GR released 1H15 unaudited results and Management Discussion and Analysis. Revenue increased 1.2% y/y on the back of a strong performance in freight transportation (up 6.5% y/y) and freight handling (up 10.4% y/y). Reduced operating expenses led to a 22.6% y/y increase in adjusted EBITDA to US$ 73.6mn. Significant weakening of GEL against US$ in 1H15 led to a substantial FX loss and pushed the bottom line into negative territory.
We expect end-FY15 net debt-to-adjusted EBITDA to improve to 2.5x, well below the Eurobond covenant of 3.5x.
1H15 revenue increased 1.2% y/y due to solid growth in GR’s core activities. Freight transportation and freight handling expanded 6.5% y/y and 10.4% y/y, respectively. Main drivers of the increase in freight transportation were oil products, ferrous metals and scrap, and grain, increasing 25.1% y/y, 43.0% y/y and 57.5% y/y, respectively. Other dry cargo categories posted y/y decreases; an exception was the ‘other’ category (the largest dry cargo category with a 14.5% share), which expanded 27.0% y/y. In line with our previous guidance, crude oil shipments dropped 32.0% y/y. A 49.5% y/y drop in freight car rental revenue resulted from an agreement with Azerbaijan Railways, according to which the corresponding freight car rental expense also decreased proportionately. Passenger traffic revenue decreased 36.4% y/y, but its share in the top line is only 2.1%. We believe GR has upside potential in oil products and dry cargo, in addition to the already fast-growing freight handling business.
1H15 operating expenses decreased 19.7% y/y to US$ 84.6mn (US$ 105.3mn in 1H14), as they are mostly GEL-denominated. A lower utilization rate of rolling stock also played its role. Freight car rental expense decreased due to the aforementioned agreement between Georgian and Azerbaijan railways, according to which both sides were exempted from freight car rental payments during the first eight days of each month, from December 2014 through February 2015.
1H15 adjusted EBITDA increased 22.6% y/y (up 2.3% y/y in 1H14) and accounted for US$ 73.6mn (US$ 60.0 in 1H14). EBIT grew 63.7% y/y to US$ 50.7mn. In the same vein, adjusted EBITDA and EBIT margins widened to 55.6% and 38.3% from 45.9% and 23.7% in 1H14, respectively. Significant weakening of GEL against US$ in 1H15 led to a substantial FX loss and pushed the bottom line into negative territory. Notably, the FX loss is an unrealized non-cash charge and not a cause for concern.
