Georgia Capital — Successful disposal from the portfolio

On 28 October, GCAP announced the disposal of its beer and distribution business to an international strategic investor, performed at a price well above the last carrying value. We believe this is a noteworthy occurrence for investors considering investment in GCAP shares from at least two perspectives. Firstly, GCAP’s second major disposal (after the water utility business was sold in 2022) proves the effectiveness of its business strategy, as it gradually builds an exit track record. Secondly, the transaction confirms that despite political unrest (described below), quality assets attract international investors into Georgia. It is worth noting that the business has achieved an organic growth rate over the last three years of 29% pa in revenue, and 79% pa in EBITDA.

GCAP has sold 80% of its 92.4% stake in its beer and distribution business (the wine segment remains within the portfolio) for net cash proceeds of US$63m. The remaining 20% stake has a clear exit path, as it is subject to put and call options. GCAP can exercise its options over three years (2028–30), and thereafter Royal Swinkels can exercise its options over the subsequent three years (2031–33). The acquirer is a global beer, malt and soft drinks manufacturer headquartered in the Netherlands with €1.1bn annual turnover (2023). The transaction was performed at an uplift to the end-June 2024 book value (we calculate a solid c 30% uplift) and resulted in a 1.8% NAV/share accretion for GCAP in Q324.

In Q324 GCAP’s NAV/share increased by 6.2% in Georgian lari (GEL) terms (up 3.3% in sterling, due to depreciation of the GEL), which was supported by NAV-accretive buybacks (2.4pp) and uplift on the disposal of the beverages business (1.8pp). The revaluation of the private portfolio (excluding the impact of disposal) added further 1.9pp NAV accretion as the solid operating performance was partially offset by a contraction in valuation metrics. The performance of BoG’s stock, which represented 33% of GCAP’s portfolio at end-September 2024, was broadly flat over Q324 in total return terms but it is worth noting that, since end-September, the share price has rallied almost 30% in total return sterling terms (as at 4 December 2024). Over the longer term, GCAP’s NAV performance is robust, as over the five years to end-September 2024 the company generated a 10.6% NAV return per year in sterling terms, compared to 5.7% delivered by the UK all-share index.

The portfolio generated a record-high level of dividends in Q324 at GEL141.6m, bringing the figure for the first nine months of 2024 (9M24) to GEL191.9m (including declared dividends). The recurring dividends amounted to GEL119.0m (9M24: GEL169.3m) and the company is comfortable with its target of GEL180m for 2024. The largest dividend payer remains BoG, contributing 75% of the total amount in cash dividends and share buybacks, including a one-off distribution of GEL22.6m. The one-off distribution represents GCAP’s advanced participation in the BoG buyback programme, which temporarily reduced GCAP’s stake in BoG to 19.1% (19.5% target).

Strong distributions from its portfolio companies have supported GCAP’s deleveraging, with the net capital commitment (NCC) ratio decreasing to 15.9% at end-September 2024 (from 18.9% at end-June 2024), close to its over-the-cycle target of 15%. We calculate that including the proceeds received from the disposal of the beverages business (US$63m) and dividends received after the reporting date (c US$16m) the NCC ratio stands at 10.3%, which may indicate scope for further significant share buybacks, as per GCAP’s capital allocation policy. We note that GCAP’s shares continue to trade at a wide discount to NAV (48.9%), thereby limiting the pool of potential new investments that are more attractive to shareholders than share buybacks.

At the portfolio companies’ level, there was some progress in deleveraging, with the aggregate net debt to EBITDA ratio of the portfolio (private companies in large and investment-stage companies) reduced to 3.1x, from 3.3x at end-June 2024, and all of the private portfolio companies have reduced their net debt to EBITDA ratios in Q324 (see Exhibit 3). GCAP’s hospitals business is furthest from its leverage target, with the ratio at 5.9x adjusted EBITDA, compared to its target of 2.5x. The operations of hospitals are still being affected by new regulations aimed at improving healthcare quality in Georgia introduced in 2023 (described in our previous note). Having said that, its cash generation has improved, with operating cash flow up 61% y-o-y in 9M24 (GEL23.1m) and EBITDA to cash conversion up 23.5pp (to 61%, on a broadly flat year-on-year EBITDA result).

The companies in GCAP’s portfolio performed well operationally, with aggregate portfolio revenue increasing by 11.9% y-o-y in Q324 and EBITDA by 16.5% (9M24: 8.9% and 15.3% y-o-y, respectively). At the same time their operating cash flows were twice as high in 9M24 compared to 9M23 (GEL215m).

The largest contributor to growth was the insurance business, with the top-line in P&C insurance business growing on strong motor, agricultural and credit life insurance lines, and the medical division being supported by the acquisition of Ardi’s insurance portfolio in April 2024 (on top of a c 10% increase in medical insurance policy prices). The increase in pre-tax profit was aided by the consolidation effect (medical) and lack of one-off effects reflected in Q323 results (P&C).

The pharmacy business remains GCAP’s largest private portfolio holding (representing 19% of the total portfolio), and continues strong expansion, with its chain reaching 434 pharmacies and franchise stores in Georgia, Armenia and Azerbaijan as at end-September 2024 (up 27 y-o-y). The same store revenues decreased by 2.0% y-o-y, affected by price regulations (maximum selling price for both prescription and non-prescription medicines), which was more than offset by the chain growth. The pressure on EBITDA margin from expansion costs is actively addressed by promoting sales of higher-margin para-pharmacy products (39.6% of revenues in Q324, flat share year-on-year).

It is also worth noting good operational improvement at the hospitals business, which recorded 10% y-o-y growth in revenues and 37% in EBITDA, despite the divestment of one hospital in Q423. The business is rebounding to normal operational levels following mandatory regulatory renovations and is increasing the share of revenues from its high-margin outpatient services (up 2.7pp y-o-y to 36.2% of total revenues), following the expansion of the range of offerings.

The value of GCAP’s stake in LSE-listed Bank of Georgia remained broadly flat in Q324. The bank reported strong Q324 results, with return on average equity of 32.1% (up from 31.3% in Q224, and compared to its target of at least 20%), and net interest margin of 6.2% (Q224: 6.3%). The bank successfully integrated the acquired Ameriabank with no visible dent in profitability.

In the October’s parliamentary elections, the ruling party Georgian Dream secured a decisive win, with 54% of the votes, allowing it to single-handedly set up a government. The results were not without controversy, as several international observers highlighted election violations, and watchdogs are questioning the results; for example, US-based Edison Research, which carried out exit polls for opposition TV channels, said the final figure could not be explained ‘by normal variation’. The ruling president accused the party of voter fraud, and civilian protests continue to this day (as of 4 December 2024). Georgia’s presidential elections are scheduled for January, which will mark the first elections in the electoral college system.

Current protests follow the longer political turmoil, started earlier this year with the introduction of the ‘foreign agents act’, which eventually prompted the European Council to stop the EU accession process for Georgia on 17 October 2024. While we recognise that political turmoil could negatively affect the international perception of Georgia, and in turn limit its ability to attract foreign capital, we need to point out that so far there is limited evidence of that, as highlighted by GCAP’s successful recent disposal. Additionally, the Georgian population is overwhelmingly pro-European and the Georgian economy is closely tied to the Western bloc, so one can expect some alignment of Georgian policies with EU values. Meanwhile, on 28 November 2024, the European Parliament voted to reject the results of the recent elections, which was met with Georgian Dream’s declaration of postponing any negotiations on EU accession until 2028.

GCAP distributes capital to investors through regular share buybacks. So far this year (up to 4 December 2024), GCAP has acquired 3.7m shares from the market, including tax-regulated statutory buybacks for the management trust. It has distributed GEL132.9m in the form of repurchases, which represents 3.9% of NAV and 8.8% of the market capitalisation at end-December 2023. We calculate that GCAP is nearing the conclusion of its current US$40m buyback programme but given that GCAP shares still trade at a wide discount to NAV, we expect the announcement of yet another programme in the coming months. GCAP currently trades at a 48.9% discount to its end-September NAV (see Exhibit 6) and, taking into account the strong performance of BoG shares, after the reporting date its discount to live NAV estimate currently stands at 53.2%.