Georgia Healthcare. But if assets are small to list with any liquidity to really sort of gain momentum and there are no private buyers either because locally, they don't have the capital, which is something you guys talk about quite a lot, or if they do have the capital that's overseas and maybe they don't know the local market, who's going to buy these things? Does it push out the time frame to monetization? Do we have to wait for the assets to be much more mature? But obviously, that means a lower multiple in an unknown market. Who is the buyer of those assets? What is the game plan here, please?

[Irakli Gilauri, Chairman & CEO]

Thanks, Andrew. So basically, what we've seen that basically the -- there is more and more interest from the trade buyers, international trade buyers to buy into Georgia. And that was especially in pre-COVID situation, we've seen quite an activity. I just briefly go this given one there was transaction closed, for instance, the Japanese TEPCO was the -- one of the hydros in Georgia. So basically, we have a -- we believe that capital -- I mean, not -- it's not our only thing. But if we look at where the capital is going in frontier market, it's going out from the public money to go to private money. And actually, we think that we can try to capture that way. When we list the GHG 2018, the amount of public money was held by the frontier, some money was we have now. So we are moving wherever the capital and the appetite is. And we think that the asset monetization will be impaired. Trade/sale situation in Georgia is very, very optimistic. So that's why we are -- we think that in our late-stage portfolio companies in the next 2 to 3 years should be monetized some of them. So that's our view. And that is kind of, in a way, our key strategic goal to monetization in a favorable types of business. But we don't want to put the strict time really there to -- we think that the next 2 to 3 years is very realistic to have monetization guidance.

[Andrew J. Brudenell, Portfolio Manager]

Okay. So sorry, just to be clear, in the next 2 to 3 years, is the sort of time frame you would expect to be selling part or all of water utility, housing development and the insurance operations. And you think each one of those is garner -- going to garner interest from -- international interest from various sort of sector specialists.

[Irakli Gilauri, Chairman & CEO]

I'm going to say that all 3, at least one of those, and we could have a kind of price discovery, the several minority stake or some kind of prices [ is trying to reduce selling ] in the price pattern. So basically, we think that there should be a material transaction within next 2 to 3 years in terms of the exit for us demonstrate that there are -- our model works because our model list as we buy, we grow, we will work the asset and then we sell. So we need to complete the cycle. If we don't complete the cycle, we obviously understand in how the most of that has worked. So we are very much aware of that. So we are more confident that we're going to monetize at better prices in the private market in the current situation, what we have vis-à-vis the public market.

[Andrew J. Brudenell, Portfolio Manager]

Right. Yes. Okay. All right. So we should wait to see. And then maybe just one other question. I don't know whatever you can say about sort of what's happening right now in terms of economic activity in the country. I guess there's still a couple of important dates for -- to be passed in terms of local tourism and international borders kind of being open. But I mean, is the first couple of 3 weeks of May, better than any part of April, is there any discernible changes yet? Or is it really too early to start talking about those sorts of things just out of the question?

[Irakli Gilauri, Chairman & CEO]

Sure. I mean that's -- basically, it's clear that May is way better than April. In some cases, April -- I won't be shy to say that some -- in some cases, there was a sharp drop in revenues. But in May, we have a very nice recovery. I mean, right now, I mean this is my first time I came to our GCAP office. I'm in a GCAP office today, in the building, which is clearer from here. Basically, the states are pretty busy. So it seems like the -- I mean, there was -- there is a pretty aggressive testing which government is doing, and we don't have cases in capital city in the past 1 week. So there is -- it is getting back to normal. So I would assume that we will have a better May and going better June. So April seems to be a kind of rock bottom. And basically, we should expect much better -- I mean, globally already have better language here, operating that what we have in the [indiscernible].

[Operator]

The next question is from the line of Harvey Sawikin from Firebird.

[Harvey Michael Sawikin, Manager & Principal]

I was going to ask specifically on the 6-stage exit strategy that you talked about. What -- can you give a little more detail since some of those things directly affect your businesses like, for example, are schools going to be open? And how does that affect? And do you -- like a school, if they did have to close down again because there was another wave or something, do you -- how much does that affect the education business? And then, of course, the horeca or restaurants opening? Or are they being allowed to have full restaurants for more? Yes, if you could go through that.

[Irakli Gilauri, Chairman & CEO]

Sure. So basically, on 8th of June, there is open to all restaurants with outside sitting. I mean it's not now, and usually the outside sitting works in June and July for those who sit inside. So basically, hotels opening is 15th of June and 1st of July is full everything effect on this. That's what the kind of the time plan is. With schools, we will be open in this academic year from 1st of September is expected to be open. We are in distance learning mode in all our 3 schools. So we don't see any kind of a negative impact so far. And it feels that if we don't have a big import of the devices after the borders will be open, I don't see how we don't go back to schools starting 1st of September. So I think that when we will have a tourist visitors and the government is very, very cautious in that, how they are going to let them in, basically. And there are number of select countries from where you can only arrive. So I don't want to now talk about the summary, but basically, I think the government has a very clear plan which country flows will be allowed. And that before around 24 hours, it allows you to talk to, you need to have test taken or you will be given the testing tools once you have arrived same-day basically. And that's kind of the plan for opening from outside of Georgia.So that will be kind of in the question mark, how are going to handle this [ some tools ]. And otherwise, as I said, today, related to our marketing and all time-high testing is 2 levels. We have 2 or 2 buildings basically, which are [ tied ] in fully. And as we have a case on there, and that it's -- if you probably someone goes around and want to test, but then they're accounting them. That's the situation we are in right now. So that's kind of -- we'll be very strange if we don't open schools in September for instance. Where we see right now, I mean that's going to be happening. And from mid-June, basically end of June, everything is to be opened -- with this regulation, obviously. But...

[Harvey Michael Sawikin, Manager & Principal]

Has GHG -- can you hear me?

[Irakli Gilauri, Chairman & CEO]

Yes, we can hear you now.

[Harvey Michael Sawikin, Manager & Principal]

Has GHG seen any elective patients starting to come back? And are they still keeping hospitals available for COVID at this point? Or is that over by now?

[Irakli Gilauri, Chairman & CEO]

They are still keeping open, but I think that there will be lower pretty soon. And those announcements that we will expect the electives to resume probably June as we find out and we will probably simply resume early June as well. So we'll really get impact to kind of normal operations of the hospitals also in June. And we had obviously a decrease in the flow on the operation things, but it's also resuming now. So...

[Operator]

[Operator Instructions] We have one more coming through, and that's from the line of Henrietta Seligman from Somerset Capital.

[Henrietta Seligman, Co]

I understand that you're in sort of cash conservation mode and trying to build up cash. But are there any opportunities that you might look to take advantage of in this market and try to consolidate any factors?

[Irakli Gilauri, Chairman & CEO]

Sure, Henrietta. We are -- thanks for the question. We are very much vigilant to look at the opportunities, and I'm sure there will be opportunities. And at this stage, obviously, it's too early. We think that there was more opportunity to come towards the Q3 or Q4. And we are in the wave also of cash preservation this year preparing for that action as well. But we are very much aware there will be consolidation opportunities. I won't talk about -- jump ahead and talk about it right now.

[Operator]

There are no other questions, so I'll hand back to you.

[Irakli Gilauri, Chairman & CEO]

Thank you. Thanks, everyone, for attending our call. We appreciate very much your -- I think we have one more question.

[Operator]

This is from the line of [ Thomas Trocancas ] from [ Getika ].

[Unknown Analyst]

And I have a question regarding the buybacks. What is your consideration to make buybacks before or after the merger with GHG?

[Irakli Gilauri, Chairman & CEO]

So basically, we are -- I don't want to jump ahead on that one as well. But basically, we -- as you know, for us, the GCAP share price is very important in terms of whether we can invest or not invest. We are seeing a GCAP discount to NAV is high, basically we don't invest in GCAP and any other opportunity in Georgia. So that's how we put it. But basically, for us, the buyback is the key part of our strategy on capital allocation.

[Operator]

No other questions at the moment.

[Irakli Gilauri, Chairman & CEO]

Thank you again, and appreciate your attendance and your time to listen to our call. We are, obviously, our team is be very happy to answer any questions you may have. And thanks again, and goodbye.

[Operator]

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