Georgia Capital Regulatory News (CGEO)

 FINANCIAL PERFORMANCE HIGHLIGHTS (IFRS)[1]

KEY POINTS

Ø NAV per share (GEL)[5] flat (up 0.2%) in 2Q22 (down 16.4% in 1H22), reflecting stabilisation following 16.5% decrease in 1Q22

Ø 2Q22 NAV per share (GBP)5 increased 14.4% (down 2.1% in 1H22), reflecting the 14.2% appreciation of GEL against GBP during the second quarter (a 17.0% appreciation in 1H22)

Ø Net Capital Commitment (NCC) ratio decreased by 1.2 ppts to 27.0% in 2Q22, resulting from ongoing robust liquidity at the GCAP level and the strong GEL

Ø GEL 9.4 million dividends collected from the private portfolio companies in 2Q22, with an additional GEL 22.8 million dividends received from BoG in July 2022

Ø US$ 46.8 million loans issued to our beverages and real estate businesses converted into equity in 2Q22, as previously announced

Ø c.816,000 shares repurchased in 2Q22 (total bought back and cancelled now at c.6% of issued capital since 10-Aug-21)

Conference call: An investor/analyst conference call will be held on 12 August 2022, at 14:00 UK / 15:00 CET / 9:00 US Eastern Time. Please click the link to join the webinar: WEBINAR LINK, webinar ID: 823 2380 9213, passcode: 791297. Further details about the webinar are available on the Group's webpage.

CHAIRMAN AND CEO'S STATEMENT

Our 2Q22 results demonstrate Georgia Capital's strong operational and balance sheet resilience. While the uncertainties created by the Russia-Ukraine war persist and potential consequences can vary, our strong management teams have remained alert to navigate the challenges and opportunities created by these unprecedented times. This, when coupled with the recent strong growth in the Georgian economy, has enabled us to deliver solid operational performance in 2Q22 and 1H22, particularly reflecting our strategy to have the majority of our capital allocated to capital-light industries and sectors.

2Q22 NAV per share was up 0.2% (down 16.4% in 1H22). The NAV per share performance in 2Q22 resulted from a combination of factors: value creation across our listed and observable portfolio totalled GEL 18.6 million with 0.8 ppts positive impact on the NAV per share. This reflects a strong recovery in BoG's share price (up 9.9% in 2Q22) and robust value creation in the water utility business, the latter reflecting the strong EBITDA growth supported by the higher levels of economic activity as the impact of the pandemic recedes. Share buybacks under our ongoing buyback programme also supported the NAV per share growth with a 1.5 ppts impact. The increase was offset by a GEL 33.1 million value reduction in the private portfolio (-1.4 ppts impact), mainly reflecting a temporary value decrease at our healthcare facilities, as a result of their recent transition to the post-pandemic environment, and increased discount rates used in our private portfolio valuations. Management platform related costs had a 0.4 ppts negative impact on the 2Q22 NAV per share. In GBP terms, the NAV per share growth in 2Q22 was particularly significant - up 14.4% - reflecting the 14.2% appreciation of GEL against GBP during the quarter.

The decrease in the 1H22 NAV per share predominantly reflects the first quarter impact of the Russia-Ukraine war, with a stabilisation in the second quarter: a) a GEL 161.4 million operating performance related value reduction of the private portfolio companies (-5.6 ppts impact) and b) a GEL 317.5 million negative impact on portfolio asset valuations from market movements in BoG's share price, discount rates and listed peer multiples from the Russia-Ukraine war (-11.0 ppts impact). The decrease was partially offset by the accretive impact from share buybacks (+3.0 ppts impact in 1H22). In GBP terms, the NAV per share was down 2.1% in 1H22.

Underlying operating performances across our private portfolio remained solid. The aggregated revenue of our private portfolio companies totalled GEL 470 million (up 4.6% y-o-y), demonstrating modest top-line growth in 2Q22, while the aggregated EBITDA was down by 20.0% y-o-y to GEL 63 million in 2Q22.

Ø 2Q22 revenues of our retail (pharmacy) business reflect a recalibration of product prices due to GEL's appreciation against foreign currencies and the termination of low-profit generating contracts in the wholesale business line. 2Q22 EBITDA was further impacted by inflation and increased operating expenses in line with the continuing expansion of the retail (pharmacy) business.

Ø Our hospitals and clinics & diagnostics businesses are currently transitioning to the post-pandemic environment. The suspension of COVID contracts by the Government in 1Q22 and the subsequent restructuring of the cost base of COVID facilities have temporarily impacted the performance of the hospitals and clinics businesses, while substantially lower COVID cases during the quarter resulted in a significant decrease in diagnostics business revenues. The growth is expected to rebound over the next few quarters as the businesses complete the expected transition.

Ø The ongoing war negatively impacted the performance of our beverages (c.60% sales exposure of our wine business to Russia and Ukraine in 2021) and real estate businesses (significant growth in construction materials costs). To ensure their sustainable development, in 2Q22 we converted US$ 46.8 million loans issued to these businesses into equity, as previously announced.

For 1H22, the aggregated revenues of our private portfolio companies increased by 9.3% y-o-y while the aggregated y-o-y EBITDA was down by 12.1%.

NCC ratio[6] decreased by 1.2 ppts to 27.0% in 2Q22. GCAP's liquidity remained solid at GEL 686 million (US$ 234 million) in 2Q22. GEL's appreciation during the quarter positively impacted the gross debt balance (down 4.0% in 2Q22) and as a result, the NCC ratio was down by 1.2 ppts to 27.0% in 2Q22, demonstrating progress towards our stated strategic priority to bring down the NCC ratio to below 15% by Dec-25. The pro-forma NCC ratio, which reflects the subsequent improvements in BoG's share price and foreign exchange rates as well as the anticipated decrease in the GCAP's guarantee towards the beer business (see page 11 for details), was down to 23.5%. Solid liquidity at the GCAP level and a robust balance sheet and capital management framework also led to an upgrade in our corporate credit ratings to "B1" by Moody's and "B+" by S&P (from "B2" and "B", respectively) in 1H22.

Update on the buyback programme. During 2Q22, under the US$ 25 million share buyback and cancellation programme, we repurchased 816,054 shares for a total consideration of GEL 19.1 million (US$ 6.3 million). This brings the total number of shares bought back and cancelled to c.6% of issued capital since we launched the programme in August 2021.

From a macroeconomic perspective, the economy has continued double-digit growth in 2022, with real GDP expanding y-o-y by an estimated 10.5% in 1H22 following a 10.4% growth in 2021. On the external side, strong foreign demand throughout the year has been supplemented by substantial remittance inflows, with money transfers being up by 65% y-o-y in 1H22. Merchandise exports grew by 35% y-o-y in 1H22, and the tourism revenues reached 79% of 2019 levels in 1H22, including 92% in May-June 2022, reflecting the global resumption of travel as well as significant migration from certain regional countries. On the domestic side, credit expansion has also been robust, as the commercial bank loan portfolio grew by 18.7% y-o-y as of June 2022 (on a constant currency basis). Additionally, while fiscal support has moderated, the fiscal stance remains expansionary, with current expenditures growing by 9% and capital expenditures expanding by 4% y-o-y in 1H22, facilitated by a 34% surge in fiscal revenues. Despite USD strengthening globally, the Georgian Lari (GEL) has sustained its appreciation trend since mid-2021 and compared to the beginning of 2022 has appreciated by 14.1% against the US dollar as of 11 August 2022, driven by growing demand for Georgian exports, robust remittance inflows, tight monetary policy and accelerated foreign currency lending, as well as the travel recovery and strong market confidence. The fiscal deficit is projected to shrink to around 3.5% in 2022 as a result of the higher-than-expected growth and is expected to return to under 3% of GDP from 2023. 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 tight policy until inflationary pressures subside. Inflation reached 11.5% in July 2022 and 12.9% on average in January-July 2022, although it is expected to decelerate gradually from the second half of 2022.

Management change. In July, we announced that Nikoloz (Nick) Gamkrelidze was to step down as Chief Executive of Georgia Healthcare. He has been replaced as GHG's CEO by Irakli Gogia, previously Deputy CEO, Finance of GHG. On 9 May 2022, the Board announced the separation of the roles of Chairman and CEO, upon the completion of my current employment contract as Chairman and CEO in May 2023, with me continuing in the role of Board Chairman and Nick assuming the role of Georgia Capital's CEO in May 2023. Following Nick's departure from GHG, he will no longer take up the role of Georgia Capital CEO in May 2023, and the Board of Georgia Capital will announce a further update in due course with regard to the appointment of a new CEO. I will continue in the existing combined Chairman and CEO role until May 2023.

Outlook. Despite the ongoing regional tensions, we remain cautiously optimistic about the emerging capital-light investment opportunities, in line with our strategy, that lie ahead in Georgia and beyond. We are already witnessing the formation of attractive new markets resulting from the proven resilience of the Georgian economy and the favourable migration to our region. While we have increased our focus on balancing the varying risks and opportunities by taking a relatively conservative approach to managing our investment portfolio and balance sheet leverage, I believe Georgia Capital is well-positioned to tap attractive investment opportunities and deliver consistent NAV per share growth over the medium term. At the same time, we will continue demonstrating strong progress toward our key strategic priority of deleveraging the Group's balance sheet.

Irakli Gilauri, Chairman and CEO

DISCUSSION OF GROUP RESULTS

The discussion below analyses the Group's unaudited net asset value at 30-Jun-22 and its income for the second quarter and first half period then ended on an IFRS basis (see "Basis of Presentation" on page 28 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 second quarter (31-Mar-22 and 30-Jun-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 first half of 2022 see page 27.

NAV STATEMENT 2Q22

A 0.2% increase in NAV per share (GEL) in 2Q22 was mainly driven by an accretive impact from share buybacks (a 1.5 ppts impact on the NAV per share). The growth was partially offset by a GEL 14.4 million negative value creation across our portfolio companies (-0.6 ppts impact), management platform related costs (-0.4 ppts impact) and other expenses (-0.2 ppts impact).

Portfolio overview

Total portfolio value increased by GEL 96.8 million (3.7%) to GEL 2.7 billion in 2Q22:

· The value of the listed and observable portfolio decreased by GEL 4.2 million (-0.7%), reflecting the net impact of GEL 18.6 million value creation, driven by a robust operating performance of the water utility business and strong recovery in BoG's share price, offset by a GEL 22.8 million accrued dividend income from BoG as of 30-Jun-22.

· Private portfolio value change in 2Q22 reflects:

o  A GEL 41.6 million value decrease, mainly resulting from a GEL 33.1 million negative value creation and GEL 9.4 million dividends paid to GCAP.

o  Conversion of GEL 142.6 million loans issued predominantly to our beverages and real estate businesses into equity, due to the adverse financial impact of the Russia-Ukraine war on these businesses. This led to a GEL 100.9 million net increase in the value of our private portfolio (up 5.1% in 2Q22).

Consequently, as of 30-Jun-22, the listed and observable portfolio value totalled GEL 608.7 million (22.5% of the total portfolio value), and the private portfolio value amounted to GEL 2.1 billion (77.5% of the total).

1) Value creation

Total portfolio value creation amounted to negative GEL 14.4 million in 2Q22.

· A GEL 18.6 million value creation across listed and observable portfolio supported NAV per share growth in 2Q22. This reflects:

o  A GEL 5.0 million value creation from BoG, resulting from a 9.9% increase in BoG's share price, partially offset by GEL appreciation against GBP by 14.2% in 2Q22.

o  GEL 13.6 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 negative value creation in the private portfolio amounted to GEL 33.1 million in 2Q22, resulting from:

o  GEL 117.1 million operating-performance related value reduction, mainly driven by the developments across our retail (pharmacy), hospitals, clinics & diagnostics and other businesses, as described in detail on pages 6-7.

o  GEL 84.0 million value creation due to GEL's appreciation against foreign currencies and changes in valuation multiples in 2Q22.

The negative impact of the ongoing Russia-Ukraine war on the discount rates and listed peer multiples used in our DCF and multiple-based valuation assessments continued in 2Q22, with discount rates being up by approximately 0.5-1.0 ppts q-o-q. However, the resilience of the Georgian economy in almost all economic data points and stronger than expected outlook of our portfolio companies drove the stabilisation of value creation in 2Q22.

The table below summarises value creation drivers in our businesses in 2Q22:

Valuation overview[11]

In 2Q22, 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. Our renewable energy and education businesses were valued by Kroll for the first time in 2Q22 (the clinics & diagnostics business was previously valued externally as a component part of Healthcare Services). The independent valuation assessments, which serve as the basis 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 the 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. These would be considered in the overall valuation assessment, where appropriate.

The enterprise value and equity value development of our businesses in 2Q22 are summarised in the following table:

Private large portfolio companies (51.3% of total portfolio value)

Retail (Pharmacy) (24.8% of total portfolio value) - the Enterprise Value (EV) of Retail (Pharmacy) increased by 1.7% to GEL 915.3 million in 2Q22, reflecting the robust outlook of the business, driven by the expansion of the retail chain and resilience of Georgian economy. 2Q22 revenues were down by 3.5% y-o-y, resulting from 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) the termination of low-profit generating contracts in the wholesale business line. EBITDA (excl. IFRS 16) was down by 11.4% y-o-y in 2Q22, further reflecting inflation and the increased operating expenses in line with the expansion of the retail (pharmacy) business. See page 14 for details. Consequently, LTM EBITDA (incl. IFRS 16) was down by 1.5% to GEL 109.7 million in 2Q22. Net debt increased by 19.1% to GEL 159.5 million in 2Q22, as the business paid GEL 31.2 million to complete the buyout of the 10% minority stake (valued at GEL 41.2 million, of which GEL 10.0 million was paid in 1Q22). As a result, the fair value of GCAP's holding increased by 2.1% to GEL 671.0 million in 2Q22. The implied LTM EV/EBITDA valuation multiple (incl. IFRS 16) increased to 8.3x as at 30-Jun-22 (up from 8.1x as of 31-Mar-22).

Hospitals (17.7% of total portfolio value) - Hospitals' EV decreased by 7.7% to GEL 678.7 million in 2Q22. The revenue was down by 10.6% y-o-y in 2Q22, reflecting the suspension of COVID contracts by the Government in 1Q22. Restructuring the cost base of COVID hospitals and phasing out from Government contracts temporarily suppressed business margins in 2Q22, which, coupled with the absence of a state income tax subsidy for low salary range employees that had been in effect during the entire 1H21 period, translated into a 6.3 ppts y-o-y decrease in the 2Q22 EBITDA margin (excl. IFRS 16). Consequently, EBITDA (excl. IFRS 16) was down 33.3% y-o-y in 2Q22. See page 16 for details. LTM EBITDA (incl. IFRS 16) decreased by 9.3% to GEL 64.9 million in 2Q22. As a result, the equity value of the business was assessed at GEL 478.0 million, down 8.8% q-o-q in 2Q22, translating into an implied LTM EV/EBITDA multiple (incl. IFRS 16) of 10.5x at 30-Jun-22 (10.3x at 30-Mar-22).

Insurance (P&C and Medical) (8.9% of total portfolio value) - The insurance business combines: a) P&C Insurance valued at GEL 199.8 million and b) Medical Insurance valued at GEL 40.3 million.

P&C Insurance - Net premiums earned increased by 16.9% y-o-y to GEL 24.3 million in 2Q22, mainly reflecting the growth in the credit life and agricultural insurance lines. The combined ratio was down 0.6 ppts y-o-y in 2Q22, reflecting a) a 3.4 ppts decrease in loss ratio on the back of the robust revenue growth and b) a 2.8 ppts increase in expense ratio due to the increase in salaries and other operating expenses in line with the business growth. Consequently, 2Q22 net income was up 17.8% y-o-y to GEL 4.9 million. See page 17 for details. LTM net income[13] was up by 4.3% to GEL 18.2 million in 2Q22. The equity value of the P&C insurance business was assessed at GEL 199.8 million at 30-Jun-22 (up 8.2% q-o-q). The implied LTM P/E valuation multiple stood at 11.0x in 2Q22 (up from 10.6x in 1Q22).

Medical Insurance - Net premiums earned increased by 0.5% y-o-y to GEL 18.0 million in 2Q22, predominantly driven by a c.5% increase in the price of insurance policies and related decrease in the number of insured clients (down 4.9% y-o-y as of 30-Jun-22). Net claims expenses were also up by 4.8% y-o-y in 2Q22, in line with the rebounding trend of elective healthcare services, compared to the patient footprint slowdown last year due to the pandemic. As a result, the net income of the medical insurance business was down by GEL 0.4 million y-o-y to negative GEL 0.2 million in 2Q22. See page 17 for details. LTM net income[14] was down by 12.5% to GEL 2.8 million in 2Q22, and the equity value of the business was assessed at GEL 40.3 million at 30-Jun-22 (down 9.4% q-o-q). The implied LTM P/E valuation multiple was at 14.5x in 2Q22, up from 14.0x in 1Q22.

Private investment stage portfolio companies (16.4% of total portfolio value) 

Renewable Energy (6.4% of total portfolio value) - The business was valued externally for the first time in 2Q22. EV in US$ terms was up by 4.3% to US$ 143.7 million in 2Q22 (down 1.5% to GEL 421.0 million in GEL terms, reflecting the local currency appreciation against US$ during the quarter). In US$ terms, revenue and EBITDA were up 2.3% and 4.4% y-o-y in 2Q22, reflecting a 12.6% y-o-y increase in average electricity selling prices (revenue and EBITDA in GEL terms were down by 7.6% and 5.9% y-o-y, respectively, in 2Q22). See page 20 for details. The pipeline renewable energy projects continued to be measured at an equity investment cost of GEL 42.0 million in aggregate. Net debt was down by GEL 14.6 million to GEL 248.8 million in 2Q22, also reflecting the currency movements (in US$ terms, the net debt remained flat at US$ 85.0 million). The business paid GEL 2.1 million dividends to GCAP in 2Q22. As a result, the equity value of Renewable Energy was assessed at GEL 172.2 million in 2Q22 (up by 5.1% q-o-q) (up 11.3% q-o-q to US$ 58.8 in US$ terms). The blended EV/EBITDA valuation multiple of the operational assets stood at 11.1x in 2Q22, up from 10.9x in 1Q22.

Education (5.6% of total portfolio value) - The business was valued externally for the first time in 2Q22. An 80.1% increase in total learner capacity in 2021 and higher than expected growth in total enrolments were reflected in the 2Q22 valuation assessment of the business, which led to a 25.5% increase in EV to GEL 182.7[15] million in 2Q22. See page 21 for details. Notwithstanding a 19.7% y-o-y increase in 2Q22 EBITDA, the LTM EBITDA of the business was down by 1.6% to GEL 11.9 million. A temporary decrease in LTM EBITDA reflects the increased operating expenses resulting from the addition of the new learner capacity, while additional revenue is expected to derive in the 2023-2024 academic year, as the utilisation rate picks up gradually. Net debt was also up by 12.7% to GEL 8.9 million in 2Q22, reflecting an expansion. As a result, the education business was valued at GEL 151.8 million in 2Q22 (up 12.1% q-o-q). This translated into the implied valuation multiple of 15.3x in 2Q22, up from 12.0x in 1Q22. The forward-looking implied valuation multiple is estimated at 11.1x for the 2023-2024 academic year.

Clinics and Diagnostics (4.4% of total portfolio value) - The EV of the business decreased by 8.4% to GEL 188.8 million in 2Q22. Similar to the hospitals business, our clinics business was also impacted by the suspension of COVID contracts by the Government, which led to an 8.6% y-o-y decrease in revenues in 2Q22. The revenue of our diagnostics business, which apart from regular lab tests is actively engaged in COVID-19 testing, was impacted by substantially lower COVID cases during the quarter and was down by 48.5% y-o-y in 2Q22. This together with the expiration of the state income tax subsidy that had been in effect in the prior period led to a 62.1% y-o-y decrease in the combined 2Q22 EBITDA (excl. IFRS 16) of the clinics & diagnostics business. See page 22 for details. Consequently, LTM EBITDA (incl. IFRS 16) was down by 16.0% to GEL 19.2 million in 2Q22. As a result, the equity value of the business was assessed at GEL 120.0 million, down 18.9% q-o-q in 2Q22, translating into an implied LTM EV/EBITDA multiple (incl. IFRS 16) of 9.8x at 30-Jun-22, up from 9.0x at 31-Mar-22.

Other businesses (9.7% of total portfolio value) - The "other" private portfolio (Auto Service, Beverages, IT Outsourcing, Housing Development and Hospitality businesses) is valued based on LTM EV/EBITDA except 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 263.5 million at 30-Jun-22, up by 90.9% q-o-q. The increase reflects the conversion of GEL 142.6 million loans issued predominantly to our beverages and real estate businesses into equity, due to the adverse financial impact of the Russia-Ukraine war on these businesses. In 2Q22, the negative value creation amounted to GEL 17.6 million.

Listed and observable portfolio companies (22.5% of total portfolio value)

BOG (16.8% of total portfolio value)[16] - In 1Q22, BoG delivered an annualised ROAE of 30.7% and strong 11.6% loan book growth y-o-y. The loan book growth was largely driven by continued strong loan origination levels in all segments, but predominantly in the consumer, micro and SME portfolios. In 2Q22, BoG's share price demonstrated a strong recovery and was up by 9.9 % q-o-q to GBP 13.06 at 30-Jun-22. The positive impact of BOG's share price performance on our valuations was partially offset by GEL's appreciation against GBP by 14.2% in 2Q22. In 2Q22, the Bank declared a final dividend for 2021 of GEL 2.33 per ordinary share. Consequently, the accrued dividend income for GCAP amounted to GEL 22.8 million as of 30-Jun-22. The final dividends were received on 14-Jul-22. In 2Q22, the Bank also announced the commencement of the GEL 72.7 million share buyback and cancellation programme, effective until 31 December 2022. The programme is in line with BoG's capital and distribution policy, which targets a dividend/share buyback payout ratio in the range of 30-50% of the Bank's annual profits. As a result of the developments described above, the market value of our equity stake in BoG decreased by 3.8% to GEL 455.7 million. BoG's public announcement of their 2Q22 results, when published, will be available on BoG's website.

Water Utility (5.7% of total portfolio value) - 2Q22 valuation of the Water Utility, where GCAP has a clear exit path through a put and call structure at pre-agreed EBITDA multiples)[17], reflects the strong operating performance of the business. Positive developments in the normalised[18] LTM EBITDA and the application of the put option valuation led to GEL 13.6 million value creation in 2Q22. As a result, the fair value of GCAP's 20% holding in the business was assessed at GEL 153.0 million, up 9.8% q-o-q.

2) Investments[19]

GCAP's investments of GEL 142.6 million in 2Q22 represent the non-cash conversion of the loans issued mainly to our real estate and beverages business into equity.

3) Share buybacks

During 2Q22, 1,174,323 shares were bought back for a total consideration of GEL 27.5 million.

· 358,269 shares were repurchased for the management trust.

· 816,054 shares were repurchased under the ongoing US$ 25 million share buyback and cancellation programme. The total value of shares repurchased under the programme amounted to GEL 19.1 million (US$ 6.3 million) in 2Q22.

· As of 11-Aug-22 a total of 2,777,234 shares with the value of GEL 69.4 million (US$ 22.7 million) have been repurchased under the buyback programme, since 10 August 2021. The share buyback and cancellation programme is extended until 31 December 2022, as set out on page 27 of this report.

4) Dividends19

In 2Q22, Georgia Capital received GEL 9.4 million regular dividends from the private portfolio companies, of which, GEL 7.4 million was collected from the P&C insurance and GEL 2.1 million from the renewable energy businesses. GEL 22.8 dividends, receivable from BOG as of 30-Jun-22, were collected on 14-Jul-22.

1H22 NAV STATEMENT HIGHLIGHTS

NAV per share (GEL) decreased by 16.4% in 1H22, reflecting a) value reduction of BoG and private portfolio companies with a 7.0 ppts and 9.6 ppts negative impact on the NAV per share, respectively, and b) management platform related costs (-0.7 ppts impact) and net interest expenses (-0.7 ppts impact). The NAV per share decrease was partially offset by share buybacks (+3.0 ppts impact).

Portfolio overview

The total portfolio value decreased by GEL 910.8 million (25.2%) to GEL 2,705.4 million in 1H22:

· The value of the water utility business decreased by GEL 544.0, reflecting the disposal of an 80% equity interest in the business.

· The value of BoG and our private portfolio companies decreased by GEL 225.5 million and GEL 141.4 million, respectively, reflecting the impact of market movements on portfolio asset valuations resulting from the Russia-Ukraine war.

1) Value creation

BoG's share price decreased by 21.7%, which coupled with a 17.0% appreciation of GEL against GBP in 1H22, translated into a GEL 202.7 million negative value creation. The negative value creation across our private portfolio amounted to GEL 276.2 million and reflect a) GEL 161.4 million operating performance related value decrease and b) GEL 114. 8 million value reduction due to changes in valuation multiples and foreign exchange rates in 1H22.

a) Operating performance related value decrease reflects the developments across our healthcare facilities 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 housing businesses (significant growth in construction materials costs).

b) The value reduction due to changes in valuation multiples and FX reflect the uncertainties surrounding the geopolitical tensions, which translated into approximately a 2.0-3.0 ppts increase in discount rates and reduced listed peer multiples as reflected in the private portfolio companies' valuations in 1H22.

The developments described above led to negative GEL 465.3 million value creation in 1H22.

The table below summarises value creation drivers in our businesses in 1H22:

The enterprise value and equity value development of our businesses in 1H22 are summarised in the following table:

2) Investments[25]

In 1H22, GCAP's cash investments amounted to GEL 1.6 million, of which GEL 1.2 million was allocated to our education business, predominantly for the capacity expansion of the existing campus of Buckswood (mid-scale segment) and the development of land and building of the new campus of Green School (affordable segment). The investments presented in the 1H22 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 1H22, 2,166,578 shares were bought back for a total consideration of GEL 53.5 million.

· 1,689,480 shares were repurchased under the ongoing share buyback and cancellation programme. The total value of shares repurchased under the programme amounted to GEL 42.0 million (US$ 13.7 million) in 1H22.

· 477,098 shares were repurchased for the management trust.

4) Dividends[26]

In 1H22, Georgia Capital received GEL 11.6 million regular dividends from the private portfolio companies, of which, GEL 7.4 million was collected from P&C insurance and GEL 4.3 million from the renewable energy businesses. The balance also reflects a GEL 22.8 million accrued dividend income from BoG.

Net Capital Commitment (NCC) overview

Below we describe the components of Net Capital Commitment (NCC) as of 30 June 2022 and as of 31 March 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 down by 7.7% to GEL 663.4 million (US$ 226.5 million) in 2Q22. The decrease was mainly driven by a) GEL's appreciation in 2Q22, as more than 90% of the cash and liquid funds were denominated in foreign currencies and b) a GEL 26.6 million cash outflow for buybacks. The decrease was partially offset by the dividend and interest receipts of GEL 9.4 and GEL 8.0 million in 2Q22, respectively. A 3.9% increase in internationally listed debt securities' balance was attributable to the temporary investments in dollar-denominated Eurobonds issued by Georgian corporates to generate yield on GCAP's liquid funds.

Total cash and liquid funds' balance was up 2.4x in 1H22, reflecting a) the receipt of GEL 526.7 million (US$ 173 million) cash proceeds (net of transaction fees) in 1Q22 from the disposal of an 80% equity interest in the water utility business, following the successful completion of the first stage of the transaction, b) dividend and interest receipts of GEL 11.6 million and GEL 13.6 million, respectively. The increase was partially offset by a) GEL 38.0 million Eurobond coupon payment, and b) GEL 58.1 million cash outflow for buybacks. The internationally listed debt securities' balance also more than doubled in 1H22. The increase was attributable to the temporary investments in dollar-denominated Eurobonds issued by Georgian corporates. 

Loans issued27. Issued loans' balance, which primarily refers to loans issued to our private portfolio companies, was up by GEL 4.2 million in 2Q22 (up by GEL 3.8 million in 1H22). Loans are lent at market terms.

Gross debt. At 30-Jun-22, the outstanding balance of US$ 365 million six-year Eurobonds due in March 2024 was GEL 1,077.5 million (down 4.0% q-o-q). The decrease in gross debt reflects the GEL's appreciation against US$, which was partially offset by a GEL 17.8 million coupon accrual[28] during the quarter.

A 5.3% decrease in the gross debt balance in 1H22 reflects the impact of GEL's appreciation against US$ by 5.8% and a GEL 38.0 million coupon payment in 1Q22, partially offset by a GEL 37.7 million coupon accrual in 1H22.

Guarantees issued. The balance reflects GCAP's guarantee on the borrowing of the beer business. Due to the recent developments in the business' operating performance, GCAP's guarantee decreased by EUR 1.0 million to EUR 14.8 million.

Planned investments. Planned investments' balance represents US$ c.54 million expected investments in renewable energy (US$ c.30 million) and education (US$ c.24 million) businesses. The balance in US$ terms remained unchanged as at 30-Jun-22 (down by 5.6% in GEL terms due to the local currency appreciation in 2Q22). The balance was up 20.3% in 1H22, in line with our capital allocation outlook.

Announced buybacks. A 27.9% decrease in the announced buybacks' balance reflects the developments in the share buyback programme as described on pages 8 and 10. A 35.0% increase in the balance in 1H22 reflects a US$ 15 million increase in the programme in 1H22.

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 30-Jun-22.

As a result of the movements described above, NCC was down by 6.1% to GEL 729.2 million (US$ 249.0 million), translating into a 27.0% NCC ratio as at 30-Jun-22 (down by 1.2 ppts q-o-q).

Subsequent to 30-Jun-22, the beer business engaged in discussions with local lenders to reduce the required amount of GCAP's guarantee on their borrowing. As of today, local lenders have agreed in principle to reduce GCAP's guarantee to EUR 8.5 million, pending approvals from their risk/various committees, which are expected to be finalised in 3Q22. Following the reduction, the guarantee amount will be down by EUR 6.3 million to EUR 8.5 million (from EUR 14.8 million), bringing the pro-forma NCC ratio down to 23.5% as of 30 June 2022.

INCOME STATEMENT (ADJUSTED IFRS / APM)

Net loss under IFRS was GEL 19.6 million in 2Q22 (GEL 371.3 million net income in 2Q21) and GEL 509.1 million in 1H22 (GEL 325.2 million net income in 1H21). 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 June 30 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.

INCOME STATEMENT (Adjusted IFRS/APM)

Gross operating income of GEL 22.6 million in 2Q22 reflects a 3.3x and 53.0% increase in dividend and interest income, respectively, which was further supported by a decrease in interest expenses due to GEL's y-o-y appreciation against US$. Gross operating income of GEL 3.5 million in 1H22 also reflects increased dividend and interest inflows, which was partially offset by GEL 11.4 million realised and unrealised loss on liquid funds held by GCAP - which was mostly unrealised due to the market volatility driven by the regional geopolitical instability. The significant interest income growth in 2Q22 and 1H22 was mainly due to the increased liquid funds balance and related investments in internationally listed debt securities.

GCAP earned an average yield of 3.9% on the average balance of liquid assets of GEL 471.7 million in 1H22 (3.1% on GEL 240.9 million in 1H21).

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 2.6% at 30-Jun-22 (1.5%[34] as of 30-Jun-21). The total LTM operating expense ratio (which includes fund type expenses) was 3.9% at 30-Jun-22 (2.4%34 at 30-Jun-21). The increase in the LTM management fee expense ratio and the total LTM operating expense ratio mainly reflect the movements in GCAP's market capitalisation.

Total investment return represents the increase (decrease) in the fair value of our portfolio. Total investment return was negative GEL 46.7 million in 2Q22 and GEL 499.7 million in 1H22, reflecting the decrease in the value of listed and observable and private businesses, as described earlier in this report. We discuss valuation drivers for our businesses on pages 5-7. 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$ 152 million (GEL 445 million) at 30-Jun-22. Net foreign currency gain was GEL 18.2 million in 2Q22 and GEL 14.4 million in 1H22. As a result of the movements described above, GCAP's adjusted IFRS net loss was GEL 16.4 million in 2Q22 and GEL 501.7 million in 1H22.

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 2Q22, 1H22, 2Q21 and 1H21 portfolio company's accounts and respective IFRS numbers are unaudited. We present key IFRS financial highlights, operating metrics and ratios along with the 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 28 for more background.

LARGE PORTFOLIO COMPANIES

Discussion of Retail (pharmacy) Business Results

The retail (pharmacy) business, where GCAP owns a 77% equity interest through GHG[35], 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 pharmacy chain operates a total of 366 pharmacies, of which 358 are in Georgia, and 8 are in Armenia.

2Q22 & 1H22 performance (GEL '000), Retail (pharmacy)[36]