Georgia Capital Regulatory News (CGEO)

FINANCIAL PERFORMANCE HIGHLIGHTS (IFRS)[1]

KEY POINTS

Ø Record 4Q22 NAV per share of GEL 65.56, up 14.9% q-o-q, mainly driven by continued growth in BoG's value

Ø NAV per share (GBP) increased by 8.5% in 4Q22 and was up 33.2% in FY22, the latter reflecting GEL's 28.1% appreciation against GBP in FY22

Ø Net Capital Commitment (NCC) ratio decreased by 3.3 ppts to 21.1% in 4Q22, resulting from strong growth in the portfolio value and robust liquidity at GCAP

Ø GEL 27.4 million regular dividend income from the portfolio companies in 4Q22 (GEL 93.9 million in FY22, up 26.2% y-o-y)

Ø Proposed transfer from LSE Premium to LSE Standard listing, which represents a better fit for execution of GCAP's strategy

Conference call: An investor/analyst conference call will be held on 21 February 2023, at 14:00 UK / 15:00 CET / 09:00 US Eastern Time. Please register at the Registration link to attend the event. Further details about the webinar are available on the Group's webpage.

CHAIRMAN AND CEO'S STATEMENT

I am pleased to present remarkably strong results for the fourth quarter of 2022, which reflect the continued financial, strategic and operational progress of Georgia Capital, supported by the resilience of the Georgian economy, notwithstanding challenging market conditions and the geopolitical backdrop created by the regional conflict.

Record-high NAV per share of GEL 65.56 in 4Q22. The NAV per share (GEL) increased by 14.9% in 4Q22, mainly resulting from the continued rally of BoG's share price, up 31.0% q-o-q in 4Q22. This created GEL 250.4 million value in 4Q22 (10.1 ppts positive impact on the NAV per share). Value creation across our private portfolio businesses amounted to GEL 77.0 million (3.1 ppts impact), demonstrating solid growth. The NAV per share growth was further supported by share buybacks and GEL's appreciation against US$ (+1.6 ppts impact), partially offset by management platform related costs and net interest expense (-0.8 ppts impact). In GBP terms, the NAV per share growth in 4Q22 was robust - up 8.5% q-o-q to GBP 20.12.

Underlying operating performances across our private portfolio remain solid. In 4Q22, the aggregated revenues and EBITDA of our private portfolio companies increased by 2.0% and 1.3% y-o-y, respectively. This reflects the net impact of the healthy performance in our non-healthcare businesses and the dampening effect of the gradual organic return to a pre-pandemic environment for our Hospitals and Clinics and Diagnostics businesses. Substantially lower COVID cases in Georgia led to the suspension of COVID contracts by the Government in 1Q22 and an adjustment period as patient traffic is only now returning to normal levels. This combined with the sale of one of our hospitals in April 2022 and the temporary closure of another hospital for renovation works which began in October 2022 (as discussed in more detail in this report), negatively impacted the y-o-y revenue and EBITDA growth of our healthcare businesses in 4Q22. Excluding Hospitals and Clinics and Diagnostics, the aggregated revenue and EBITDA of our private portfolio were up 8.1% and 22.2% y-o-y, respectively, in 4Q22.

NCC ratio decreased by 3.3 ppts to 21.1% in 4Q22. The decrease in the NCC ratio was mainly driven by the robust portfolio value growth (up 12.0% in 4Q22) and strong liquidity levels at GCAP. Liquidity was up 13.8% to US$ 152.4 million in 4Q22, reflecting the repayment of the US$ 80 million shareholder loan provided to the renewable energy business (GEL 222.8 million) and dividend and interest receipts of GEL 34.7 million in aggregate. The increase in GCAP's liquidity balance was partially offset by GCAP Eurobond buybacks (GEL 180.4 million), GEL 14.3 million cash outflows for share buybacks and GEL 11.6 million capital allocations in 4Q22. In GEL terms, the liquidity balance increased by only 8.5% in 4Q22, reflecting GEL's appreciation against US$, as more than 95% of the cash and liquid funds were denominated in US$. Given BoG's consistent return of a significant portion of capital via buybacks, we intend to receive capital returns by gradually monetising our stake in BoG to the historical level of 19.9%. This is expected to lead to an approximately US$ 23 million increase in GCAP's liquidity balance, when completed, while also decreasing the NCC ratio by a further 1.5 ppts.

We continue to deliver on our strategic priorities. Looking back, 2022 was an eventful year for the Group. 1) In what was a challenging global environment, we successfully completed the sale of an 80% interest in the water utility business to a high-quality international strategic investor for US$ 180 million. The disposal marked the completion of the full investment cycle for one of our large portfolio businesses and created substantial value for our shareholders. 2) Our renewable energy and housing development businesses closed milestone transactions on the Georgian capital market. At the same time, the US$ 80 million green secured bond offering by our Renewable Energy business represented the largest-ever corporate bond placement in Georgia, which once again validated our superior access to capital. 3) Buybacks and cancellation of GCAP Eurobonds demonstrated strong progress on our key strategic priority of deleveraging GCAP. Through the end of 2022, we repurchased US$ 116 million GCAP Eurobonds, of which US$ 65 million were cancelled following a Modified Dutch Auction ("MDA") in 4Q22. These positive developments in our leverage profile, coupled with our robust balance sheet and capital allocation processes, led to a 10.8 ppts decrease in the NCC ratio in 2022. This also resulted in an upgrade in our corporate credit ratings to "B1" by Moody's and "B+" by S&P (from "B2" and "B", respectively). 4) During 2022, under the US$ 25 million share buyback and cancellation programme, we repurchased 2,252,341 shares for a total consideration of GEL 54.3 million (US$ 18.1 million). This brings the total number of shares bought back and cancelled to 6.4% of issued capital since we launched the programme in August 2021.

Proposed Transfer from LSE Premium to LSE Standard Listing. We have recently put forward to our shareholders a proposal to transfer GCAP to an LSE Standard listing, which we consider is more suited to the Company's size and strategy and will help create greater value for shareholders. In particular, the transfer will eliminate transaction delays and costs associated with regulatory class tests and ensure a more seamless execution of significant transactions, such as disposals/exits from portfolio companies. This will also enable GCAP to minimise its dependency on market capitalization fluctuations, especially in the current challenging market conditions, as GCAP's market capitalization will no longer be the main factor in determining class test related transaction execution paths. The proposed transfer will also provide greater flexibility to execute meaningful share buybacks, as repurchasing more than 15% of our issued equity capital will no longer be subject to complex legal and regulatory procedures. Following the proposed transfer, GCAP will remain committed to the highest standards of corporate governance and transparency. For details on the proposed transfer please refer to the shareholder circular at https://georgiacapital.ge/.

From a macroeconomic perspective, 2022 has delivered a second consecutive year of double-digit growth, with real GDP expanding by an estimated 10.1% y-o-y in 2022, following 10.5% real growth in 2021. On the external side, strong foreign demand throughout the year has been supplemented by substantial remittance inflows, with money transfers up by 86% y-o-y in 2022. Merchandise exports grew by 32% y-o-y in 2022, and tourism revenues reached 108% of the 2019 level in 2022, including 135% in 2H22, reflecting the global resumption of travel as well as significant migration, especially from Russia. On the domestic side, credit expansion has also been robust despite rising interest rates, as the commercial bank loan portfolio grew by 12.1% y-o-y as of December 2022 (on a constant currency basis). Additionally, while fiscal support has moderated, Georgia's fiscal stance remains expansionary, with current expenditures growing by 9% and capital expenditures expanding by 22% y-o-y in 2022. The unemployment rate reached a historic low of 15.3% in 3Q22, reflecting economic expansion. Despite US$ strengthening globally, the Georgian Lari (GEL) has sustained its appreciation trend since mid-2021 and, compared to the beginning of 2022, appreciated by 17% against the US dollar as of 20 February 2023. This appreciation is driven by growing demand for Georgian exports, robust remittance and migration inflows, tight monetary policy, accelerated foreign currency lending and strong tourism recovery. The National Bank of Georgia (NBG) has maintained a tight monetary stance with the refinancing rate set at 11% since March 2022, reaffirming its commitment to pursue a tight monetary policy until the current inflationary pressures subside. Inflation was 9.8% in December 2022 (11.9% on average in 2022), back to single digits following a peak of 13.9% in January 2022, and is expected to continue decelerating gradually in 2023.

Outlook. The resilient performance of our portfolio companies coupled with our robust balance sheet and capital allocation management were instrumental to our outstanding 4Q22 and FY22 results. We have made strong progress in deleveraging the business towards our targeted NCC ratio of 15%, while consistently growing NAV per share on the back of capital light and sustainable investments. Looking ahead, we see a return to normal growth in Hospitals and Clinics and Diagnostics and exciting opportunities in any number of our businesses, including Insurance and Education to name a few. With greater flexibility and the more cost-effective structure that transferring to a Standard Listing may bring, I believe that Georgia Capital is extremely well positioned to deliver consistent NAV per share growth over the medium to long term, while also continuing to make significant progress on our key strategic priorities.

Irakli Gilauri, Chairman and CEO

DISCUSSION OF GROUP RESULTS

The discussion below analyses the Group's unaudited net asset value at 31-Dec-22 and its income for the fourth quarter and full year period then ended on an IFRS basis (see "Basis of Presentation" on page 37 below). 

Net Asset Value (NAV) Statement

NAV statement summarises the Group's IFRS equity value (which we refer to as Net Asset Value or NAV in the NAV Statement below) at the opening and closing dates for the fourth quarter (30-Sep-22 and 31-Dec-22). The NAV Statement below breaks down NAV into its components and provides a roll forward of the related changes between the reporting periods. For the NAV Statement for the full year of 2022 see page 37.

NAV STATEMENT 4Q22

NAV per share (GEL) was up by 14.9% q-o-q in 4Q22, reflecting a) value creation across our portfolio companies with a positive 13.3 ppts impact, b) share buybacks (+0.8 ppts impact) and c) GEL's appreciation against US$, resulting in a foreign currency gain of GEL 21.0 million on GCAP net debt (+0.8 ppts impact). The NAV per share growth was slightly offset by management platform related costs and net interest expense with a negative 0.8 ppts impact in total.

Portfolio overview

Total portfolio value increased by GEL 341.8 million (12.0%) to GEL 3.2 billion in 4Q22:

· The value of the listed and observable portfolio was up by GEL 234.3 million (31.2%), reflecting GEL 252.4 million value creation, mainly driven by a robust recovery in BoG's share price, slightly offset by a GEL 18.1 million dividend income from BoG;

· The value of the private portfolio increased by GEL 107.5 million (5.1%). This mainly reflects the net impact of a) GEL 77.0 million value creation, b) investments of GEL 39.0 million (of which, GEL 27.4 million represents the non-cash conversion of the shareholder loan to Renewable Energy into equity) and c) a decrease of GEL 9.3 million due to dividends paid to GCAP.

Consequently, as of 31-Dec-22, the listed and observable portfolio value totalled GEL 985.5 million (30.8% of the total portfolio value), and the private portfolio value amounted to GEL 2.2 billion (69.2% of the total).

1) Value creation

Total portfolio value creation amounted to GEL 329.4 million in 4Q22.

· A GEL 252.4 million value creation from the listed and observable portfolio was attributable to:

o  A 31.0% increase in BoG's share price, supported by GBP's appreciation against GEL by 6.0% in 4Q22.

o  GEL 2.0 million value creation in Water Utility, reflecting the strong operating performance and the application of the put option valuation to GCAP's 20% holding in the business (where GCAP has a clear exit path through a put and call structure at pre-agreed EBITDA multiples).

· The value creation in the private portfolio amounted to GEL 77.0 million in 4Q22, reflecting:

o  GEL 95.3 million operating-performance related value reduction, mainly driven by the developments across our healthcare (Hospitals and Clinics and Diagnostics) and other businesses, as described in detail on pages 6-7.

o  GEL 172.4 million value creation due to changes in valuation multiples in 4Q22, resulting from the recovery in listed peer multiples as well as the continued resilience of the Georgian economy in almost all economic data points and the strong outlook for our private portfolio companies.

The table below summarises value creation drivers in our businesses in 4Q22:

Valuation overview[10]

In 4Q22, valuation assessments of our large and investment stage portfolio companies were performed by a third-party independent valuation firm, Kroll (formerly known as Duff & Phelps), in line with International Private Equity Valuation ("IPEV") guidelines. The independent valuation assessments, which serve as an input for Georgia Capital's estimate of fair value, were performed by applying a combination of an income approach (DCF) and a market approach (listed peer multiples and, in some cases, precedent transactions). The independent valuations of large and investment stage businesses are performed on a semi-annual basis. In line with our strategy, from time to time we may receive offers from interested buyers for our private portfolio companies, which would be considered in the overall valuation assessment, where appropriate.

The enterprise value and equity value development of our businesses in 4Q22 are summarised in the following table:

Private large portfolio companies (44.9% of total portfolio value)

Retail (Pharmacy) (22.7% of total portfolio value) - the Enterprise Value (EV) of Retail (Pharmacy) was up by 3.7% to GEL 957.7 million in 4Q22, resulting from the continued strong outlook of the businesses driven by the expansion of the retail chain and the resilience of the Georgian economy. The outlook of the business also reflects the anticipated negative impact of the recently implemented External Reference Pricing model which introduces a maximum retail price on targeted prescription medicines that are financed by the State. The direct impact of the new regulation on the 2023 EBITDA is expected to be a decrease of GEL 4 million. However, in order to minimise the impact, the business intends to renegotiate the trading terms with its suppliers. See page 14 for details.

4Q22 revenues were down by 3.3% y-o-y in 4Q22, reflecting a) the recalibration of product prices due to GEL's appreciation against foreign currencies (the FX effect is directly transmitted into the pricing as c.70% of the inventory purchases are denominated in foreign currencies) and b) gradual transfer of the hospitals business' procurement department from pharmacy to hospitals (which began in Jan-21 and was completed in Dec-22). EBITDA (excl. IFRS 16) was down by 9.2% y-o-y in 4Q22, reflecting the increased operating expenses in line with the expansion of the retail (pharmacy) business and inflation. Consequently, LTM EBITDA (incl. IFRS 16) was down by 1.8% to GEL 105.5 million in 4Q22. Net debt (incl. IFRS 16) was down by 7.9% q-o-q to GEL 145.9 million in 4Q22, reflecting the strong cash flow generation of the business. As a result, the fair value of GCAP's stake in Retail (Pharmacy) amounted to GEL 724.5 million, up by 7.0% q-o-q in 4Q22. The implied LTM EV/EBITDA valuation multiple (incl. IFRS 16) increased to 9.1x as at 31-Dec-22 (up from 8.6x as of 30-Sep-22).

Hospitals (13.5% of total portfolio value) - Hospitals' EV increased by 1.1% to GEL 653.3 million in 4Q22, resulting from the strong outlook of the business, which also reflects the anticipated positive impact from the rollout of a Diagnosis Related Group (DRG) financing system in 4Q22. The DRG system is expected to better reflect inflation and other price pressures that are present in the healthcare sector. See page 16 for details.

Revenue and EBITDA (excl. IFRS 16) were down by 14.9% and 17.2% y-o-y, respectively, in 4Q22, reflecting a) the suspension of COVID contracts by the Government in 1Q22, b) the temporary closure of Iashvili Paediatric Tertiary Referral Hospital due to mandatory renovation works and c) the absence of revenues from the Traumatology Hospital, which was divested in April 2022. This led to a 5.4% decrease in LTM EBITDA (incl. IFRS 16) to GEL 53.6 million in 4Q22. Net debt remained largely flat, up by 2.8% q-o-q to GEL 188.1 million as of 31-Dec-22. As a result, the equity value of the business remained largely flat at GEL 433.2 million in 4Q22, translating into an implied LTM EV/EBITDA multiple (incl. IFRS 16) of 12.2x at 31-Dec-22 (up from 11.4x at 30-Sep-22).

Insurance (P&C and Medical) (8.8% of total portfolio value) - The insurance business combines: a) P&C Insurance valued at GEL 228.0 million and b) Medical Insurance valued at GEL 51.9 million.

P&C Insurance - Net premiums earned increased by 3.6% y-o-y to GEL 25.3 million in 4Q22, mainly reflecting the growth in the credit life, agricultural and border MTPL insurance lines. The combined ratio was up 0.2 ppts y-o-y in 4Q22, reflecting a) a 0.9 ppts increase in expense ratio due to the increase in salaries and other operating expenses in line with the business growth, and b) a 0.6 ppts decrease in loss ratio on the back of the robust revenue growth and reduction in COVID-19-related credit life as well as Agro insurance claims. Consequently, 4Q22 net income was up 11.6% y-o-y to GEL 5.8 million. See page 18 for details. LTM net income[12] was up by 6.2% to GEL 21.2 million in 4Q22. The business paid GEL 7.4 million dividends in 4Q22. As a result, the equity value of the P&C insurance business was assessed at GEL 228.0 million at 31-Dec-22 (up 6.6% q-o-q). The implied LTM P/E valuation multiple remained unchanged q-o-q at 10.7x in 4Q22.

Medical Insurance - Net premium earned increased by 9.1% y-o-y to GEL 20.0 million in 4Q22, reflecting c.5% increase in the prices of insurance policies. The combined ratio was at 100.2% in 4Q22 (down 0.1 ppts y-o-y). Consequently, the net income of the medical insurance business was up by 47.7% y-o-y to GEL 0.9 million in 4Q22. See page 18 for details. LTM net income[13] was up by 7.9% to GEL 3.5 million in 4Q22. As a result, the equity value of the business was assessed at GEL 51.9 million at 31-Dec-22 (up 27.4% q-o-q). The implied LTM P/E valuation multiple adjusted for the excess cash was at 10.6x in 4Q22, up from 8.4x in 3Q22.

Private investment stage portfolio companies (15.7% of total portfolio value) 

Renewable Energy (7.0% of total portfolio value) - EV in US$ terms was up by 5.3% to US$ 154.7 million in 4Q22, reflecting the impact of the upward dynamics in electricity selling prices on our valuations (up 0.3% to GEL 417.9 million in GEL terms, reflecting the local currency appreciation against US$ during the quarter). In US$ terms, 4Q22 revenue and EBITDA were down by 11.1% and 20.5% y-o-y, respectively. This reflects the net impact of a) a 12.5% y-o-y decrease in electricity generation in 4Q22, as two of the power-generating units of Hydrolea HPPs were temporarily taken offline due to planned rehabilitation works, and b) a 1.8% y-o-y increase in the average electricity selling price in 4Q22. Revenue and EBITDA in GEL terms were down by 21.9% and 30.1% y-o-y in 4Q22, respectively. See page 20 for details. The pipeline renewable energy projects continued to be measured at an equity investment cost (GEL 48.1 million in aggregate as at 31-Dec-22). Net debt was down by 16.5% to US$ 71.4 million in 4Q22 (in GEL terms, down by 20.4% to GEL 192.9 million), mainly reflecting a) conversion of US$ 10 million shareholder loan from GCAP into equity in 4Q22, and b) receipt of US$ 2.7 million remaining proceeds from the sale of the Mestiachala 1 HPP. The business paid GEL 2.0 million dividends to GCAP in 4Q22. As a result, the equity value of Renewable Energy was assessed at GEL 225.0 million in 4Q22 (up by 29.2% q-o-q), (up 35.5% q-o-q to US$ 83.3 in US$ terms). The blended EV/EBITDA valuation multiple of the operational assets stood at 11.4x in 4Q22, up from 10.7x in 3Q22.

Education (5.1% of total portfolio value) - EV of Education was up by 12.0% to GEL 218.3 million in 4Q22, reflecting the strong operating performance of the business. Revenue of the business was up by 17.9% y-o-y in 4Q22, reflecting strong intakes and ramp-up of utilization in line with both the organic growth and expansion of the business. The revenue growth also reflects the negative impact of the lower academic days at our premium schools in 4Q22. EBITDA was up by 2.7% y-o-y in 4Q22, further reflecting the increased operating expenses, up by 29.1% y-o-y, in line with the expansion of the business and inflation. In 4Q22, GCAP's investments in the business amounted to GEL 0.8 million. See page 22 for details. Consequently, LTM EBITDA was down by 1.9% to GEL 12.9 million in 4Q22. Net debt was up by GEL 8.9 million to GEL 16.3 million in 4Q22, reflecting cash outflows for the development of the premises of our mid-scale and premium schools. As a result, GCAP's stake in the education business was valued at GEL 164.2 million in 4Q22 (up 0.5% q-o-q). This translated into the implied valuation multiple of 16.9x in 4Q22 (up from 14.8x in 3Q22), which also reflects increased EV due to the first-time valuation of the recently acquired/launched schools in the affordable segment, which were previously valued at cost (additional EBITDA is expected to derive in the 2023-2024 academic year, as the utilisation rate picks up gradually). The forward-looking implied valuation multiple is estimated at 11.2x for the 2023-2024 academic year.

Clinics and Diagnostics (3.5% of total portfolio value) - The EV of the business decreased by 2.2% to GEL 179.9 million in 4Q22. Similar to the hospitals business, our clinics business was also impacted by the suspension of COVID contracts by the Government, which led to a 19.3% y-o-y decrease in revenues in 4Q22. The revenue of our diagnostics business, which apart from regular lab tests was actively engaged in COVID-19 testing, was impacted by substantially lower COVID cases and was down by 49.6% y-o-y in 4Q22. Consequently, the combined 4Q22 revenue of the clinics and diagnostics business was down by 30.2% y-o-y leading to a 74.0% y-o-y decrease in 4Q22 EBITDA (excl. IFRS 16). See page 23 for details. LTM EBITDA (incl. IFRS 16) of the business was down by 24.8% to GEL 10.9 million in 4Q22. As a result, the equity value of the business was assessed at GEL 112.2 million, down 4.1% q-o-q in 4Q22, translating into an implied LTM EV/EBITDA multiple (incl. IFRS 16) of 16.5x at 31-Dec-22, up from 12.7x at 30-Sep-22.

Other businesses (8.6% of total portfolio value) - The "other" private portfolio (Auto Service, Beverages, Housing Development and Hospitality businesses) is valued based on LTM EV/EBITDA except for the housing development (DCF), wine business (DCF) and hospitality businesses (NAV). See performance highlights of other businesses on page 25. The portfolio had a combined value of GEL 274.1 million at 31-Dec-22, down by 4.5% q-o-q, mainly reflecting the decrease in the value of the real estate businesses due to the negative carry on the investments in the businesses. This was partially offset by a) GEL 13.8 million value creation across our beverages and auto services businesses, and b) GEL 10.8 million investment in Housing Development for the bridge financing of the business.

Listed and observable portfolio companies (30.8% of total portfolio value)

BOG (26.0% of total portfolio value) - In 4Q22, BoG delivered an annualised ROAE of 33.7% and a 4.3% loan book growth y-o-y (on a constant currency basis, the loan portfolio increased by 12.9% y-o-y). In 4Q22, BoG's share price demonstrated robust recovery and was up by 31.0% q-o-q to GBP 26.05 at 31-Dec-22. This reflects the strong growth in BoG's earnings, supported by the accretive impact from the Bank's share buybacks, the latter leading to an increase in GCAP's holding in BoG to 20.6% at 31-Dec-22 (up from 20.3% at 30-Sep-22). LTM P/E valuation multiple was at 2.8x at 31-Dec-22 (down from 2.9x at 30-Sep-22). The positive impact of BOG's share price performance on our valuations was further supported by GBP's appreciation against GEL by 6.0% in 4Q22. As a result, the market value of our equity stake in BoG increased by 38.8% to GEL 830.5 million in 4Q22. On 16 February 2023, the Bank announced its Board intention to recommend a final dividend for 2022 of GEL 5.80 per ordinary share at the Bank's 2023 Annual General Meeting. This will make a total dividend paid in respect of the Bank's 2022 earnings of GEL 7.65 per share. BoG also announced the new share buyback and cancellation programme of GEL 148 million. BoG's public announcement of their 4Q22 results is available on BoG's website.

Water Utility (4.8% of total portfolio value) - In 4Q22, the fair value of GCAP's 20% holding in the water utility business, where GCAP has a clear exit path through a put and call structure at pre-agreed EBITDA multiples, was up by GEL 2.0 million to GEL 155.0 million. The 4Q22 valuation assessment reflects the application of the put option valuation to the normalised[14] LTM EBITDA of the business as at 31-Dec-22.

2) Investments[15]

In 4Q22, GCAP invested GEL 39.0 million in private portfolio companies.

· GEL 0.8 million was allocated to the education business predominantly for the capacity expansion of the existing campus of Buckswood (mid-scale segment).

· GEL 10.8 million was invested in Housing Development for the bridge financing of the business.

· GEL 27.4 million represents the non-cash conversion of the US$ 10 million shareholder loan to Renewable Energy into equity.

3) Share buybacks

In 4Q22, 587,271 shares with a value of GEL 14.3 million were repurchased for the management trust.

4) Dividends[16]

In 4Q22, Georgia Capital collected GEL 27.4 million regular dividends in aggregate from portfolio companies, of which:

· GEL 18.1 million was collected from BoG,

· GEL 7.4 million from P&C Insurance,

· GEL 2.0 million from Renewable Energy.

FY22 NAV STATEMENT HIGHLIGHTS

NAV per share (GEL) increased by 4.0% in FY22, reflecting a) value creation across our portfolio companies with a 1.2 ppts positive impact, b) share buybacks (+5.0 ppts impact) and c) GEL's appreciation against US$ by 14.6%, resulting in a foreign currency gain of GEL 47.6 million on GCAP net debt (+1.6 ppts impact). The NAV per share increase was partially offset by management platform related costs (-1.4 ppts impact) and net interest expenses (-1.3 ppts impact).

Portfolio overview

The total portfolio value decreased by GEL 417.6 million (11.5%) in FY22.

· The value of the water utility business decreased by GEL 542.0, reflecting the net impact of the disposal of an 80% equity interest in the business and the application of the put option valuation to GCAP's remaining 20% holding in the business, the latter leading to GEL 15.6 million value creation in FY22.

· The value of GCAP's holding in BoG was up by GEL 149.3 million, reflecting the net impact of a GEL 190.2 million value creation and GEL 40.9 million dividend receipt from the Bank in FY22.

· The value of the private portfolio decreased by GEL 24.9 million in FY22.

1) Value creation

Total portfolio value creation amounted to GEL 34.1 million in FY22.

· A 56.2% increase in BoG's share price was partially offset by GEL's 28.1% appreciation against GBP in FY22, resulting in a GEL 190.2 million value creation.

· GEL 15.6 million value was created at our water utility business in FY22, reflecting the strong operating performance and the application of the put option valuation to GCAP's 20% holding.

· The negative value creation across our private portfolio amounted to GEL 171.7 million, resulting from a) GEL 316.2 million operating performance related value reduction and b) GEL 144.5 million value creation due to GEL's appreciation against foreign currencies and changes in valuation multiples in FY22.

a) Operating performance related value decrease reflects the dampening effect of the gradual organic return to a pre-pandemic environment for our Hospitals and Clinics and Diagnostics businesses as described earlier in this report and the spillover effect of the Russia-Ukraine war on our wine (c.60% sales exposure to Russia and Ukraine in 2021) and real estate businesses (significant growth in construction materials costs).

b) The value creation due to changes in valuation multiples and FX reflects the strong outlook of our private portfolio companies, supported by the resilience of the Georgian economy, notwithstanding the continued uncertainties surrounding the regional geopolitical tensions, the latter leading to approximately 2.0-3.0 ppts increase in discount rates and the reduction of listed peer multiples in FY22.

The table below summarises value creation drivers in our businesses in FY22:

The enterprise value and equity value development of our businesses in FY22 are summarised in the following table:

2) Investments[22]

In FY22, GCAP's cash investments amounted to GEL 53.4 million, of which:

· GEL 6.3 million was invested in the education business, in line with GCAP's capital allocation outlook.

· GEL 19.2 million was allocated to Housing Development for the bridge financing of business.

· GEL 27.4 million represents the conversion of the US$ 10 million shareholder loan to Renewable Energy into equity.

The investments presented in the FY22 NAV statement also reflect the following non-cash operations: a) the transfer of the remaining 20% equity interest in the water utility business to the listed and observable portfolio (GEL 139.4 million), and b) the conversion of loans issued predominantly to our beverages and real estate businesses into equity (GEL 142.6 million).

3) Share buybacks

During FY22, 3,442,863 shares were bought back for a total consideration of GEL 83.1 million.

· 1,190,522 shares were repurchased for the management trust.

· 2,252,341 shares were repurchased under the US$ 25 million share buyback and cancellation programme. The total value of shares repurchased under the programme amounted to GEL 54.3 million (US$ 18.1 million) in FY22.

Since the commencement of the buyback programme in August 2021, 3,075,923 shares (6.4% of issued capital) have been repurchased and cancelled. The total value of shares amounted to GEL 76.2 million (US$ 25.0 million).

4) Dividends[23]

In FY22, Georgia Capital collected GEL 93.9 million dividends in aggregate from the portfolio companies, of which:

· GEL 40.9 million was received from BoG,

· GEL 16.0 million from Retail (Pharmacy),

· GEL 13.0 million from Hospitals,

· GEL 14.7 million from P&C Insurance,

· GEL 8.2 million from Renewable Energy,

· GEL 1.0 million from Medical Insurance.

Net Capital Commitment (NCC) overview

Below we describe the components of Net Capital Commitment (NCC) as of 31 December 2022 and as of 30 September 2022. NCC represents an aggregated view of all confirmed, agreed and expected capital outflows at the GCAP HoldCo level.

Cash and liquid funds. Total cash and liquid funds' balance was up by 8.5% q-o-q to GEL 411.8 million (US$ 152.4 million) in 4Q22. This reflects the repayment of the US$ 80 million shareholder loan provided to the renewable energy business (GEL 222.9 million), and dividend and interest receipts of GEL 27.4 and GEL 7.3 million, respectively, in 4Q22. The increase was partially offset by a) the repurchase and cancellation of US$ 65 million GCAP Eurobonds following the Modified Dutch Auction ("MDA") (GEL 180.4 million), b) GEL 14.3 million cash outflow for buybacks, c) GEL 11.6 million capital allocations, d) GEL 6.9 million cash operating expenses and e) GEL 7.4 million impact due to GEL's appreciation in 4Q22, as more than 90% of the cash and liquid funds were denominated in foreign currencies.

Internationally listed debt securities balance includes dollar-denominated Eurobonds issued by Georgian corporates to generate yield on GCAP's liquid funds. As at 31-Dec-22, the balance amounted to GEL 173.4 million, of which GEL 138.5 million (US$ 51.3 million) was allocated to GCAP's Eurobond.

In FY22, total cash and liquid funds' balance was up 51.2%, reflecting a) the receipt of GEL 526.7 million (US$ 173 million) cash proceeds (net of transaction fees) from the disposal of an 80% equity interest in the water utility business, b) dividend and interest receipts of GEL 93.9 million and GEL 27.5 million, respectively. The increase was partially offset by a) GEL 180.4 million cash outflow for the cancellation of US$ 65.0 million GCAP Eurobonds, b) GEL 89.2 million cash outflow for buybacks, c) GEL 70.0 million coupon payment and d) GEL 54.0 million capital allocations.

Loans issued. Issued loans' balance primarily refers to loans issued to our private portfolio companies and are lent at market terms. The balance was down by 89.4% to GEL 26.8 million in 4Q22, mainly reflecting the repayment of an US$ 80 million shareholder loan provided to the renewable energy business in 3Q22 to redeem the renewable energy business's portion of GGU's US$ 250.0 million Green Eurobond.

Gross debt. Following the repurchase through the modified Dutch auction, in 4Q22 GCAP cancelled US$ 65.0 million Eurobonds reducing the outstanding amount of six-year Eurobonds due in March 2024 to US$ 300 million (down 17.8% q-o-q). In GEL terms, the outstanding balance of the gross debt was at GEL 819.6 million as of 31-Dec-22, down by 20.4% q-o-q (down by 28.0% y-o-y in GEL terms), further reflecting the GEL's appreciation against US$.

Guarantees issued. The balance reflects GCAP's guarantee on the borrowing of the beer business. In EUR terms, the balance remained unchanged over the quarter. In FY22, GCAP's guarantee decreased by EUR 9.4 million due to the reduction of the amount of the guarantee agreed with the lenders following the strong operating performance of the business.

Planned investments. Planned investments' balance represents expected investments in renewable energy and education businesses over the next 2-3 years. The balance was down by 5.2% due to the investments in the businesses in 4Q22 as well as GEL's appreciation against US$ during the quarter.

Announced buybacks. The decrease in the announced buybacks compared to the 31-Dec-21 balance reflects the completion of the US$ 25 million share buyback and cancellation programme, as described on page 10.

Contingency/liquidity buffer. The balance reflects the cash and liquid assets in the amount of US$ 50 million, held by GCAP at all times, for contingency/liquidity purposes. The balance remained unchanged in US$ terms as at 31-Dec-22.

As a result of the movements described above, NCC was down by 4.1% q-o-q to GEL 675.9 million (US$ 250.1 million), translating into a 21.1% NCC ratio as at 31-Dec-22 (down by 3.3 ppts q-o-q and by 10.8 ppts y-o-y).

INCOME STATEMENT (ADJUSTED IFRS / APM)

Net income under IFRS was GEL 332.4 million in 4Q22 (GEL 133.2 million net income in 4Q21). Net loss was GEL 12.2 million in FY22 (GEL 692.9 million net income in FY21). The IFRS income statement is prepared on the Georgia Capital PLC level and the results of all operations of the Georgian holding company JSC Georgia Capital are presented as one line item. As we conduct almost all of our operations through JSC Georgia Capital, through which we hold all of our portfolio companies, the IFRS results provide little transparency on the underlying trends.

Accordingly, to enable a more granular analysis of those trends, the following adjusted income statement presents the Group's results of operations for the period ending December 31 as an aggregation of (i) the results of GCAP (the two holding companies Georgia Capital PLC and JSC Georgia Capital, taken together) and (ii) the fair value change in the value of portfolio companies during the reporting period. For details on the methodology underlying the preparation of the adjusted income statement, please refer to page 98 in Georgia Capital PLC 2021 Annual report. A full reconciliation of the adjusted income statement to the IFRS income statement is provided on page 27.

INCOME STATEMENT (Adjusted IFRS/APM)

Gross operating income of GEL 29.0 million in 4Q22 reflects a) a 6.2% increase in interest income, b) GEL 10.4 million realised and unrealised gain on the liquid funds held by GCAP (reflecting GEL 9.9 million gain on GCAP Eurobond repurchases), c) 23.7% decrease in interest expense reflecting both US$ 65.0 million GCAP Eurobonds cancellation and appreciation of GEL against US$ and d) an 8.3% y-o-y decrease in the dividend income in 4Q22.

Gross operating income of GEL 54.3 million in FY22 reflects increased dividend and interest income, up by 26.2% and 42.4% y-o-y, respectively, slightly offset by GEL 2.7 million realised and unrealised loss on liquid funds (also reflecting GEL 9.9 million gain on GCAP Eurobond repurchases). The increase in gross operating income was further supported by a 9.8% y-o-y decrease in interest expense in FY22. 

GCAP earned an average yield of 3.4% on the average balance of liquid assets of GEL 411.1 million in FY22 (3.7% on GEL 240.0 million in FY21).

The components of GCAP's operating expenses are shown in the table below.

GCAP Operating Expenses Components

GCAP management fee expenses have a self-targeted cap of 2% of Georgia Capital's market capitalisation. The LTM management fee expense ratio was 2.69% at 31-Dec-22 (1.70%[31] as of 31-Dec-21). The total LTM operating expense ratio (which includes fund type expenses) was 3.76% at 31-Dec-22 (2.60%31 at 31-Dec-21).

Total investment return represents the increase (decrease) in the fair value of our portfolio. Total investment return was GEL 302.0 million in 4Q22, reflecting the growth in the value of our listed and observable and private portfolio businesses. In FY22, total investment return was negative GEL 59.8 million, mainly reflecting the decrease in the value of the private businesses, as described earlier in this report. We discuss valuation drivers for our businesses on pages 5-8. The performance of each of our private large and investment stage portfolio companies is discussed on pages 14-24.

GCAP's net foreign currency liability balance amounted to c.US$ 147 million (GEL 397 million) at 31-Dec-22. Net foreign currency gain was GEL 21.0 million in 4Q22 and GEL 47.6 million in FY22. As a result of the movements described above, GCAP's adjusted IFRS net income was GEL 341.1 million in 4Q22 and GEL 1.5 million in FY22.

DISCUSSION OF PORTFOLIO COMPANIES' RESULTS (STAND-ALONE IFRS)

The following sections present the IFRS results and business development extracted from the individual portfolio company's IFRS accounts for large and investment stage entities, where the 2022 portfolio company's accounts and respective IFRS numbers are unaudited. We present key IFRS financial highlights, operating metrics and ratios along with commentary explaining the developments behind the numbers. For the majority of our portfolio companies the fair value of our equity investment is determined by the application of an income approach (DCF) and a market approach (listed peer multiples and precedent transactions). Under the discounted cash flow (DCF) valuation method, fair value is estimated by deriving the present value of the business using reasonable assumptions of expected future cash flows and the terminal value, and the appropriate risk-adjusted discount rate that quantifies the risk inherent to the business. Under the market approach, listed peer group earnings multiples are applied to the trailing twelve months (LTM) stand-alone IFRS earnings of the relevant business. As such, the stand-alone IFRS results and developments driving the IFRS earnings of our portfolio companies are key drivers of their valuations within GCAP's financial statements. See "Basis of Presentation" on page 37 for more background.

LARGE PORTFOLIO COMPANIES

Discussion of Retail (pharmacy) Business Results

The retail (pharmacy) business, where GCAP owns a 77% equity interest[32], is the largest pharmaceuticals retailer and wholesaler in Georgia, with a 35% market share by revenue. The business consists of a retail pharmacy chain and a wholesale business that sells pharmaceuticals and medical supplies to hospitals and other pharmacies. The business operates a total of 372 pharmacies (of which 362 are in Georgia and 10 are in Armenia) and 12 franchise stores.

4Q22 & FY22 performance (GEL '000), Retail (pharmacy)[33]