2021 February-March Analysis Featured

The London Stock Exchange likes its Georgian trio

Georgia’s London-traded stock market trio – Bank of Georgia, TBC Bank and Georgia Capital – continued to attract investment and plaudits in 2020, even though foreign direct investment into the country’s industries and infrastructure has been slipping. For the trio, brokers’ research and ratings remain positive as 2021 opens, funds are buying, and financing is flowing.

International ratings agency Fitch, highlighting plus points for Georgia in a report a few weeks ago, named “support that Georgia enjoys from official creditors” as one reason, adding that this had “reduced refinancing risk” and noted that in relation to its large stimulus program, Georgia had received official funding “in excess of its 2020 needs.”

With this backing and the “improving sector outlook for Georgia,” Fitch sees for the banks “stronger-than-peers’ [(in neighboring countries] upside potential for revenues.”

U.S.-based global investment bank Citi was among those last month said by London Stock Exchange dealers to be increasing profit forecasts for the two major Georgian banks (Bank of Georgia and TBC Bank), “despite the surge in Covid-19 cases,” on grounds that the assessments they had made in the early days of the global pandemic had been “too pessimistic.” Several brokers issued “buy” recommendations after the banks’ November third-quarter trading announcements and presentations to analysts and fund managers encouraged them to become positive.

Large U-turns were performed in analysts’ earnings forecasts, some going for as much as 45% more than previously forecast for 2020, 29% more in 2021 and 22% more in 2022 for Bank of Georgia, and 28% more, 23% more and 13% more respectively for TBC Bank for those respective years.

This was generally a reflection of how the banks had successfully managed the crisis so far, the performance of the non-tourist economy of the country and the financial inflows from the diaspora’s remittances as well as support of international financial institutions.

Looking at the banks’ trading numbers for the third quarter of 2020, dealers were commenting positively, with one noting that“Continued healthy pre-provision profit at just under 5% of loans in a difficult year, and poised to increase in our view, is a testament to the resilience of Georgian banks to stress.”

Traders’ target share prices on the London Stock Market have now increased across the board, up to around £16.00 plus per share muted for both Bank of Georgia and TBC Bank (up from £14.50 and £13.60, respectively). On January 25, Bank of Georgia shares were trading on the London Stock Exchange at £1196 per share and TBC at £1282 per share.

Adding to the attraction of these Georgian banks for yield-hungry international funds, dealers believe that they will generate enough profit this year – a 2021 rise of around 16% is forecast compared to 2020 – to pay dividends from it in 2022 if not before. However, currently the Georgian National Bank, in line with central banks globally, is insisting that plenty of money be put aside as provision against loan defaults as Covid-19 lockdowns continue to hit businesses and slash jobs.

Yet for the banks, the last two quarters have seen, analysts point out, not only a strong rebound in customer activity but improved net interest margins and a strong recovery in fee income. Adverse pressures, resulting from prudential official regulations, mortgage limits, declining foreign exchange yields and currency devaluation, have now abated and more normal conditions have been returning.

The level of lockdown restrictions is less severe. While the hit to tourism and hospitality has been heavy indeed, overall, says Fitch, the level of loans not repaid to these banks is thought unlikely to be significantly higher than normal, as other sectors of the economy are proving to be resilient.

The economy as a whole is forecast by many to recover to growth of around 5–5.5% in 2021. That, says Georgian broker Galt & Taggart, is “if tourism recovers to 50% of its 2019 level; without tourism [Galt & Taggart] expect[s] growth at around 3.7% in 2021.”

TBC Capital’s December 2020 forecast sees tourism in 2021 as likely to recover to around 30% of its 2019 level and GDP growth to stand at around 4.6%. Tourism contributed 11.6% of GDP in 2019. Of course, most brokers are hoping that the launch of many Covid-19 vaccines will enable some tourism at least to return.

The market expects the banks to meet their target returns to investors of around 20% of shareholders’ equity as tourists return, helping bring a spectacular recovery in banking business in 2022. Both banks are very highly digitalized, with individual, corporate and commercial servicing platforms as well as banking, so costs are under tight control.

New opportunities for Bank of Georgia include those seen in capital markets, where its in-house broker, Galt & Taggart, is advising on increased local corporate activity and attracting foreign investment clients. It has an ambition to be a regional financial hub, its wealth management side already extending into Turkey, Hungary and Israel.

Property is also a growth area, and a third-party managed property investment vehicle, a Real Exchange Investment Trust, looks a definite flyer, as international real estate firms, such as Cushman & Wakefield and Colliers, have offices in Georgia and thus organization of external valuations would be easy. Bank of Georgia is already active in real estate, with a real estate sales and renovation platform – area.ge.

All of the Georgian trio members are included in the FTSE All Share Index. TBC Bank has also won admittance to the MSCI UK Small Cap Index, which sent its shares shooting up by 14% a few weeks ago, as this makes it a “must” buy for funds mirroring the index. This has helped the share price recoup pre-Covid-19 levels. Markets also welcome TBC Bank’s recent diversification into Uzbekistan, currently the favorite growth-country pick in the region among the international financial institutions. It is also already present in Azerbaijan.

The London market likes the stories being told not just by the banks on their current and future growth, but also by local private equity player Georgia Capital, where the strategy is picking and growing winning businesses for trade sales and stock market listings. While the component parts of the company are well known in Georgia, the fact that Qartli Wind Farm, Mestiachala HPP, m2 real estate, Aldagi Insurance, wine company Kindzmaureli Marani, GPC Pharmacies, Kempinski Hotel and Green School, to name just a few, are clustered in specialist divisions under the Georgia Capital banner is undoubtedly less so.

These, plus some bought since, are among the non-banking interests split off from Bank of Georgia’s holding company in 2018, in line with international regulation, packaged into Georgia Capital and listed on the London market.

The holdings of Georgia Capital at the end of September 2020 were 20% in healthcare services, 20% in retail pharmacy, 7% in insurance, 17% in water utilities, 8% in renewable energy, 4% in education and 15% in its investment in Bank of Georgia. The remaining 9% is a mix of beverages, hospitality, housing, real estate, auto services and digital services.

The strategy, says chairman and CEO Irakli Gilauri, who has more than 20 years experience, is to “invest in Georgia in large opportunities which have a potential to reach 500 million GEL in equity value” within three to five years and at the same time build portfolios of smaller or earlier-stage companies that can be developed for sale. Exits from the large companies could be through either sales to major companies, Georgian or international, or via listing on a stock market.

The hope is that the 500 million GEL target size will be large enough to put the companies “on the radar” of foreign investors, comments research house Edison. With respect to portfolio exits, their timeline is five to ten years from their initial investments. Smaller companies are more likely to find local buyers.

Currently, its large companies are among its healthcare services, pharmacy, water and insurance interests. Georgia Capital plans, Gilauri says, to “realize the value of one of our large investments [which] will help validate the value of our portfolio..”

Monetizing one of the larger investments will also help to reduce the discount to NAV (net asset value), he added, outlining his strategy at a presentation to investors in November, thus targeting a trade sale of one of those assets. At the moment of this writing (January 13, 2021) Georgia Capital’s NAV is put at £9.43 a share by external valuation, while its share price is £5.56, so it looks considerably under-priced.

To simplify its story, Georgia Capital has decided to focus on developing internationally popular “green and sustainable” businesses, and its portfolio investments are now to be made in “the local renewable energy (wind and hydro) and private education sectors.”

Edison, which suggests investing in Georgia Capital, says while it is spending its cash currently on building the businesses rather than paying dividends, it has the attraction of having a history of supporting its share price by buying shares.

Georgia Capital’s “sustainability” theme has gone down well with international investors, as one of the major emerging market ones, Aberdeen Assets Investment, has posted on it on its website: “As one of the country’s most important institutional investors, we believe it should be well placed to perform within Georgia’s rapidly growing economy. Research from our Emerging Market Debt team – which has a long track record of investing in frontier markets – gave us the background we needed to be confident that Georgia’s economy is in good shape. The team uses a cutting-edge ESGP [environmental, social, governance and political assessment] tool to rate countries on a number of ESG metrics.”

In addition, one of Georgia Capital’s businesses, Georgian Global Utilities, last year became the first Georgian company to issue a “Green” Eurobond.

Other funds that have bought into Georgia in recent months include Norway’s Sovereign Wealth Fund, Norges Bank, and international asset manager Fidelity (both into Bank of Georgia) as well as U.S. investment firm Eaton Vance (into Georgia Capital). Like Edison, they take a long, positive view – after all, as the research house points out, Georgia’s economy “has been in a secular growth trend for over 15 years, with a 5.6% average real GDP growth rate in 2002-19” and Georgia is well-backed.

While Covid-19 has brought a downturn in 2020, Edison added in an investment note last month that “Georgia’s fiscal deficit and external gap should be fully covered by funds from international financial institutions and rebounding remittances.”

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