The demerger of the Bank of Georgia went through today and we now have two entities to invest in for a stake in the fast-growing Caucasian republic. The Bank of Georgia (BGEO) has now separated out its asset management arm which is listed as Georgia Capital, ticker CGEO.
On paper, the new entity represents an attractive investment idea for adventurous types although I think they’re over valued at the current price (around £11.23p a share). First let’s rehearse the arguments on Georgia. There are some fairly obvious negatives: in no particular order I’d highlight:
- The fact that Georgia is a small country with only 3.2 million people
- Is in the volatile Caucasus where failed governments (thinking Armenia here) and civil wars (Chechnya and Dagestan) are common
- Georgia is also trying to build an independent economy and foreign policy, away from the interfering tendencies of big neighbors such as Russia and Turkey. Trouble in Iran may also have a spill over effect on the economy although Azerbaijan is more likely to be immediately impacted.
- A past history of political turmoil is also troubling
- Lack of obvious substantial natural resources
On the plus side I’d observe that
- The lack of substantial natural resources could be a plus, as it discourages rent-seeking behavior
- Its petite size might actually be a help rather than a hindrance as it manages to sail below the radar of the big powers
- Its economy is still in the early stages of an entrepreneurial revolution and is showing signs of real resilience. This seems like an economy where there’s a general consensus in favour of a capitalist system not dominated by the state
- It has a free trade agreement with the EU but also is an ideal way into the broader regional markets
- Low tax rates and relatively low levels of corruption
- Last but by no means least, it’s a fabulous country full of wonderful places to visit!
Anyway, whatever your view on Georgia, it strikes me that it is nevertheless an interesting frontier economy with the fund offering an opportunity to be exposed to wider growth trends in the former Soviet Union as well as Turkey and Iran.
Which brings us nicely to the new asset management business. I tend to prefer asset managers over banks because they are easier to value whereas banks – especially systemically important national ones – always tend to be a law unto themselves.
It’s also obvious that Georgia Capital is in effect becoming a bit like a single country closed fund i.e a one-stop investment vehicle to access the wider economy and its trends. In that respect, Georgia Capital looks and feels rather more like closed-end fund outfits on the LSE such as VinaCapital Vietnam Oppos and (Romanian) Fondul i.e one simple investment vehicle which combines lots of public and private business holdings.
At Georgia Cap the big holdings currently comprise a bunch of unlisted private businesses (Numis lists them as Utility & Energy, Real Estate, Insurance, and Beverages), a 19.9% stake in Bank of Georgia itself, a 57% stake in publicly listed Georgia Healthcare plus a dollop of cash and debt securities. Numis reckons that these stakes all add to a net asset value of around £442m, against a mid price (today) which has a market cap of £436m.
From an outsider’s perspective, the portfolio is dominated by those two big holdings – Georgia Healthcare and Bank of Georgia which account for over 70% of the value of the business. As these stakes become less material and the portfolio is diversified I’d expect to see the shares begin to move up in value.
In the meantime, though I’d be very wary of investing in this new entity. Vietnam Opps trades at a near 20% discount to Nav whereas Fondul trades at a 23% discount to NAV whereas in effect Georgia Capital at today’s price is trading at a premium. That might be warranted if you are investing in the asset manager because you want to have access to the growth story at the Healthcare and banking business but from a fund investor’s perspective, the price is too rich. My hunch is that we’ll see a discount emerge, probably at around 5 to 15% over time.