GOGC posted promising FY14 results given the high regional uncertainty in 2014, especially in the oil and gas sector. FY14 revenue showed modest, yet welcoming growth. Gardabani Combined Cycle Power Plant (CCPP) was completed ahead of schedule and is expected to commence operations in 2015, providing profitable revenue diversification. Keeping in mind the regional economic slowdown, we believe revenue growth from existing sources will be subdued and align with that of GDP’s.
Despite its slight deterioration to 2.5x, FY14 net debt-to-adjusted EBITDA is well below the Eurobond covenant. We expect FY15 net debt-to-adjusted EBITDA to increase slightly to 2.6x before sliding to 1.3x in FY16. GOGC is considering two major capital projects including an underground gas storage reservoir and Gardabani CCPP II. In addition, the company is negotiating a potential sale of Gardabani CCPP.
Profitability declined slightly in FY14, set to rebound in FY16
FY14 revenue grew by a respectable 3.5% y/y, fueled by sale of gas and pipeline rental. We expect the top line to grow 9.3% y/y in FY15 thanks to the addition of electricity sales from Gardabani CCPP. FY14 operating expenses grew 5.6% y/y, mainly due to a 6.5% y/y increase in cost of gas, the largest operating expense with an 83.7% share. We see operating expenses growing slower than revenue starting end-FY15, as the company enters the more profitable electricity generation sector.
FY14 adjusted EBITDA shrank 1.3% y/y to US$ 62.1mn. The adjusted EBITDA margin narrowed to 30.7% in FY14 from 32.1% in FY13. We forecast adjusted EBITDA to increase 3.3% y/y in FY15 and 62.4% y/y in FY16 (the first fully operational year for Gardabani CCPP). FY14 EBIT saw a one-off drop mainly due to the reclassification of customer penalties from other income to finance income. A hike in finance costs weighed on net income of US$ 47.5mn – down 16.2% y/y. The FY14 net profit margin fell to 23.4% from 28.9% in FY13. Due to a significant expected FX loss in FY15, we expect net income to more than halve in FY15. However, the FX loss is an unrealized non-cash charge and not a cause for concern.
Two major capital projects considered, Gardabani CCPP may be sold
GOGC is considering building an underground gas storage reservoir, with a capacity of 230-250 mmcm (10-15% of current annual consumption), which would increase Georgia’s energy security. A feasibility study should be completed by early 2016. In addition, GOGC is considering building Gardabani CCPP II with similar technical characteristics to Gardabani CCPP. GOGC is also negotiating a potential sale of Gardabani CCPP for at least US$ 290.0mn. A final decision is expected in late 2015.
Compliant with Eurobond covenants
Decreased adjusted EBITDA, together with increased net debt due to reduced cash (down 12.9% y/y), led to a worsened net debt-to-adjusted EBITDA ratio of 2.5x. Still, the figure is well below the Eurobond covenant of 3.5x. Due to CCPP-related investing outflows in 1H15, we expect the year-end ratio to increase slightly to 2.6x before sliding to 1.3x in FY16 on the back of significantly increased EBITDA.
