Opus 22: Investing Adventures in Georgia

Exploring the market where east meets west

Introduction

I recently visited Tbilisi, Georgia as part of a quick work trip. This Central Asian / Eastern European (depending on who you ask) country sits as an isthmus between the Caspian and Black seas and shares its northern border with the Russian Caucasus region and Turkey, Armenia, and Azerbaijan to its south. 

While in Georgia, I attended a conference organized by Sturgeon Capital. The event highlighted the region’s investment opportunities and technology innovation sector. I recommend you check out Sturgeon’s work as they operate in exciting markets around the world.

I am continuing the “Investing Adventures” series by looking at the Georgian market. I did not get time to study the public market specifically while there, but many conversations during the trip informed the following. 

Here are a few quick bullet points on Georgia to start:

Population - 3.7M people, down from a peak of 5M in 1991

GDP - $24B 2023 estimate, similar to Iceland and Senegal

GDP per capita PPP - $20,000 2022 estimate, similar to Columbia and Thailand

Size - 69K sq km, similar to Ireland and Sri Lanka

Main exports - Copper ore, Ferroalloys, Wine (it’s excellent!), cars, and oil

Median Age - 36 years old

GDP Growth - Average 4.5% real growth annually over the last decade

Macroeconomic Situation

Georgia’s GDP growth is impressive, especially for an economy of its relative size and population wealth. Real growth in recent years has been 7-10%+ and over the last decade it’s averaged 4.5%. In 2023, it was the 14th fastest growing economy in the world in real GDP terms with many of its growth peers being micro-economies like Fiji, Saint Vincent, and Samoa or frontier economies such as Tajikistan, Libya, and Ethiopia, which have far more volatile, commodity-driven economies.

Source: GNB

Reading the Georgian National Bank’s recent report, private consumer consumption decelerated significantly toward the end of 2023. Georgia's fiscal deficit increased in 2023 to ~$1B as a result of broad increases of government expenditures. 

Georgia’s location lends itself to being a transit hub for many economies. Russian ground trade to the Middle East must pass through Georgia’s borders and its Caspian and Black Sea ports handle maritime trade between Eastern Europe and Central Asia. In recent quarters, net trade has fallen off a cliff as exports to regional and global markets decreased significantly across industries.

Georgia’s currency, the Lari (GEL), is a rare emerging economy currency that has appreciated against the dollar over the last few years. I do not know all the reasons for this performance, but imagine the Russian capital leaving the country and entering Georgia as one of the drivers. The below shows the U.S. dollar’s three-year, -20% depreciation versus the Lari (black) compared to the Dollar’s appreciation versus other regional and global currencies i.e. Armenia, Azerbaijan, Euro, etc.

The National Bank of Georgia has excellent documentation and analysis across the Georgian economy. Its statistics page has a plethora of datasets covering labor, banking liquidity, digital payments, FX, and much more. One interesting recent movement I noticed was a ~8% drop in the bank’s currency reserves in Q3/Q4 of 2023. I was only able to find one press release covering this event which was the bank’s response to misinformation regarding the country’s financial sector and subsequent weakening of the GEL currency. 

For more reading on Georgia’s economy and its history, I highly recommend Frank Muci’s piece.

Georgia’s Banking Sector

I wanted to see if the Georgian banking sector had issues similar to those of its Lithuanian peer. Georgia has the reputation of being the center of gravity for the region when it comes to banking and capital. The Bank of Georgia and TBC Bank are two of the country’s publicly traded crown jewels and control ~85% of all domestic banking assets. 

The table below shows household credit utilization between Poland and Germany. Interest spreads are 50-70% higher than its Central and Eastern European peer group. But overall, the Georgian banking market is servicing the needs of its population reasonably well. Bank account penetration is 70-75% while credit card usage is ~13%, which are both healthy for the region and relative socioeconomic levels of the country. Credit lending to households, small businesses, and corporations is all very healthy:

Georgia’s banking sector health also looks solid. Non-performing loans are in line with comparable markets at 4.8%: 

Georgia’s Stock Exchange (GSE)

As of Q1 2024, 40 securities are available to trade on the GSE. Only eight securities are equity instruments, the remainder being corporate, international financial institutions, or other organizations’ bonds.

Many securities have never experienced any trading. Bhutan, a country with an economy 15% the size of Georgia, has a more liquid domestic exchange. The lack of documented trading could be explained by Georgia’s securities laws, which allow for offline, paper-based transactions in the OTC market. The GSE official website captures some of these OTC trades, but it is suspected that most trading happens outside of the exchange venue. Over the last 30 days, ~30 documented OTC trades and four exchange trades occurred. Documented liquidity is almost nonexistent.

GSE listing fees are ~$1,000 for resident companies, cheaper than the NYSE’s ~$250,000 listing fee!

The GSE’s ownership is complicated. According to the 2022 filing, there are three listed shareholders: JSC Galt & Taggart (17.3%), TBC Capital LLC (17.3%), and GCF Holdings Georgia LLC (15.3%). The exchange does not disclose who owns the remaining ~50% of shares. 

JSC Galt & Taggart (the greatest name ever for Ayn Rand fans) is a boutique brokerage and investment banking firm based in Georgia that is wholly owned by The Bank of Georgia. Similarly, TBC Capital is a subsidiary of TBC Bank. Oddly, the two largest domestic banks own significant portions of the country’s equity exchange. David Aslanishvili, a professor at TSU, seems to agree: 

“56% of shares of the stock exchange were owned by its competitors – Georgian commercial banks. In the author’s opinion, it means that Georgian commercial banks will not allow the development of their competitor - the stock market - as it threatens their own preferential and successful financial position.”

Then things get complicated, really complicated. GCF Holdings Georgia (15.3% of the exchange’s ownership) is a domestic Georgian entity wholly owned by a Panamanian entity called Frankston International which Bidzina Ivanishvili, the former Prime Minister of Georgia, ultimately owns. Ivanishvili is the wealthiest Georgian, with an estimated fortune of $5B. His Wikipedia page is worth a read. He owns the largest home in Georgia. It looks like an airport on top of a hill overlooking the capital city and houses his exotic animal collection. It is believed that most of Ivanishvili’s wealth came from the privatization era of Russia. He acquired companies for next to nothing by purchasing share vouchers from the Russian people. One of these companies was Rossiysky Kredit, which at one point was the largest Russian bank in the 1990s before the 1998 Russian financial crisis.

I believe a former political official, let alone a PM, owning 15% of a country’s stock exchange through an offshore entity fits squarely in the “that is corrupt” category. 

Overall, the GSE is locked in a state of dormancy and needs an effective ownership or governance group to change anything. It is unfortunate that a country with such strong economic growth and a mature financial services industry cannot develop an effective domestic capital market to service its companies and provide access to Georgian investments for its local population.

Bank of Georgia (BGEO) and TBC Bank (TBC)

Given the lack of domestic exchange liquidity, public Georgian companies choose to dual-list on the London Stock Exchange (LSE). The two largest companies are the country’s two leading banks. The two banks control a vast majority of banking deposits in Georgia. The Bank of Georgia (BGEO) claims 42% market share while TBC Bank controls 40%. The banks are financially identical in many ways:

Source: company filings

The 10-year  revenue CAGR has averaged ~15-17% for both banks while earnings have grown 30% per year on average over the same period. This is impressive growth considering the country’s population shrunk over the same 10-year period. 

Both banks are exceptionally well-run and have produced ROEs north of 20% for most of their recent history. TBC Bank has entered the Uzbekistan market, which is in dire need of banking competition as NIMs are 5%+ in the country and only ~50% of the population currently holds a bank account. TBC reports 20%+ NIMs within their Uzbek operations which is almost hard to believe. But, given the cost of unsecured consumer credit in the country combined with very low funding costs from deposits not having to pay anything, I suppose it could be true. The country is comparable to much poorer African countries regarding its banking penetration:

Source: IMF, DU calculations

Turning to the stocks, both of the banks’ market caps have moved in lockstep for the last five years except for the most recent move in BGEO due to their acquisition of Armenia’s AmeriaBank:

The AmeriaBank acquisition allows BGEO to enter the Armenian market with a market-leading asset. The acquisition is funded entirely by excess cash BGEO holds and priced AmeriaBank at 0.65x tangible book value and 2.6x 2023 earnings. BGEO acquired 90% of all share capital, with the remaining 10% kept by EBRD. The above table shows that Georgian banks are cheap, but this purchase price is really low for the quality assets BGEO is getting. AmeriaBank was not in a distressed financial situation but their largest shareholder, Ruben Vardanyan, is currently being held by officials in Baku, Azerbaijan awaiting trial for his involvement in the Armenia / Azerbaijan war in the Karabakh region. It wouldn’t be surprising if the EBRD and ADB, 30% combined shareholders of AmeriaBank, forced a liquidation of the company due to Vardanyan’s imprisonment and sanctions by many Western countries. BGEO took advantage of the situation and picked up a bank at <50% of its relative valuation without diluting existing shareholders. Welcome to the emerging markets!

Until 2023, both banks were not great equity return stories, but markets have seemingly woken up to the narrative. Despite the recent price appreciation, both banks still trade at ~6-8% dividend yields with ~25-30% payout ratios. 

As of February 2024, there is an extreme discount between the BGEO shares traded on the domestic exchange and those on the London Stock Exchange. According to the GSE’s website, the BGEO shares traded between 90-130 GEL in the last six months which implies a $950M-$1.3B market capitalization and is a ~40-50% discount compared to BGEO’s London equity. The GSE-listed stock often goes weeks without trading, so the real value is hard to pinpoint. When a trade does happen, it is usually only for a few thousand dollars, except for one large block trade in the GSE OTC market on December 18th, 2023. Over 5.5M BGEO shares were traded at 158 GEL per share (a 50+% premium compared to all other recent trades) for a total value of ~$333M at the time of the trade. This trade represents nearly 20% of all shares exchanging hands in one trade. The exact number of shares at the same value traded 28 seconds later, implying that the trade was rolled back. Even stranger, the exact same number of shares (5,534,619) were traded twice in 2018 - once for 20 GEL / share and once for 191 GEL per share a few months later. If anyone has any idea what happened here, I am curious. 

BGEO’s London listing is far more liquid and trades around a $2.18B market capitalization. Unfortunately, shares are not fungible and cannot be transferred or redeemed across exchanges, so I don’t think any arbitrage is possible. But the deep discount is still eye-opening.

Bank of Georgia and TBC have been focal points for many global value investors over the past few years. The recent runup has put them both into multiple territories comparable to their US counterparts. Unfortunately, I think the “easy money” is no longer available on the rerating of the banks, but the banks are still heavy dividend payers and that is not expected to change. 

Georgia Capital (CGEO)

The trend of Georgian companies listed on the LSE continues with Georgian Capital, a holding company that owns assets across the Georgian economy. Georgia Capital is the largest single shareholder of the Bank of Georgia and the BGEO holding, in turn, is the most significant portion (33%) of Georgia Capital’s portfolio. The pharmacy business makes up 19% of NAV, and its healthcare portfolio (private hospitals and insurance) constitutes 19% of NAV. 

CGEO’s 2023 results are a mixed bag. Portfolio revenue grew 9% in 2023, roughly in line with Georgia’s GDP, which makes sense given the industries they are primarily involved in. Earnings only grew ~2% with the fund’s hospital assets seeing a contraction in earnings. 

As is the case with many public holding companies, Georgia Capital trades at a steep discount to its reported NAV. VEF is another group that sees a 60+% discount to their NAV. As of December 2023, the company reported net assets of $1.26B, but the Georgian Capital equity on the LSE was trading at $551M, a ~57% discount and roughly 2x 2023 earnings. CGEO has dealt with this NAV discount for almost all of its public existence.

As shared above, CGEO’s largest holding is the publicly traded Bank of Georgia, so there should be no market skepticism or discount about the specific value of that position specifically. CGEO’s Bank of Georgia equity portion is worth $522M - 19.7% ownership * $2.65B BGEO market capitalization. Meanwhile, Georgia Capital equity is trading at a $668M market value as of February 23rd, 2024. Implying the market values the remaining holdings of Georgian Capital at $145M. In FY2023, these remaining holdings (Pharmacies, Hospitals, Energy, etc.) produced ~$75M in EBITDA. Therefore, Georgia Capital investors are purchasing Bank of Georgia stock plus a portfolio of other businesses at 1.9x earnings. Georgia Capital does not give earnings guidance, so the market may expect a material contraction soon. Regardless, it is an interesting setup.

CGEO has been covered by other writers, such as Oscar100 and LWS Research. 

Telasi JSC

One of the “Admitted to Trading” securities on the GSE is the energy and electricity distribution company Telasi. 

Telasi's ownership structure and history are complicated. The company was founded in 1937 and was a state-owned power company throughout the Soviet Union. In 1995, Telasi was converted into a joint-stock company. Most of the business was purchased by “Silk Road Holding J.V.” a subsidiary joint venture set up by the American energy company AES Corporation. On August 1, 2003, the business was sold in a majority transaction to RAO Nordic OY, which is ultimately owned by Inter RAO, a prominent Russian energy holding company with activities spanning energy generation, distribution, infrastructure development, and trading. It is one of the largest publicly traded Russian companies with revenues north of $13B.

As part of the 2003 transaction, Inter RAO paid AES Corporation $26M for the equity of Telasi but forced AES to pay off $60M of the Georgian company’s debt - effectively creating a net cash increase for Inter RAO where AES paid Inter RAO to take Telasi off their hands. 

Currently, Inter RAO owns ~75% of Telasi’s share capital, with the remaining 25% being owned by  “Best Energy LLC,” a subsidiary of CBS Group, a large Georgian holding company controlled by Khvicha Makatsaria. CBS Group purchased this block of shares from the Georgian Partnership Fund, a government development fund, but it is unclear when this happened or for what value. According to a 2023 interview, Makatsaria intends to purchase the remaining 75% of Telasi shares so the company can become “fully Georgian” and separate itself from Russian influence. 

The Georgian government has been in a decade-long legal battle with Inter RAO, and Georgia is not winning per recent court decisions. Surprisingly, the Georgian government has allowed Inter RAO to continue controlling Telasi, given the strategic importance of energy grids and the two countries’ complicated and bloody history. 

Other Securities 

The only other listed equities on GSE are Liberty Bank, Green Insurance, and Batumi Euphoria Hotel. 

Liberty Bank has only experienced 29 trades in the last 12 months. in 2017 the company went through a majority transaction with Georgian Financial Group, a subsidiary entity of Hunnewell Partners. Liberty Bank has not released financial information for 2023. Long-term financial performance appears to be materially lower than the two larger Georgian peers. 

Green Insurance’s filings are all in Georgian, so it is difficult to understand how the company is doing. ChatGPT was unable to translate the filings.

Batumi Euphoria Hotel is a large hotel, casino, convention center, spa, and entertainment complex in the resort coastal town of Batumi, Georgia. Similarly, the last English reports were published in 2020. I imagine it is doing quite well given the reflection in tourism but I cannot confirm. The largest shareholder of Euphoria Hotel, Galip Ozturk, is currently imprisoned in Georgia, awaiting court proceedings on a drug position and import charge.

Numerous bonds are traded on the GSE but very few have seen any trades in the last few years. Given the lack of financial disclosures by the companies behind the bonds, I can’t provide any commentary.

Closing Thoughts

The Georgian capital market is in a weird place. It has two mature, well-run banks that have taken their listings elsewhere. It has a growing, relatively stable economy that can support more listings of domestic companies. Plenty of industrial, manufacturing, energy, and services businesses have the financial scale required to list. 

Unfortunately, I fear many Georgian companies and their ultimate owners do not want the spotlight and forced transparency that going public demands. The country has many ghosts of the past when it comes to corrupt government officials, offshore entity ownership, and poor disclosure rules. 

Georgia has more potential than most of its peers. The country is one of the easiest in the world to do business in. The natural beauty and rich history attract tourists from all around the globe every year and the hospitality industry continues to blossom. I am excited to return to the country one day.