Next week I’ll be checking back in on my Alternative Funds trading list. But for now, I have one addition to the list in the shape of deeply unloved Georgia Capital. This a slightly peculiar London listed fund that buys you comprehensive access to the local economy of the most Western-oriented Caucasian economy…Georgia. This week the fund announced full-year final results through to December 31st. Overall the message from this increasingly private equity-focused outfit was very positive.
At the top line the NAV of GEL48.12 at 31 December was up 27.2% from GEL37.84 at 30 September and is equivalent to 1,070p per share, up 16.3% from Q3 in Sterling terms. For the financial year ending 31 December 2020, the NAV per share was up 2.7% in local currency terms. According to analysts from Numis “the current NAV has fallen 5.6% to 1,010p allowing for currency movements and the 11.3% fall in the share price of Bank of Georgia. The share price as of yesterday’s close of 510p (£244m market cap) is equivalent to a 50% discount to our estimated NAV.
The portfolio is a mixture of mostly private and listed businesses. In terms of valuation uplifts, Bank of Georgia (24% of net assets at 31 December) was up 36.6% during the Q4 while the private assets portfolio added GEL339m including GEL243m through operating performance and GEL95m from movements in multiples and FX.
So, what’s in the portfolio? The highest-profile investment is in Bank of Georgia (18% of the portfolio). Shares in this London listed public entity are dirt cheap – at 6.8x the current year, compared to the bottom of the cycle recession earnings and 3.7x 2021 earnings. Another big investment is in Healthcare services, which consists of a business managing 20% of total hospital bed capacity in the Caucasian minnow. This business consists of hospitals, clinics and diagnostics segments. The implied LTM EV/EBITDA multiple increased to 13.2x from 12.2x at 30 June.
There is also the largest pharmaceuticals retailer and wholesaler in Georgia plus a growing infrastructure component. The big asset is a Water Utility business which is a regulated monopoly in the capital Tbilisi and the surrounding area where it provides water and wastewater services to 1.4m residents, representing more than one-third of Georgia’s population and c.37,000 companies. This was definitely the portfolio business with the biggest challenges. Revenues were down 28.2% in Q4 y-o-y and down 20.1% in FY20 versus FY19. Sticking with the infrastructure theme there’s also three wholly-owned commissioned renewable assets: 50MW Mestiachala HPPs (20MW of which remains offline following flooding in July 2019), 20MW Hydrolea HPPs and 21MW Qartli wind farm.
Finally, there are also some insurance businesses including a 28% market share in property and casualty insurance as well as a small medical insurance business in the which is one of the largest private medical insurers in Georgia with 26% market share. Oh yes and I forgot that there is also a long tail of smaller businesses including private schools, Commercial Real Estate, Beverages, Auto Service and Digital Services.
So, Georgia Capital is in essence a one-stop investment smorgasbord fund invested in all aspects of the Georgian economy. Which begs the question about how the local economy is performing? According to Numis again “The IMF estimates GDP growth of 4.3% in 2021, while the medium-run growth forecast stands at 5.25%, representing one of the highest growth expectations in the region. The economy is nearing a full reopening and restrictions on travel, remote education, non-grocery shops, restaurants, and regular flights have been lifted whilst country-wide curfews, gyms and hotels, and ski resorts are due to be lifted in coming days”.
Stepping back from the nitty-gritty I would make two observations, one on emerging/frontier market economies, the other relating to the fund itself.
In some respects, this fund is similar to say the VinaCapital Vietnam Opportunities fund, in that you are making a single country bet. The Georgian economy has liberalized aggressively and compared to other ex-Soviet states is in a much better place than say Ukraine or, god forbid, benighted Armenia. Politics, though messy, are democratic, and Georgia sits at the crossroads of a number of big geopolitical spheres of influence. The dominant cultural force is Russia which is kept at a cautious distance while the influence of Turkey and Iran is also evident. But this is a country that aspires – Russia willing or otherwise – to at some stage join the EU and NATO. Its economy works and benefits from the relatively stable Russian economy in terms of trade flows. So, the fund looks and feels like a frontier market play but with more conventional emerging market characteristics, sitting alongside a commitment to Western liberal democracy. Crucially from an asset allocation perspective, my hunch is that these kind of assets should do well in the next phase of the reflation cycle.
Looking at the fund itself I think it’s worth saying that Georgia Capital has become a much simpler, easier to understand entity in recent years, with improved corporate governance. For instance, all large portfolio holdings are now externally valued (by Duff & Phelps), whereas previously they were internally valued and audited by EY. Net gearing is currently 32% of net assets. The fund has also been cleverly moving into more ‘stable’ infrastructure assets and has been trying to lower its exposure to listed shares such as the Bank of Georgia (whose shares are fairly volatile). Crucially the shares currently trade at a 50% discount to yesterday’s closing price. My sense is that a big discount is justified because of the private equity and frontier profile plus its single country focus but 50% is too much. I think the shares – currently at 480p – should be trading at closer to a 35% discount and thus set a target of 600p a share for the next 12 months.
If readers are interested, here’s the house broker Numis’ view:
“In our view, this is a strong set of results for Georgia Capital, with NAV growth of 27.2% for the quarter and 2.7% for 2020. This should be encouraging to investors as the portfolio has recovered after Covid-19 had a significant impact on H1 valuations (NAV down 32% in H1). We believe that the decision to operate a cash accumulation and preservation strategy at the portfolio company level during the crisis was a sensible move by management, and therefore the dividend income outlook for the forthcoming year appears positive, and this could give the potential for share buybacks. We believe that the Georgian economy remains well placed to deliver solid growth over the next few years, and Georgia Capital provides well-managed exposure to a number of growth sectors. The portfolio is predominantly exposed to defensive, non-cyclical sectors such as healthcare, utilities and education, whilst Bank of Georgia is rated as a ‘Buy’ by Numis analysts, with a target price of 2,000p (versus 1,070p currently). Georgia is clearly going to be a niche market for most investors, but we believe that Georgia Capital is an interesting opportunity based on a robust economic backdrop, strong management team and exposure to an attractive selection of portfolio companies. In addition, Georgia Capital currently offers significant value, trading at a 50% discount to yesterday’s closing price. In our view, a key trigger to narrowing the discount will be management demonstrating support for the valuations through a significant disposal, one of the company’s two strategic priorities.”