Value Opportunity in Georgia?

2nd Nov '22 by Martin VT

18 comments 1860 reads

I just realised that the market capitalisation of Bank of Georgia (LON:BGEO) has eased over £1bn

This is of interest to me as a holder of Georgia Capital (LON:CGEO) as it’s market capitalisation is only £281m

The possible opportunity is that this very well run and prudent private equity company, in terms of it valuations and business growth record (eg see Edison report of May 31st 2022) has a 19.9% holding in Bank of Georgia (LON:BGEO) (ie worth approximately £200m. As of May this represented 18.2% of Georgia Capital (LON:CGEO) assets. This would appear to suggest that one can buy the remaining 81.8% of assets the company holds for £81m!

I hesitate to use the term mis-pricing, but I’m struggling to find the enormous mistake I surely must have made in my analysis making this case. Any illumination would be most welcome.

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Martin VT

9th Nov '22

Third Quarter results today give a large increase in NAV to 1845p (this reflects unwinding of some discounts to value applied in light of the start of the Ukraine war and the recent increases in value of Bank of Georgia (LON:BGEO) ( Georgia Capital (LON:CGEO) owns 19.9% of their shares ).

Even with an 8% increase in share price today, this reflects a discount of over 60% to NAV. Why?

1. Value Risk

'Values of businesses held by £CGEO are untested and may be over stated.'

This was a possibly valid argument until 2021 when the company sold the majority of its large water business at a premium to its assessed value.

2 Country Risk.

'Given Georgia's proximity to Russia, and indeed the fact that Russia invaded in 2008 , Georgia is at significant risk.'

Whilst I would not wish to deny that this part of the World is more risky than Western Europe, the following now applies:

* Georgia is generally viewed positively by both the World Bank and the EU

* Following Russia's extremely costly venture into Ukraine and the higher level of awareness and concern by the West about Russian adventurism, the chances of Russia wanting to invade another neighbor any time soon would seem to be reduced

* The recent Russian mobilisation of men aged 18 - 45 has produced a large scale exodus from Russia. Georgia it appears has gained in the region of 60K of these young and educated men, an approximate 8% increase in the male workforce, who, one would imagine, have above average skills and training.

Given their reasons for leaving, and the state of Russian economy and politics, I would suggest that these people are not likely to rush back to Russia , in fact potentially their families may soon join them. I find it hard to see how these people will be anything but a significant asset to Georgia's economy. There could also be benefits from Ukrainian refugees coming to the Country.

3. Currency risk

Agreed. however post Covid this has very much run in favour of share holders as the GEL has increased in value against the £. At the moment both the £ and the UK economy are under a lot of pressure whilst the Georgian economy is growing @ 5% pa, this year and next, so the risk of adverse currency moves seems lower at present.

4. Dodgy foreign management culture

Georgia scores lowish on Democracy, scores mid on Freedom and scores higher than USA, France and Australia on Internet Freedom.

The management is experienced and has come out of Bank of Georgia (LON:BGEO) management ( Georgia Capital (LON:CGEO) was spun out of the Bank in 2018).

The company and its predecessor have a strong track record of diligent process and communication.

Bottom Line

This company is currently operating with a very large discount to NAV. I find it hard to see how this can be justified, and so I will continue to hold Georgia Capital (LON:CGEO) in the hope of both growing NAV and a future reduction in discount.

Any critique of my case would be most welcome.

Harry Hindsight

22nd Jan '23

TBC Bank (LON:TBCG) currently StockRank 97 and level in comparison.

A quick research, Georgia sits between Russia and Turkey, Armenia and Azerbaijan defined by mountain ranges and the Black Sea. Intersection of Eastern Europe and Western Asia. Population 3.7m with capital Tbilisi. Russia invaded but gained independence in 1991. Wants to join the EU and NATO. Russo-Georgian War in 2008 and Russia occupies part of their territory.

Sorry no insights but seems to be in a financial sweet spot.

16th Feb '23

Value of Georgia Capital (LON:CGEO) keeps looking better...

Today Bank of Georgia (LON:BGEO) produced its 2022 figures with a huge beat of estimates (EPS was GEL of 23, (2021 - 14.88) actual 2022 was 30.3. Increases in dividends (this year will be around 8% even with today's price rise) and also share buy back help in its valuation.

Dividend increased. Most business metrics showing strong improvement.

By my calculation BGEO @ 2990p is worth £1.42 billion - CGEO owns 20% so a stake now worth £284 million. This morning CGEO were capitalised at £340m. So you get all of the company's other assets (some of which also pay substantial dividends to CGEO) for £56m (plus today's rise in value). BGEO comments on how robust the economy has been is also encouraging.

Edison in Nov 22 quoted CGEO NAV at 1855p . The increase in BGEO since is approximately 15% higher.

I hold both shares happily.

Charles Mitchell

Looks like BOG is valued at GEL 912,064./GBP£285K Total portfolio value net of debt GEL 2,798,698 GBP £875k- using the tool kit og the Georgia Capital site https://georgiacapital.ge/inve.... The discount to NAV per share sits at 60.3% which looks a buy. But many funds with PE investments are trading on large discounts. Does look a very interesting situation-I have been following BOG but did not buy unfortunately. This could be a way in, so thanks for raising it. Need to look at the other investments in a bit more detail.

The Pharmacy business, education, and insurance businesses are growing well. The hospitals and clinics business (as of September 22) was down as it readjusted back to normal health services post the Covid business distortions (and profits).

One of the benefits of Georgia is that it’s small enough to not encourage multinational competition.
Re BGEO, I think it’s still on a PE of less than 3 for 2022, with a div of over 8%. I expect that estimates for 2023 will be revised up, given there was such a large beat for 2022.

Also, I remember seeing that the larger businesses are also paying a healthy dividend to CGEO along with the £23m div for this year from BGEO.

mjfgs

18th Feb '23

Thank you for your insights. I enjoy finding these UK-listed apparent 'bargains' in more risky parts of the world. (I hold TBCbank, CGEO and Bank of Georgia). Have you come across Steppe Cement (LON:STCM) ? I've done very well from it over the last year.

The Pharmacy business that is owned 77% by Georgia capital would look cautiously valued compared with say the US listed CVS.

Boon

19th Feb '23

I guess the key question to ask is - why has the market tolerated such a clear mis-pricing? It is such a simple case - there is a daily mark-to-market price of the Bank of Georgia stake. Yet for many months, maybe years already, investors have turned a blind eye and the price gap has not closed.

And don't forget - there are existing sellers of the shares, who are ignorant and selling it at this discount for so long? Or do they know something you don't?

Food for thought.

Brigra

26th Feb '23

There was an interesting write-up of CGEO published today by Oscar 100 - a young Spanish Private Investor;

In fact it was his article that led me to look up the Company here on Stocko..

https://oscar100.substack.com/...

bullhead

27th Feb '23

Thanks for the link interesting article and interesting site

28th Feb '23

Oscar has now followed it up with a YT video, if you have 30 minutes to spare..

1st Mar '23

Hi Boon, I don’t think you are quite accurate, the ‘blind eye’ has not been going on for years, at least not to this extent. The meteoric rise in discount has happened in 2022 when the Lari dramatically increased in value from 21 to £ in May 21, to 31.8 to £ now. Also 2022 saw an Italian mark down of NAV due to the Russian invasion.

So yes, there has always been a discount but it is particularly prominent now @ 60%!

Other than that Georgia is small, on the border with Russia, and is not well known as a country…but the key point is that this did not stop Aqualia buying the water business at a 30% premium…and of course the value of Bank of Georgia (LON:BGEO) is publicly quoted. If you take that into account, the discount on the remaining Private Equity companies becomes ludicrous.
Also Georgia’s economy is growing at a gallop, 10.5% in 2022, and anticipated 5.2% for 2023, which can only support the longer term value of both companies.

Thanks for this Brian, it’s good analysis, and it’s nice to see a few others interested in the CGEO, and indeed BGEO.

AlexP1994

Thank you for sharing this, it does look interesting. I will share my thoughts, which are more objective towards the wider-economic picture rather than specifically towards CGEO.

-It is likely that the Russia-Ukraine war is influencing the price. Buying companies in the Euro-Asia region is risky at this current time. I remember a lot of people were buying Russian/Ukrainian companies late 2021 and early 2022 before the war escalated; Gazprom, Sberbank, Ferrxpo, Polymetal to name a few.

-Recent Russo-Georgian war in 2008 with the Abkhazia and South Ossetia remaining disputed territories, essentially Russian now. I think it is unlikely for Russia to actively invade Georgia again, especially considering what is happening in Ukraine at this present time. It is highly unlikely NATO will offer Georgia membership anytime soon.

-Sanctions imposed on Russia will likely increase imports/exports to Euro-Asia region. Resulting in a higher dependence on Russia economic activity. Short-term this could be good for Georgia as a nation and economic activity, but the longer-term consequences are a huge risk.

-I read something recently that energy imports come from Azerbaijan, unsure on how consistent this supply is with recent macroeconomics; there is a possibility that Georgia finds cheaper energy from Russia, thus increasing their reliance...

-Possible increase in Russian companies registering in Georgia and neighbouring Euro-Asian regions due to consequences of sanctions on Russia [unsure how to find evidence of this].

-Recent increase in migration of skilled Russians into Georgia will add to the GDP of Georgia.

-PDMR activity and share buybacks recently which is positive.

Conclusion: I believe this is a high-risk, high-reward scenario. I would add CGEO to my speculative fund as a value play (10% of my portfolio - I never add to this) but would personally stay clear of including this as part of a long-term investment portfolio. The risk are just too high given the current political and macroeconomic situation.

Video: May be of interest, published 4 months ago and less than 1000 views thusfar. It is 1 hr 40m long.

porl99

12th May '23

I just thought I would revive this given that Bank of Georgia (LON:BGEO) has been on such a bull run recently whilst the Georgia Capital (LON:CGEO) hasn't quite so much. I make it that their 20.4% stake in BGEO is now worth over £310m whereas the MCAP of the entire company is only £362m.

Alphaflight

Source - Approx 27 mins into this video

19th Dec '23

Well, this is a story which keeps running! I keep expecting the discount to NAV to narrow, but as of today there still appears to be a discount of 55%.

The 20% Bank of Georgia (LON:BGEO) stake held by Georgia Capital (LON:CGEO) is today worth around £334m, which means that the remaining £99m of Georgia Capital (LON:CGEO) market cap (£433m today) offers £631m of assets (77 GEL @ 29p = £22.33 * 43,270,840 shares = £966m NAV)

Also if the business stayed completely still for a year it would still increase in value by 5.4% due to the 7% dividends from Bank of Georgia (LON:BGEO) .

Georgia received candidate status from the EU last week, having applied just last year, which has been celebrated across political parties. It seems likely that rapidly growing Georgia will be keen to access the vast wealth transfers that the EU bestows upon poorer applicants, as well as trade and governance opportunities.

Interestingly, Georgia's corruption index rating is =41st in the world, the same as Italy, and has been heading in the right direction for the last 25 years.

Finally, it should be remembered that its business holdings are generally defensive businesses, eg Retail Pharmacy, Specialist Hospitals, Local Healthcare and Diagnostics, Insurance, Education, (Renewable) Energy, and its one major realisation (majority stake in its water business) was sold for more than NAV.

I suppose that an alternate viewpoint of the same information is that when the Russian Ukraine war ends and business relations between the West and Russia normalise, as at some point they will, then Georgia will have more business opportunity with Russia, alongside its growth in business with the EU as it moves (slowly no doubt) along the path to becoming a member.

Value Opportunity in Georgia?

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Martin VT

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