Georgian Railway last week issued FY13 results, in-line with our most recent post-9M13 projections. Revenues rose slightly despite weaker volumes thanks to higher tariffs. Lower electricity and fuel costs indicate gains in efficiency but profitability was hurt by rise in salaries. In FY14, we expect higher revenues and EBITDA as new liquid cargo contracts contribute to growth and dry cargo volumes recover. We expect revenues to grow by 8.2% in FY14 reaching US$ 312.1mn, with the EBITDA margin expanding back to 50.1%.The Tbilisi Bypass Project is still on hold for three years, pending a final decision, meaning that GR now has access to the remaining US$ 91mn in unused project funds.

Tariffs rescue revenues from volume-driven drop
Georgian Railway’s FY13 revenues added 2.1% y/y (in GEL terms) as higher tariffs offset a drop in cargo volumes last year. We now expect two main revenue driving segments, liquid and dry cargo transportation (together accounting for 88.5% of total revenues in FY13), to increase by 15.4% and 11.3% y/y in 2014 respectively, compared to our previous estimates of 26.6% and 11.6% growth. 

EBITDA to recover on the back of higher liquid cargo volumes
With higher tariffs already in place, we believe that a recovery of freight transportation will have a positive impact on margins going forward. We now expect a 3.6ppts EBITDA margin expansion in FY14 as new liquid cargo volumes and a recovery in dry cargo will provide a boost to the bottom line. Meanwhile, FY13 EBITDA decreased by 12.1% y/y due to higher salary costs effective as of 4Q12. Total salaries increased by GEL 25.0mn (US$ 14.5mn), or 23.1% y/y. A reduction in income from non-continuing operations also fed into last year’s bottom line weakness. This was caused by the reversal of a GEL 15.6mn (US$ 9.5mn) guarantee provision made in 2012 that evaporated other income from non-continuing operations.

Lower net income in FY13 was due to higher finance costs and FX losses 
Net income plunged 32.9% (33.4% in US$ terms) as the above mentioned factors were joined by higher financing costs and lower income. Finance income decreased by GEL 6.8mn (US$ 4.1mn), posting a 35.4% decline compared to FY12, due to decrease in interest rates. Additionally, a GEL 34mn (US$ 20mn) in FX losses were booked in FY13, which expect not to reoccur and net income to reach US$ 72.5mn in FY14 (a 9.6ppts margin expansion).

Cash balance benefits from capex delays
GR’s liquidity position was little-changed in 2013 as delays on the Tbilisi Bypass Project cut the size of planned capex outflows. We believe GR will not need additional funding as on average, its funding sources are almost twice as much as uses over the 2014-18 period.