My current top contender for wooden spoon prize of the year for woeful investment trust launches is….drum roll…..Georgia Capital. A few months this emerged in a separate listing on the LSE via a demerger and then promptly turned into a veritable financial lead balloon. One couldn’t have picked a worse set of circumstances for a launch. Let’s take some time to rattle through the negatives.
First off, we must be close to the top of the equity cycle and thus the fund IPO cycle – it’s not impossible to get stuff away, just that you have to have a really, really compelling idea. Next up the fund invests in Georgia who’s two biggest neighbours are Russia and, yes, Turkey. Yikes. And of course, Georgia is still a frontier market, whose fortunes are tied closely with those of international capital flows and the strength of the dollar. To add one final simile, the nail in the coffin is that Georgia Capital also mixes both public market investments with private equity structures – I’d observe that sentiment has been turning bearish on PE deals as the M&A cycle hits a frenzied peak. So, all in all, this had to be one of the worst timed IPOs ever. The chart below, from the funds’ team at Numis, tells the painful story…the share price is down over 100p.
Now, to be fair, I actually think this is an interesting frontier investment. Just not at the price it was listed at. A few months ago on this blog I suggested that Georgia Capital was definitely worth watching but that a sensible discount to NAV needed to be applied. You can read the original blog from earlier in the summer HERE
The key passage was the conclusion, which I stand by…….
“….. 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.”
Well, flash forward a few months and we have shot past that suggested 5 to 15% discount and the fund is now sitting at a 24% discount according to estimates from Numis. The results this week “contained no surprises” according to Numis, “although new business ventures in Education and Vehicle Inspection are interesting developments. In our view, weak sentiment towards Emerging/Frontier markets in general, as well as more specific concerns over Turkey and Russia, have weighed upon the price of Georgia Capital (as well as BGEO and GHG) since the demerger”. Quite.
Today brought some further, arguably positive news. The fund has said it’s changed its mind and doesn’t now intend to reduce its holding in Georgia Healthcare Group below 50% – it’s currently at 57%. According to Numis again, “the Board of Georgia Capital [now] believes that the current Georgia Healthcare share price significantly undervalues its performance and prospects, and so a reduction in the holding would not currently be in shareholders’ best interests. As a result, it no longer expects to own less than a 50% stake in GHG at the end of 2018, and starting from H2 2018 Georgia Capital will fully consolidate GHG’s accounts in its IFRS statements. Georgia Healthcare has performed well in terms of fundamentals. In the quarter to 30 June, sales and EBITDA were in line with expectations, with revenues of GEL211.8m, up 15% on a like for like basis, and EBITDA of GEL31.2m, up 20% like for like. However, the share price has de-rated, primarily due to concerns over the deteriorating political and economic backdrop in neighbouring Turkey. In our view, the perception of an overhang from Georgia Capital has also weighed on the share price in recent months.”
I’d argue that this a positive development. In for a penny, in for a pound. You either really believe in the value of your business or you don’t – in which case properly sell it off. So, I think this decision shows fortitude and some small amount of courage. It also sounds like the healthcare business is performing well.
BUT the board should also be wary about letting that discount drift even lower. My guess is that news from Turkey will get much, much worse before it gets any better. I think we’ll see a very substantial impact on its neighbours including Georgia. We could even enter a negative feedback loop for NAV, in which the NAV is marked constantly lower because of bad macro, forcing the share price to march lower and the discount to widen to 30%. Which is sort of where I think the discount will end up – possibly even hitting 35%? At that point, the board has to do something. IPO investors would be right to feel mightily aggrieved at the timing of this demerger/IPO and I think some limited share buyback programme would be required.
Arguably once we see the share price move closer to 200p/220p and the discount move past 30%, I’d personally think about becoming a buyer again. I’d agree with the long-term outlook from the Numis team which is 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 balance sheet is good shape, giving the potential for further share buybacks”. It’s just that the current share price doesn’t fully discount to the near-term downside.”
One last observation before I sign off for a week-long holiday – on Allied Minds. I’ve already blogged in recent weeks about this fallen angel – a US IP business listed on the LSE. You can see that blog HERE. The share price has now moved decisively below 80p and I’ve started slowly but steadily buying small quantities of the stock. I’d expect the share price to move past 75p given its current negative momentum and we could see 70p tested. But I now think most of the bad news is in the share price although we are expecting a results announcement in September and that might contain some unexpected nasties.