Georgia Capital Regulatory News (CGEO)

Georgia Capital PLC

Half-year 2019 results

Name of authorised official of issuer responsible for making notification:

Nino Rekhviashvili, Head of Investor Relations and Funding

www.georgiacapital.ge

For an user-friendly copy of this announcement, please click on the link below to open a PDF version:

http://www.rns-pdf.londonstockexchange.com/rns/1100J_1-2019-8-14.pdf

About Georgia Capital PLC

Georgia Capital PLC ("Georgia Capital" or "the Group" - LSE: CGEO LN) is a platform for buying, building and developing businesses in Georgia. The Group's primary business is to develop or buy businesses, help them institutionalize their management and grow them into mature businesses that can further develop largely on their own, either with continued oversight or independently. The Group's focus is typically on smaller or early stage businesses in sectors capable of rapid development and consolidation, but we also consider more developed sectors, where a strong market position can be achieved through an acquisition or larger greenfield project. Once we have successfully developed a business, we actively manage our portfolio to determine each company's optimal owner. Georgia Capital will normally seek to monetise its investment either through initial public offering, trade sale, fund structure or promoting interest over a 5-10 year period from initial investment.

Georgia Capital currently has six private company holdings: (i) a water utility business (GGU), (ii) a renewable energy business (GGU); (iii) a housing development business (m2) (iv) a hospitality and commercial real estate business (m2); (v) a property and casualty insurance business (Aldagi) and (vi) a beverages business (Georgia Beverages). We also have two public company holdings (London Stock Exchange premium-listed Georgian companies): (i) Georgia Healthcare Group PLC ("GHG"), (57% equity stake), a UK incorporated holding company of the largest healthcare services provider in Georgia, which is also the largest pharmaceuticals retailer and wholesaler in the country; and (ii) Bank of Georgia Group PLC ("BoG"), (19.9% equity stake), a leading universal bank in Georgia. Additionally, Georgia Capital has three businesses in the pipeline: Education, Auto Service and Digital Services.

Georgia Capital aspires to deliver total shareholder returns of 10-times over 10-years[1]

10x = 10y

Content

Georgia Capital PLC announces the Group's first half 2019 financial results. Throughout this document, "Georgia Capital" and the "Group" refer to Georgia Capital PLC and its portfolio companies as a whole, while "GCAP" refers to the aggregation of stand-alone Georgia Capital PLC and stand-alone JSC Georgia Capital accounts[2]. This announcement contains financial results presented on two different bases: under International Financial Reporting Standards ("IFRS") as adopted by the European Union and under an adjusted IFRS methodology[3]. The financial results are unaudited and derived from management accounts.

An investor/analyst conference call, organised by the Group, will be held on 15 August 2019, at 15:00 UK / 16:00 CET / 10:00 U.S Eastern Time. The duration of the call will be 60 minutes and will consist of a 20-minute update and a 40-minute Q&A session.

FORWARD LOOKING STATEMENTS

This announcement contains forward-looking statements, including, but not limited to, statements concerning expectations, projections, objectives, targets, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, competitive strengths and weaknesses, plans or goals relating to financial position and future operations and development. Although Georgia Capital PLC believes that the expectations and opinions reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations and opinions will prove to have been correct. By their nature, these forward-looking statements are subject to a number of known and unknown risks, uncertainties and contingencies, and actual results and events could differ materially from those currently being anticipated as reflected in such statements. Important factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements, certain of which are beyond our control, include, among other things: currency fluctuations, including depreciation of the Georgian Lari, and macroeconomic risk; regional instability; regulatory risk across a wide range of industries; portfolio company strategic and execution risks; investment risk and liquidity risk and other key factors that could adversely affect our business and financial performance, which are contained elsewhere in this document and in our past and future filings and reports and also the 'Principal Risks and Uncertainties' included in this document and in Georgia Capital PLC's Annual Report and Accounts 2018. No part of this document constitutes, or shall be taken to constitute, an invitation or inducement to invest in Georgia Capital PLC or any other entity, and must not be relied upon in any way in connection with any investment decision. Georgia Capital PLC and other entities undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent legally required. Nothing in this document should be construed as a profit forecast.

 GEORGIA CAPITAL HIGHLIGHTS - MANAGEMENT ACCOUNTS[4] (GEL'000) (except per share information)

KEY POINTS 

Ø NAV per share up 21.6% to GEL 53.9 on the back of GEL 347 million value creation and decrease in number of shares outstanding by 2.1 million shares

o Listed assets contributed GEL 246 million to value creation, while private assets contributed GEL 101 million

o GEL 60 million share buybacks, while 2 million were cancelled and 0.7 million transferred to management trust in 1H19

Ø GEL 44 million capital allocated across early stage and pipeline portfolio businesses in 1H19

o Acquired an 80% stake in the second largest auto service industry player, Amboli

o Entered the high growth digital services industry by acquiring a 60% stake in the leading digital marketing agency, Redberry

o The beer business acquired the fifth largest Georgian beverages brand, Kazbegi, with 5% market share

Ø Since 30 June 2019, invested GEL 41 million to secure high quality partnerships with three top schools across premium, mid-level and affordable private education segments with an aim to grow the existing capacity from 2,530 to 11,750 learners by 2024

Ø GEL 556 million firepower available for deployment at 30 June 2019 subject to rigorous 360-degree analysis

PERFORMANCE HIGHLIGHTS - IFRS (GEL'000)

KEY POINTS 

Ø Consolidated cash flow from operating activities up 52.9% y-o-y in 1H19 due to strong performance across all businesses

Ø The beer business reached a significant milestone and successfully launched five new brands, including Amstel and Heineken. As a result, EBITDA was at break-even level in June 2019, while EBITDA was positive at GEL 0.6 million in July 2019

Ø 50MW Mestiachala hydro power plant, launched towards the end of 1H19, generated GEL 2 million EBITDA in 1H19

Ø Construction permit obtained and works commenced on the largest ever affordable housing project, Digomi, in July 2019

Ø GEL 8 million revaluation gain was recorded in the hospitality business on Kempinski hotel

Ø Fulfilled all privatisation conditions and subsequently obtained clean title over Water Utility shares

Ø Periodic technical inspection business, fully launched in March 2019, serviced 140,338 cars in 1H19

o PTI generated GEL 0.5 million and GEL 0.6 million monthly EBITDA in June and July 2019, respectively

CHAIRMAN AND CEO'S STATEMENT

Georgia Capital has delivered an excellent performance in the first half of 2019, as our NAV per share increased by 21.6% to GEL 54 at 30 June 2019. This strong growth was a result of a 14.8% increase in NAV to GEL 1.9 billion and a 5.6% reduction in outstanding shares during 1H19. The NAV growth reflects GEL 347 million value creation across the portfolio businesses, where GEL 246 million value was generated by the listed portfolio businesses and GEL 101 million value was provided by our private portfolio businesses. The decrease in share count was driven by our share buyback programme and the subsequent cancellation of 2 million Georgia Capital shares and transfer of 0.7 million shares to the management trust. At 30 June 2019, our firepower available for deployment remained high at GEL 556 million.

During 1H19, we recorded GEL 37 million dividend inflows from our portfolio businesses, while interest income and gains on liquid funds exceeded interest expense for the first time at the GCAP level. Operating expenses were contained at our targeted 2% level of market capitalisation at 30 June 2019, while the 7.2% devaluation in the Georgian Lari during the half was the driver of the GEL 26 million foreign currency loss. As a result, our net income was GEL 306 million during the first six months of 2019.

Listed businesses

Our listed businesses performed well in 1H19 and generated GEL 246 million value. GHG led the value creation with GEL 145 million contribution on the back of its share price recovery, driven by a strong operating performance and declaration of first-time ever dividends. At the same time, we recorded GEL 101 million value creation from our 19.9% investment in Bank of Georgia, where GEL 76 million came from share price appreciation and GEL 25 million from dividend inflows. Bank of Georgia strengthened its executive management team during 1H19 and improved its already strong capital position with the issuance of the first-ever US$100 million Additional Tier 1 capital bonds from Georgia.

Private businesses

Our private businesses delivered a strong GEL 101 million value creation in 1H19 driven by continued growth in operating performance, enhancement of multiples and the first-time valuation of greenfield projects.

Across our late stage portfolio, Water Utility and P&C Insurance were major drivers of value creation. Together they generated GEL 68 million value in 1H19, as Water Utility benefited from a remarkable 75% y-o-y increase in electricity sales revenues during the first six months, while a significant multiple enhancement across P&C Insurance peers resulted in GEL 31 million valuation uplift for our P&C insurance business.

The past six months have been busy within our early stage portfolio, with the businesses progressing well towards their established goals. Renewable Energy commissioned its first 50MW hydro power plant, although we are sad to report that the plant was damaged during flooding in July, which will take us some time to repair (we expect insurance recoveries to substantially compensate our loss). The hospitality business partnered with Kempinski to manage the only luxury hotel in its portfolio following the buyout of a minority shareholder. As a result, the hotel was revalued, creating GEL 5 million value for the Group. The beer business launched four new brands in 1H19 while integrating the production and sales of the prominent beverages brand, Kazbegi, following its acquisition in March. This has been followed by the launch of Heineken in July 2019. Due to the launch of new products and strong sales, the brewery has been operating at full capacity in the months of June and July. It was pleasing to see all early stage portfolio businesses demonstrating high double-digit revenue growth in 1H19, led by the wine business with outstanding 75% topline growth.

Within the pipeline portfolio, we launched the periodic vehicle inspection (PTI) business in March 2019. PTI demonstrated outstanding performance in line with the budget, which led to GEL 15 million value creation at 30 June 2019. In June the PTI business reached 35% market share and generated monthly EBITDA of GEL 0.5 million with a 36% EBITDA margin.

Capital allocations

We allocated GEL 44 million capital to existing and new portfolio businesses in 1H19, of which GEL 20 million was used for bolt-on acquisitions, GEL 23 million was invested in pipeline businesses across Education, Auto Service and Digital Services and GEL 1 million was allocated to the evaluation of new investment opportunities. Since 30 June 2019 we have earmarked a further GEL 41 million capital to the education business. In line with our 360-degree analysis, we took advantage of Georgia Capital's attractive share price and spent GEL 60 million on buybacks in 1H19. Following the completion of the US$ 45 million share buyback programme, where we have already spent US$ 43.8 million, we will be cancelling all remaining shares in treasury (currently 553,375 shares). In addition, we have announced a US$ 20 million share purchase programme for the management trust.

We allocated GEL 10 million to the auto service business in 1H19, where we acquired an 80% equity stake in the second largest auto service industry player, Amboli, for GEL 3.4 million. Auto services represents an attractive GEL 1.8 billion market dominated by one large player, where we target to be present throughout the full ecosystem: auto service & parts, PTI, auto trading and auto insurance.

We expanded into the high growth digital services business in 1H19 by allocating GEL 9 million capital to acquire a 60% equity stake in Redberry. Redberry works with Georgian corporates to help them build digital sales platforms and also plans to make small bets to launch its own digital businesses.

We have been very active in the high-margin, large and growing, but fragmented private education market, where we have acquired majority equity stakes at three leading schools in the country across the premium, mid-level and affordable education segments for GEL 41 million. We will be providing equity capital totaling GEL 73 million spread over these three segments to support their expansions and learner capacity growth. Through these carefully selected three partnerships, we now have a clear pathway to 11,750 learners and to more than 50% of our targeted GEL 70 million EBITDA by 2025.

Macroeconomic environment

Estimated GDP growth was 4.9% in 1H19, which demonstrates that Georgia' economic fundamentals remain strong, backed by improved net export and fiscal stimulus. Declining pressure on imported goods resulted in the current account deficit shrinking significantly from 11.9% of GDP in 1Q18 to 6.2% of GDP in 1Q19. Tourism inflows are expected to remain strong despite a ban on direct flights from Russia, however, negative sentiment led to the Georgian Lari's recent depreciation, which in our view is not driven by fundamental macro factors. The Lari started to rebound after it recorded an all-time low against US$ at 2.95. NBG, a buyer of US$ during 1H19, accumulated record high reserves of US$ 3.7 billion as of 30 June 2019. Based on the preliminary data in the first seven months of 2019 trade deficit narrowed by 14% y-o-y to US$ (2.9) billion from US$ (3.3) billion, further alleviating the pressure on Lari.

Outlook

Our outlook for 2H19 performance and beyond remains robust. Over the last few quarters we have laid strong foundations for significant value creation across all our private businesses, which we expect to be reflected within our NAV over the next 12 to 24 months. We believe that organic growth and operating performance improvements in our late stage portfolio businesses will continue to deliver value for the Group. At the same time, we expect our investments across our early stage and pipeline businesses to start bearing fruit as we complete construction of pipeline hotels, hydro power plants and wind power plants, expand our wine business, benefit from our beer business' turnaround path, scale up and expand recently acquired top class schools, auto service business and high-growth digital services.

Georgia has progressed enormously well over the last two decades and we believe that the rapid development of its democratic institutions and economy achieved so far are irreversible and that progress will continue. This is expected to have positive impact on Georgia Capital's businesses and support its business model and growth for the years to come. This was very clear at our recent investor day that we hosted in Tbilisi, where many of you had a chance to see the depth of our management talent and see a number of our businesses in person. We were pleased to see strong engagement from participants as we continue to build out top class institutions in Georgia. Reshaping part of our investor base, inherited from our former parent company, continues well and we look forward to working with our existing loyal and new long-term shareholders on our journey to our 10x =10y aspiration.

Irakli Gilauri

Chairman and CEO

14 August 2019

DISCUSSION OF RESULTS

Management Accounts

Management monitors the Group's performance on a regular basis based on developments in a management Net Asset Value (NAV) statement and a management income statement, both prepared under the adjusted IFRS methodologies. The management accounts are an alternative performance measure ("APM"); they have not been audited or reviewed. A reconciliation of our management accounts to the IFRS statements is provided on page 21.

Net Asset Value (NAV) Statement

NAV statement breaks down NAV into its components and provides roll forward of the related changes between the reporting periods, including a snapshot of the Group's financial position at any given time. For detailed valuation methodology of the investments and the methodology underling the presentation of the NAV statement please refer to the Georgia Capital PLC's 2018 Annual Report and Accounts on pages 82-90.

NAV STATEMENT

NAV per share increased by 21.6% from 31 December 2018 to 30 June 2019 on the back of 14.8% growth in NAV and a 5.6% decrease in the number of shares outstanding. NAV increased due to a GEL 347 million value creation[12], which led to 20.5% growth of NAV. Listed assets contributed 14.5% to NAV growth with GEL 246 million value creation from a recovery in the share prices of our investments in GHG and BoG. The private portfolio businesses generated GEL 101 million value for the Group in 1H19, thereby contributing 6.0% to NAV growth, as a result of their strong operating performances together with valuations that were overall positively affected by favourable movements across the peer group multiples.

The 20.5% positive NAV impact from value creation was partially offset by the GEL 108 million increase in Net Debt, which reduced the NAV growth by 5.7%. The Net Debt increase was driven primarily by GEL 60 million share buybacks. As of 30 June 2019, 2,890,643 shares were bought back for US$ 39.4 million since the launch of the share buyback programme. Net Debt was further affected by net GEL 10 million capital allocations, as GEL 44 million was invested across private early stage and pipeline businesses, while GEL 33 million dividends were collected from BoG and P&C Insurance (GHG dividends were recorded as income in 1H19, but were collected in July 2019). GCAP cash operating expenses of GEL 9.6 million and foreign exchange loss of GEL 26 million also contributed to the widening of Net Debt and, as a result, drove 2.3% decrease in NAV during 1H19.

The number of outstanding shares decreased during 1H19, as Georgia Capital cancelled 2,000,000 shares bought back under the on-going US$ 45 million share buyback programme and transferred 686,468 shares from treasury to the management trust in June 2019. The number of outstanding shares were further impacted by 656,026 million share compensation awards in respect of FY18 annual performance. The cancellation and transfer together with the awards, resulted in 6.8% increase in NAV per share on top of the 14.8% NAV growth.

1) Listed businesses

The listed assets contributed 14.5% to NAV growth with GEL 246 million value creation in 1H19. This reflects GEL 217 million market value increase in BoG and GHG share prices, while the GEL 29 million represents dividend accruals on our BoG and GHG investments.

GHG continued to deliver a strong operating performance in 1H19 with EBITDA increasing 19.4%[13] y-o-y in 1H19. Strong cash flow generation during 2018 enabled GHG to declare dividends in respect of 2018 year, which had a record date of 28 June 2019. The Group received a GEL 4.0 million dividend payment from GHG on 12 July 2019. GHG's share price increased by 19% to GBP 2.42 during 1H19 resulting in a GEL 141 million return for the Group. As a result, the Group recorded total GEL 145 million value creation from its 57% holding in GHG in 1H19. GHG's public announcement on 1H19 performance is available at http://ghg.com.ge/financial-results.

BOG's share price recovered during 1H19 by 9% to GBP 14.98 at 30 June 2019 leading to GEL 76 million increase in the market value of the Group's equity stake in BOG. In June 2019, we received GEL 25.0 million dividend payment from BoG. As a result, aggregate value creation from BoG investment was GEL 101 million in 1H19. BoG's public announcement on 1H19 performance is available at https://bankofgeorgiagroup.com/results/earnings.

2) Private businesses

The table below summarizes valuation of our holdings in private portfolio companies as at 30 June 2019:

The value of private portfolio companies increased by 15.2% in 1H19 to GEL 1 billion at 30 June 2019. The increase reflects GEL 36 million net capital allocation from Georgia Capital, while the businesses delivered GEL 101 million value creation in 1H19, adding 6.0% to NAV growth. Value creation was driven by strong operating performance across the late stage portfolio (GEL 25 million); first-time valuation of the greenfield projects (GEL 20 million) and enhancement of multiples across the peer companies (GEL 46 million). The table below summarises value creation drivers in private businesses in 1H19:

Late stage businesses

The 3.8% increase in Water Utility's LTM EBITDA created approximately GEL 28 million value, which was partially offset by GEL 15 million net debt widening. The resulting GEL 13 million value creation from operating performance was further supported by GEL 16 million uplift due to multiple enhancement from 8.8 to 9.0. As a result, the water utility business generated GEL 29 million value for the Group in 1H19.

Housing Development is valued at GEL 61 million using discounted cash flow method. Following the receipt of a construction permit for its largest residential project, Digomi, together with higher than projected sales prices, expected cash inflows were increased leading to a GEL 12 million value creation. Digomi project construction works commenced on 1 July 2019. During the first half of 2019, the business distributed GEL 18 million in-kind dividend, representing commercial spaces (ground floors) in the completed residential projects, which was then allocated to the hospitality & commercial real estate business. As a result, Housing Development's valuation decreased by GEL 6 million to GEL 61 million at 30 June 2019.

P&C Insurance's LTM net income adjusted for non-recurring items remained flat at GEL 17.7 million, while the multiple increase from 7.4 to 9.1 generated GEL 31 million in value. Multiples improved significantly across all peer group companies. P&C Insurance paid a dividend of GEL 8 million in 1H19 on the back of strong cash flow generation and stable operating performance. As a result, GEL 39 million value was created in 1H19, leading to a GEL 31 million net increase in valuation after dividends to GEL 161 million as of 30 June 2019.

Early stage businesses

The renewable energy business has successfully commissioned its first hydro power plant in 1H19, which is still carried at cost in the NAV statement. The business has already generated GEL 2.0 million EBITDA from its 50MW Mestiachala HPPs since the launch in April 2019. Value creation is expected to be reflected in the NAV statement over the coming quarters, as the hydro demonstrates stabilised performance following recovery from the flood damage discussed on page 17. The increase of GEL 1.6 million in Renewable Energy value reflects capital allocations from Georgia Capital in 1H19 for the development of wind power plants.

The NAV valuation of Hospitality & Commercial Real Estate increased through a GEL 26 million capital allocation and GEL 7 million value creation during 1H19. The business received an in-kind dividend of GEL 18 million in finished commercial properties from Housing Development, while GEL 8 million of cash capital was allocated from Georgia Capital for development of existing and pipeline hotels. The business also created GEL 7.1 million value on the back of operating performance (GEL 2.3 million) and a hotel project revaluation (GEL 4.8 million). In February 2019 the business bought for US$ 5.2 million the 40% equity stake it did not own in a luxury hotel project in Tbilisi. The hotel, which is currently under construction, is located on a hill near the center with views of the city. In May 2019, the business signed a management agreement with the luxury hotels management group Kempinski Hotels S.A. pursuant to which Kempinski will manage the hotel. The management agreement led to the revaluation. Kempinski will be the only luxury hotel in the hospitality business's hotel portfolio.

The 7.6% increase in the wine business's LTM EBITDA created approximately GEL 1.8 million value, which was further supported by GEL 0.8 million uplift due to a multiple increase from 9.1 to 9.9. As a result, GEL 2.6 million value was created in 1H19 in the legacy Teliani wine business. The Kindzmarauli business is still carried at cost in line with our valuation policy to keep new equity investments at cost during the first 12-24 months following acquisition. We expect to revalue Kindzmarauli in 2H19.

The beer business valuation increased by GEL 6.7 million as a result of the GEL 10 million capital allocation for the acquisition of prominent beverages brand Kazbegi, the fifth largest beer company in Georgia. Beer business performance, however, was negatively affected by delays in launching Heineken brands, and had a negative GEL 2.4 million impact on value creation, which was further affected by a negative GEL 1.8 effect from the multiples change. Operating performance began to improve significantly in June and July, while all Heineken brands have been launched as of today, and the Group expects a positive impact from beer business operating performance in 2H19.

Pipeline businesses

The education business value increased by the GEL 4.1 million capital allocation in 1H19. GEL 1.3 million was allocated for the existing land development and GEL 2.8 million was used to acquire new land for a premium school development;

The auto service business combines vehicle technical inspection business valued at GEL 19 million and the recently acquired second largest auto service industry player Amboli valued at acquisition cost of GEL 5 million, i.e. the auto service business was valued at GEL 24 million at 30 June 2019. Periodic technical inspection became mandatory in Georgia in 2H18 and the business successfully launched 26 PTI centers in March 2019, while managing to generate GEL 0.6 million EBITDA in 1H19. At 30 June 2019, the periodic technical inspection business was valued using next twelve months (NTM) EBITDA earnings of GEL 6.7 million and an EV/EBITDA multiple of 10.1, resulting in a valuation of GEL 19.4 million. As the greenfield business has demonstrated strong performance in line with the budget, a GEL 15.6 million value was created from the revaluation in 1H19. In addition, GEL 3.4 million was used to acquire an 80% equity stake in Amboli in 1H19 and GEL 1.6 million was an additional pro-rata equity capital injection into Amboli to fund the growth of the business.

The digital services business is carried at GEL 8.8 million cost at 30 June 2019. We allocated GEL 1.2 million to the acquisition of Redberry, the leading Georgian digital marketing agency, while GEL 7.6 million was an additional equity capital injection to fund the business growth.

We allocated GEL 1.4 million capital to the research and evaluation of new investment opportunities during 1H19, driving the total cost of other pipeline projects to GEL 1.6 million at 30 June 2019.

3) Net Debt

Cash and liquid funds. In line with its risk management practices, the Group actively monitors the allocation of its liquid resources and its commitment to maintain at least US$ 50 million liquid funds. At 30 June 2019, cash and liquid funds were allocated as follows:

Internationally listed debt securities include Eurobonds issued by Georgian corporates (GEL 144 million) and sovereign Georgian Eurobonds (GEL 34 million). Locally listed debt securities are local bonds issued by Georgian corporates, which are listed and traded on the Georgian Stock Exchange.

Loans issued. At 30 June 2019, loans issued primarily refer to three facilities: (i) a GEL 49.5 million (US$ 17.3 million) to the housing development business (ii) a GEL 30.1 million (US$ 10.5 million) loan to the hospitality & commercial real estate business for on-going development, construction and growth of the hotel pipeline and (iii) a GEL 143.4 million (US$ 50 million) loan issued to the BoG holding company as part of the demerger, maturing in March 2020. During the 1H19 loans issued to portfolio companies in amount of GEL 91 million were repaid, of which, GEL 75 million (US$ 28 million) was repaid by the hospitality & commercial business. The loans are issued at market terms.

Gross debt. At 30 June 2019 the outstanding balance of US$ 300 million six-year Eurobonds due in March 2024 was GEL 861 million, reflecting foreign exchange loss of GEL 58 million during 1H19. Gross debt balance was further impacted by GEL 25 million coupon accrual (included under Net Interest Income column), which was offset by GEL 26 million coupon payment (included in Liquidity Management column) in March 2019.

Capital allocations and buybacks. The table below summarises capital allocations and buybacks during 1H19:

Georgia Capital recorded GEL 37 million dividends in 1H19, of which, GEL 25.0 million were from BoG, GEL 4 million from GHG[16] and GEL 8 million from P&C insurance. During 1H19, we invested GEL 44.6 million across our portfolio, of which, GEL 20.3 million was invested in early stage portfolio companies and GEL 24.3 million in the pipeline businesses. We also allocated GEL 60 million capital to share buybacks during 1H19. During the first half of 2019, the housing development business re-allocated GEL 18 million capital, which represents commercial spaces (ground floors) in the completed residential projects, to the hospitality & commercial real estate business.

INCOME STATEMENT (MANAGEMENT ACCOUNTS)

In line with the change to disclose private businesses at fair values instead of book values in the NAV statement from FY18 results announcement, Georgia Capital is now, therefore, presenting the performance of each portfolio company in its management income statement on fair value basis. The management P&L is an aggregation of: a) GCAP's stand-alone P&L and b) fair value change in the value of portfolio companies during the reporting period. A comparative period is not presented, as management believes that 1H18 is not directly comparable and its presentation is not useful for users. For details on the methodology underling the preparation of management account income statement, please refer to page 33 in this report.

INCOME STATEMENT

Georgia Capital generated Gross operating income of GEL 38.2 million in 1H19 on the back of strong dividend inflows, as discussed earlier on page 11 in this report. As part of its comprehensive liquidity management, Georgia Capital earned an average yield of 7.6% on the liquid assets and issued loans in 1H19, of which 9.7% was earned on the loans issued and 5.1% on the liquid funds. As a result, GEL 1.3 million of net interest income was generated during 1H19 at GCAP level. The table below summarizes net interest income components for 1H19:

GCAP operating expenses have a targeted cap of 2% of Georgia Capital's market capitalisation. LTM expense ratio was 2% at 30 June 2019. The components of GCAP's operating expenses are presented in the table below:

Total investment return represents increase in the fair value of our portfolio. Total investment return of GEL 310 million and dividend income of GEL 37 million together led to GEL 347 million value creation as presented in the NAV statement. We discuss valuation drivers for each business on pages 9-11 and the performance of private assets is discussed on pages 14-20.

The Group's net income is then driven by net foreign currency loss during 1H19. GCAP incurred a net foreign currency loss of GEL 25.6 million in 1H19 from GEL devaluation against US dollar due to its net foreign currency liability balance amounting to c. US$ 149 million (GEL 428 million) at 30 June 2019, i.e. difference between foreign currency denominated financial assets and financial liabilities. As a result of the movements described above, net income was GEL 306 million in 1H19.

CONSOLIDATED STATEMENT OF CASH FLOWS (IFRS)

Cash flows from operating activities. As a result of strong operating performance across all businesses, the Group's consolidated cash flows from operating activities increased significantly by 52.9% y-o-y in 1H19. The increase was mainly driven by a) double-digit growth in the healthcare and pharmacy business operating cash flows, contributing GEL 21 million to the overall growth, b) the water utility business cash flow from operating activities was up 85% y-o-y in 1H19 and drove GEL 14 million growth for the Group, c) on the back of organic business growth and efficient liquidity management, P&C Insurance contributed GEL 5 million to the increased operating cash flows, d) recently launched PTI business added GEL 2 million to operating cash flows within its first three months of operations from March 2019. The increase was slightly offset by GEL 5 million decrease in GCAP operating cashflow, mainly due to y-o-y growth in cash operating expenses. As a result, the Group's consolidated net cash flow from operating activities was GEL 109 million in 1H19.

Cash flows from investing activities. Net cash used in investing activities decreased as GHG has completed its major investment programme in 2018, while following the completion of privatisation obligations investment Water Utility decreased its capital expenditures in 1H19. Further, in 2018, a US$ 50 million loan maturing in March 2020 was issued to JSC BGEO Group as part of the demerger. As a result, net cash used in investing activities decreased by 61.6% to GEL 195 million in 1H19.

Cash flows from financing activities. Decrease in net outflows from financing activities was due to the issuance of the inaugural US$300 million bonds by GCAP in March 2018.

IFRS Results/Business Development - Individual Business Units/Segments

The following sections present the IFRS results and business development derived from our IFRS accounts for each of the late stage and early stage portfolio companies. For the pipeline companies we present information on the investments and where available business development. For a discussion of value creation by the business units please refer to 1H19 results presentation. For a discussion of investment rationale, value creation potential and value realization outlook, please see the Annual Report.

(100% ownership)

Business description

Our Water Utility is a natural monopoly in Tbilisi and the surrounding area, where it provides water and wastewater services to 1.4 million residents representing more than one-third of Georgia's population and c. 34,000 legal entities. Water Utility also operates hydro power plants with total installed capacity of 152 MW.

Water Utility is 100% owned through GGU.

1H19 performance (GEL '000, unless otherwise noted)

KEY POINTS

Ø 6.7% growth in revenues primarily driven by increased electricity sales

o Energy revenue up 74.5%, reflecting 55% increase in electricity price on the back of electricity market deregulation

Ø Positive operating leverage of 6.4 ppts drove 8.4% growth in EBITDA

Ø Outstanding collection rates and positive operating leverage drive operating cash flow up 85%

Ø Development capex down significantly by 64%

Ø In May 2019 privatisation conditions confirmed and GGU obtained clean title on Water Utility assets

INCOME STATEMENT HIGHLIGHTS

The Water Utility's 1H19 revenues up 6.7% y-o-y on the back of solid growth in electricity sales. Significant improvements in average electricity sales price (up from 5.6 Tetri/KWh to 8.7 Tetri/KWh), together with continued savings in Water Utility's self-produced electricity consumption (down 13.1% y-o-y to 86.3 million KWh in 1H19) resulted in almost doubling of energy revenues to GEL 8.2 million in 1H19. Electricity market deregulation, effective from May 2019, had an immediate impact on electricity sales prices and is anticipated to positively affect revenue streams from electricity sales going forward. Growth in top-line was also supported by increased water supply revenues (up 1.8% y-o-y) mainly on the back of strong business activity across various industries. Continued efficiency improvements were reflected in positive operating leverage of 6.4 percentage points, as operating expenses were flat at GEL 29.7 million in 1H19. The result was 8.4% y-o-y growth of Water Utility's 1H19 EBITDA.

Net interest expense was up 44.7% y-o-y in 1H19 in line with increased leverage during 2H18 to finance capital expenditures. Foreign exchange losses of GEL 9.5 million in 1H19 reflect the accounting impact of GEL depreciation against the Euro. GGU recorded losses on its unhedged position of GEL 151.8 million in Euros at 30 June 2019. As a result, Water Utility profit was GEL 2.0 million in 1H19 (down by 88.3% y-o-y).

BALANCE SHEET HIGHLIGHTS

The 4.9% increase in property, plant and equipment in 1H19, was primarily due to development works on water utility infrastructure carried out during the year in order to upgrade the network. Such efficiency programmes have a dual effect of reducing own electricity consumption and increasing third party electricity sales. Additionally, regulated CAPEX is included in Regulated Asset Base, used by the regulator to calculate fair return on investment. Capital expenditure level is expected to decrease in 2019 and gradually reach long-term run-rate level in the range of c. GEL 70-90 million by 2023. The increase in total liabilities is due to increased borrowings obtained from local banks to support capital expenditures for development of water supply network.

CASH FLOW HIGHLIGHTS

GGU has an outstanding water supply receivable collection rates. During 1H19, the collection rates for legal entities and households were 99% and 94%, respectively. Operating cash flow was up 85.3% y-o-y in 1H19 as a result of the growth in revenues and positive operating leverage. Development capex substantially decreased y-o-y by 64% to GEL 28 million in 1H19. Last year's elevated capex was mainly due to privatisation obligations.

Key performance metrics

Capital Outlook through 2H19 -2023

(1) Please see definitions on page 34.

(2) Capex figures are stated including VAT.

(3) Gross capital needs, excluding dividend distribution.

(4) Please refer to detailed IFRS financial statements of Water Utility on page 26.

(100% ownership)

Business description

Our housing development business is a leading real estate developer on the US$ 1.6 billion Georgian real estate market with three business lines: (a) a residential development arm targeting mainly mass market customers by offering affordable, high quality and comfortable housing; (b) a construction arm, engaging in construction contracts for other businesses as well as third-parties; and (c) franchise platform for development of third-party land plots with fee sharing arrangements.

Housing Development is 100% owned through m2.

1H19 performance (GEL '000, unless otherwise noted)

KEY POINTS

Ø Construction permit received on the largest ever in-house project at the end of June 2019 expected to drive cash flow generation in 2H19

Ø Digomi project construction works commenced on 1 July 2019

Ø Revenue recognition from Digomi project to start from 1 July 2019. No revenue recognized in 1H19

Ø GEL 18 million in-kind dividend was distributed in 1H19

INCOME STATEMENT HIGHLIGHTS

The Housing Development gross profit from apartment sales fluctuates with the cycle of projects and strength of demand in the market for affordable housing. Despite healthy market conditions, the sales momentum was negatively affected by delayed construction permit for the largest ever in-house residential Digomi project. The permit was finally approved at the end of June 2019 by Tbilisi City Municipality. The construction works commenced in July 2019 and will drive the growth in gross profit from apartment sales as well as cash flow generation in 2H19.

Digomi is the only in-house project in the pipeline of Housing Development in line with its asset-light strategy to develop third-party land plots under franchise agreements going forward. The project will be developed in three stages and the construction and development of 168,000 sq.m. residential and 84,000 sq.m. commercial spaces will continue for approximately four years. Housing Development started pre-sales for the first stage of Digomi residential project from February 2019 and has pre-sold 6,430 sq.m. with US$ 6.5 million sales value to date, representing approximately 29% of the total available space. Revenue from pre-sales has not been recognised yet as construction works commenced in July 2019. Revenue recognition will start in 3Q19 and will be reflected in financials as construction works progress. An additional 1,405 sq.m. with US$ 1.5 million value has also been booked (i.e. reservations were made).

1H19 gross real estate profit was supported by robust performance of the construction arm, which generated gross profit of GEL 2.5 and more than doubled y-o-y. Construction fees were mainly driven by the following two third-party projects: i) the shell and core construction of a new shopping mall located in Tbilisi's Saburtalo district and (ii) fit-out works for Radisson Tsinandali in Kakheti region.

1H19 operating expenses increased by 44.4% y-o-y to GEL 6.8 million and resulted in negative 1H19 EBITDA of GEL 2.1 million. The y-o-y increase reflects increased administrative expenses within the construction arm in line with the business ramp up. The incremental expenses are fully covered by gross profit generated from the construction segment.

BALANCE SHEET HIGHLIGHTS

Housing Development currently has a land bank with a value of GEL 9.4 million. Land bank is expected to decrease further over the coming years, in line with its asset light strategy. During the first half of the year, the business distributed GEL 18 million in-kind dividend to Hospitality & Commercial Real Estate, representing commercial spaces (ground floors) in the completed residential projects.

CASH FLOW HIGHLIGHTS

The housing development business continued to deploy cash for on-going project developments, while most of the apartments sold are on pre-sales stage with cash collection expected to rise in line with the construction progress in 2H19. Operating cash flow, therefore, was negative GEL 16.7 million in 1H19. As the business has received the construction permit at the end of June 2019, cash collection is expected to recover significantly in 2H19.

Key performance metrics

Capital Outlook through 2H19 - 2023

 (1) Please see definition on page 34.

(2) Gross capital needs, excluding dividend distribution.

(3) Please refer to detailed IFRS financial statements of Housing Development on page 27.

(4) In line with IFRS requirements, starting from 2019 year the Group ceased capitalization of borrowing costs to cost of inventory property represented by residential apartments from the moment when such properties become ready for sale. Comparative periods were respectively restated.

(100% ownership)

Business description

Our property and casualty Insurance (P&C Insurance) business is a leading player in the local P&C insurance market with a 29% market share based on gross premiums. P&C Insurance offers a wide range of insurance products to Georgian corporates and retail through five business lines: motor, property, credit life, liability and other insurance services.

P&C Insurance is 100% owned through Aldagi.

1H19 performance (GEL '000, unless otherwise noted)

KEY POINTS

Ø Border third-party liability insurance and organic business growth drive revenue up 15.4%

Ø GEL 8 million dividend was paid out on the back of strong operating cash flow generation, with remaining GEL 4 million dividend expected to be paid in 2H19

INCOME STATEMENT HIGHLIGHTS

The property & casualty insurance business revenue increased as a result of growth in earned premiums from: (i) compulsory border third-party liability insurance, introduced in March 2018 (up GEL 0.8 million y-o-y); (ii) organic growth in credit life insurance (up 28.0% y-o-y); (iii) credit unemployment and property insurance (up GEL 2.4 million y-o-y). P&C Insurance's key performance ratios remained healthy during 1H19 as noted below:

The 5.6 percentage point increase in the combined ratio in 1H19 was mostly due to higher commission rates on credit life, property and compulsory insurance. The 1.8 percentage point increase in the loss ratio was due to increased net claim expenses, predominantly in the credit life insurance portfolio. As a result, Aldagi's net income was up 8.2% y-o-y, resulting in 28.3% ROAE in 1H19 (32.7% in 1H18).

BALANCE SHEET HIGHLIGHTS

At 30 June 2019, total assets stood at GEL 161.7 million, up 11.0% from 31 December 2018. The growth was driven by 16.1% increase in cash and liquid funds. Insurance receivables are up 36.2% from 31 December 2018 mainly due to seasonality of agricultural insurance and prolongation of fidelity bond and commercial property insurance contracts near the period-end. The decrease in pension assets and pension liabilities resulted fully from new state pension regulation that came into effect from 1 January 2019. P&C Insurance's solvency ratio stood at 116% at 30 June 2019, above the required minimum of 100%, however down from 136% at 31 December 2018 due to payment of a dividend of GEL 8 million near the period-end. P&C Insurance is expected to pay an additional GEL 4 million dividend by the end of 3Q19.

CASH FLOW HIGHLIGHTS

Operating cash flow was up 54.3 % y-o-y in 1H19 on the back of efficient asset management and increased interest inflows in line with the growth in liquid assets.

Key performance metrics

Capital Outlook through 2H19 - 2023 

(1) Adjusted for non-recurring items.

(2) Please see definition on page 34.

(3) Gross capital needs, excluding dividend distribution.

(4) Please refer to detailed IFRS financial statements of P&C Insurance on page 28.

4. Renewable Energy

(65% ownership)

Business description

Our renewable energy business is a platform for developing hydro and wind power plants across Georgia.

Georgia Capital owns 65% in the energy business, with the remaining 35% owned by the Austrian company RP Global - an independent power producer with 30 years of experience of developing, building, owning and operating renewable power plants globally.

1H19 performance (GEL '000, unless otherwise noted)

KEY POINTS

Ø The first hydro power plants successfully launched in 1H19 on time and within budget

Ø Mestiachala HPPs recorded GEL 2 million EBITDA with 28 GWh generation since the launch in 2Q19

Ø Mestiachala HPPs were damaged during flooding in July 2019. Repair works are currently in progress and we estimate that insurance will compensate substantially all of our losses

Renewable Energy financials reflect the Mestiachala HPPs being in its active construction stage throughout the first five months of 2019 and other renewable energy projects being at different stages of development. The increase in property, plant and equipment and in debt is in line with spending on Mestiachala HPPs construction works. Overall the energy business is financing the projects with up to 30% equity contribution. The Mestiachala HPPs successful commissioning and launch in 2Q19 resulted in EBITDA of GEL 2.0 million in 1H19. 28.2 GWh were generated since launch.

The Mestiachala HPPs project was delivered on time and within budget. Its first phase (30MW) was launched on 8 April 2019, followed by the second phase (20MW) on 4 June 2019. Total project cost was US$ 61.2 million, in line with budgeted US$ 1.2 million per MW. Unfortunately, in late July 2019, the HPPs were damaged by flooding resulting from a natural disaster, which has interrupted operations of the cascade of HPPs. The business is currently estimating the losses, working with the insurance company to file a claim and developing a plan to repair the damage and restore operations, which is expected to take several months.

The annual net generation capacity of Mestiachala HPPs is projected at approximately 171GWh on stabilized basis, with peak generation in July-August, when the market prices are higher compared to May-June period, when most of the HPPs in Georgia have peak generation. Mestiachala HPPs has a 15-year fixed price purchase power agreement (PPA) with the Georgian Government, guaranteeing recurring revenue streams for eight months (from September through April) each year at 5.5 cents per kilowatt-hour. Electricity market deregulation has created significant upside for electricity sales also during May-Aug period, when government PPA is not effective.  

Renewable Energy continues to develop its pipeline hydro and wind projects with total 330MW installed capacity. The business also seeks acquisition possibilities among existing projects, which are either commissioned or under feasibility stage. Currently, preparation works are underway to commence construction works on 46 MW Zoti HPPs in 2H19, located in Western part of Georgia, with expected net generation of 170 GWh, where c. 53% of generation is covered by a 15-year Government PPA (weighted average 5.1 cents per KWh during Sep-Apr period). The management is currently negotiating with the Government on MoU and PPA terms and conditions of wind power plants near Tbilisi and Kaspi. Due to the changes in the regulatory framework on issuance of PPAs, management is expecting to finalize the process in 2H19.

The table below summarises the indicative pipeline of upcoming energy projects:

Key performance metrics

Capital Outlook through 2H19 - 2023

 (1) Please see definition on page 34.

 (2) Gross capital needs, excluding dividend distribution.

 (3) Please refer to detailed IFRS financial statements of Renewable Energy on page 29.

(100% ownership)

Business description

Our hospitality & commercial real estate business renamed as Amber Group is comprised of: (a) rent-earning commercial assets with targeted 10% yield and (b) hotel development business across Georgia with targeted 1,000 rooms.

The hotel development business has already confirmed 1,222 rooms, of which, 152 are operational and 1,070 are in pipeline.

Hospitality & Commercial Real Estate is 100% owned through m2.

1H19 performance (GEL '000, unless otherwise noted)

(4) Value created on commercial property.

KEY POINTS

Ø GEL 8 million revaluation gain recorded on the upcoming Kempinski hotel

Ø Progressing against the targeted 1,000 operational hotel rooms:

o Kutaisi hotel construction commenced in 1Q19

o Acquired land in Zugdidi to develop a midscale internationally branded hotel with c. 130 rooms by 2021

o Acquired land in Shovi to develop a 92-room hotel under Amber group brand by 2021

Ø Expansion of the commercial real estate portfolio drives gross profit from operating leases up 47%

INCOME STATEMENT HIGHLIGHTS

Gross profit from operating leases increased by 46.9% y-o-y to GEL 2.8 million in 1H19 primarily due to the expansion of the commercial real estate portfolio (which resulted mainly from the re-allocation of finished properties from Housing Development), supported by high occupancy levels. The commercial portfolio increased by 34% to US$ 32.4 million in 1H19 (US$ 24.2 million in 1H18), while the occupancy level and gross income yield stood at 86.7% (89.5% in 1H18) and 8.6% (10.2% in 1H18), respectively. New additions to the portfolio will reach stabilized occupancy and income yield by year-end. Nearly 80% of the total commercial assets represent office and retail areas and another 20% residential and industrial spaces.

Our first hotel, Ramada Encore on Kazbegi ave., launched in March 2018, generated gross profit of GEL 0.7 million in 1H19 with US$ 63.5 ADR and 48.8% occupancy rate. Revenue was supported by a pick-up in occupancy levels, averaging 69.6% in 2Q19 vs. 28.3% in 1Q19. Overall, Ramada Encore hotel RevPAR1 increased by 12.5% y-o-y to US$ 31.0 in 1H19, which led to improved net operating profit margin of 32.2% (up 3.4 ppt) respectively.

In 1H19 Amber group recognised revaluation gain of GEL 7.9 million on under construction Kempinski hotel, which is expected to open in fall 2020 in Tbilisi. Amber group signed a management agreement with Kempinski to manage the upcoming only luxury hotel in its portfolio. Following initial acquisition in December 2017 Amber group held a 60% stake in Kempinski hotel and the business announced the buyout of the remaining 40% equity stake in February 2019 for US$ 5.2 million. US$ 0.3 million was paid in cash and US$ 4.9 million was settled through bonds issued by the commercial real estate business.

BALANCE SHEET HIGHLIGHTS

At 30 June 2019, total assets of Amber group amounted to GEL 374.6 million (up 27.1% from 31 December 18) and was largely concentrated in investment property. Commercial real estate increased by 27.3% in 1H19 mainly due to the commercial portfolio expansion re-allocation of finished properties from Housing Development and construction works performed for hotels under construction. Amber group continued to build ground for its targeted 1,000 hotel rooms portfolio by acquiring: an 8,694 sq.m. land plot for a total cash consideration of GEL 7.3 million in Zugdidi, a historical region in western Georgia and 7,500 sq.m. land plot for a total cash consideration of US$ 0.9 million located in Shovi, Racha - a climatic and health resort in the greater Caucasus mountain region.

CASH FLOW HIGHLIGHTS

The first operational Ramada Encore hotel added GEL 0.8 million to operating cash flow in 1H19, while contribution from rent-generating assets was GEL 1.9 million. In 1H19 the business spent GEL 43.2 million on capital expenditures and acquisitions of land plots for further hotel development. Amber group targets 70%:30% debt to equity leverage ratio at hotels after hotel opening and 50%:50% during construction stage. During 1H19 business refinanced US$ 28 million debt outstanding from Georgia Capital with borrowings from local financial institutions.

Key performance metrics

Capital Outlook through 2H19 - 2023

(1) Please see definition on page 34.

(2) Gross capital needs, excluding dividend distribution.

(3) Please refer to detailed IFRS financial statements of Hospitality & Commercial real estate on page 30.

(86% ownership)

Business description

Our Beverages combines three business lines: a wine business, a beer business and a distribution business. We produce and sell wine locally and export to 17 countries, while in our beer we have a 10-year exclusive license to produce Heineken brands in Georgia and sell them in the South Caucasus.

Georgia Capital owns 86% of Beverages.

1H19 performance (GEL '000, unless otherwise noted)

KEY POINTS

Ø Wine export sales outperforming the strong market growth in 1H19 and driving wine revenues up 75%

Ø Outstanding topline growth coupled with positive operating leverage led to 87% growth in wine EBITDA

Ø Beer business launched four new brands in 1H19, followed by the launch of Heineken in July 2019

Ø Strong beer sales volumes in June and July of 2019 leading to 100% utilization brewing capacity (c. 31,000 hectolitres in June and c. 33,505 hectolitres in July)

Ø GEL 0.6 million positive EBITDA in July 2019 in the beer business

WINE BUSINESS

The wine business demonstrated a robust performance in 1H19, which was supported by growth in exports. The country's strong export markets increased by 6% y-o-y in 1H19 reaching record high 40.4 million wine bottle export sales over the last six years. Increase in our wine bottle sales exceeded market growth and was up by 49% from c. 1.7 million bottles in 1H18 to c. 2.5 million in 1H19. As a result, wine revenues increased remarkably by 75.0% y-o-y, reaching GEL 17.3 million in 1H19.

The wine business maintained a solid gross profit margin of 45% in 1H19 (48% in 1H18) despite discontinuation of the Government subsidy on grapes, adversely affecting grape purchase price and therefore cost of goods sold. Management expects to minimize reliance on purchased grapes and manage gross margin levels, as the business benefits from last year's vineyard acquisitions and further progresses towards its targeted 1,000 hectares of vineyards. Outstanding growth in the top-line, coupled with positive operating leverage, led to 87.2% y-o-y growth in EBITDA to GEL 3.0 million.

Wine business is progressing against its strategic priorities to increase production capacity, enter untapped strategic markets and diversify its product mix by portfolio premiumization.

BEER BUSINESS

During the first five months of 2019 beer business was focused on launching new brands: in March the business acquired a prominent Georgian beverages brand - Kazbegi, followed by launch of Kazbegi beer and lemonade in April; Krusovice, Amstel and local light beer, Kayak, three upper-mainstream segment beer brands, were also fully launched during May. As a result, beer sales in June 2019 was close to 100% brewing capacity (c. 31,000 hectolitres out of annual 360,000 hectolitres capacity), resulting in an 88.8% y-o-y increase in month of Jun-19 revenues and improved EBITDA by 72.6% y-o-y.

After successful consecutive trial brews for Heineken, the business received the license to produce Heineken end of June 2019 and launched locally brewed Heineken cans in July 2019. Successful diversification of beer business portfolio is not yet fully reflected in financial results and we expect to see the full effect of new launches from July 2019. EBITDA is expected to break even during the second half of 2019. The beer business expects to achieve 20%+ local market share in beer by the end of 2019 on the back of new brand launches. Meanwhile the business also started to tap the international markets, by exporting its mainstream beer and lemonade brands to Azerbaijan and China.

Key performance metrics

Capital Outlook through 2023

(1) Please see definition on page 34.

(2) Gross capital needs, excluding dividend distribution.

(3) Please refer to detailed IFRS financial statements of Beverages on page 31-32.

Pipeline businesses

Attractive service business - Auto Service

Georgia Capital sees strong value creation opportunity in the auto services industry, which is currently a very fragmented market with approximately GEL 1.8 billion annual revenues. The leading player controls c. 16% of the market, while the rest of the market is dominated by small, owner-operated lower-end service shops. The number of vehicles has grown at 8% CAGR over the last six years, while vast majority of vehicles in the country remains largely outdated. The attractive growth rates combined with the expected increase in customer spending due to the stricter regulatory environment make the auto service business an attractive strategic opportunity. Georgia Capital aims to build a diversified business model with digital platform combining many different auto-related services: car services and parts, secondary car trading, car insurance and periodic technical inspection (PTI).

The Group began opening PTI centers in 1H18 and launched the PTI business from March 2019 under the name of Greenway Georgia (GWG), as described in more detail below. Additionally, the Group acquired an 80% interest in Amboli, at the end of June 2019. Amboli, the second largest player on the market with approximately 1% market share, was valued at 0.7x EV/Sales. The Group paid GEL 3.4 million for the acquisition and also contributed GEL 2 million pro-rata capital into equity to fund the business growth. Amboli, an importer, distributor, wholesaler and retailer of car consumables and spare parts, is expected to have break-even EBITDA in 2019.

PTI business 1H19 performance (GEL '000, unless otherwise noted)