With a market capitalisation of £220m it is essentially a medium sized fish in a small pond. But whilst regionally there are bigger players and many multinational firms could easily come in and dwarf CGEO, they have boots on the ground, some level of early player advantage and at the moment the pond is fairly empty.
This has been both a boon and a curse for CGEO. The initial strategy and the way to develop shareholder value was to build up local businesses and then to list them locally and either fully or partially exit on flotation. This has not been a successful strategy. The 2 listings have had only a lukewarm reception and the Georgia Healthcare business had had to be taken back into private ownership.
The new strategy announced was that going forward the company would look to create businesses that can be grown to at least a GEL 0.5Bln (currently 4.3 Lari to 1 GBP) equity value and can then be sold to either a regional group looking for a local add on or a multinational looking for a regional presence. I personally am rather unsure on the “if you build it they will come strategy”.
However in the same way that they are building businesses of scale that they hope will be of interest to other parties they are building businesses that can generate real cash returns for the long term. Cash returns that they can either use to buy shares back or pay out as dividends. Operating cash flows are up 100% YoY and cash balances in most of the operating businesses are increasing. Though this is in part due to working capital movements that are coronavirus related.
The company believes, based on their asset valuation, that it is trading at a 60% discount to its NAV. As opposed to a periodic discount of circa 26%. Should it really develop its base business whether it sells them or reaps the rewards via dividends then a share buyback may well help it reduce that discount over the next few years.
The company now operates through 5 main companies, a couple of development businesses and a portfolio of businesses that are now no longer part of the core strategy as they are not expected to grow to the target size under CGEO ownership.
Main Companies
Bank of Georgia – Publicly listed
Healthcare Services – Private. Was part of the failed Georgia Healthcare listing.
Pharmacy (Retail) – Private. Was part of Georgia Healthcare
Water Utility-Private
Insurance-P&C and Medical (was part of Georgia Healthcare)
These are businesses largely seen as capable of funding themselves to grow to the target size.
Given how much of the above was Georgia Healthcare you get some feel for how much the strategy is changing.
Under this there are two development companies, Education and Renewable Energy. Which are seen as needing significant further investment to help them grow to the target size.
Then a tail of what is now portfolio companies held for resale.
NAV Values GEL millions
Bank of Georgia 360
Healthcare Services 474
Pharmacy 475
Water Utility 412
Insurance 185
Renewable Energy 201
Education 81
Held for disposal 223
Total 2,411
Less Debt 678
Less Other Liabilities 1
Total 1,732 something in the region of £403m with a market cap of
£220m. So some level of MoS. Though as the above shows there is a lot of debt.
I do not think that the changes being made in the strategy are a great catalyst for events. However disposal of the non-core assets at NAV might be as successful transactions would help validate the NAV calculations they are using across their portfolio.
I also see the opportunity and in particular the development of solid stand alone businesses that at worst the central business will be able to take dividends from whilst waiting for a sale. When/should a sale occur this would be a potential valuation and rerating moment. If not solid cash operations allowing both dividends and buy backs might also be avenues to narrow the discount. As such I do not see a need to rush in but I just before these results added and will probably add again in the next few days. I see this as being a business that I want to have at over 1% in my portfolio.
However this is an overseas business in a region of the world not known for the rule of law. Though Georgia itself scores well. It is also an area of the world that Russia has made clear is within an area that Russia sees as its sphere of influence and is prepared to use troops to ensure it and it’s allies interests. As such it is hard to see a premium waiting being attached. That said Turkey’s recent defeat of Russia in their proxy fight Armenia – Azerbijan may have implications. Though whether it shows Russia’s grip is weakening or Russia will have even more strongly to hold the line in Georgia I cannot say.
Also worth mentioning is that CGEO is a regular provider of detailed information. Provided that information is itself correct then the only firm that I see that routinely produces such clear and informative information is Next Plc and that is a high bar to match.
As always DYOR. None of this is intended as investment advice as what I do, I do it for me and it reflects only my situation and my risk profile.