Georgian Railway reached a favorable agreement with the professional union of employees following the staff strike in late 2014. As a result, we have slightly revised our numbers and expect the employee benefits to grow 1.1% y/y in 2014. We also performed a sensitivity analysis on 2015 GR revenues in light of the regional economic weakness. As a result, we see no major impact on GR Eurobond covenants in 2015. Due to promising 9M14 performance (see our previous note) and new freight in oil products, we project a revenue growth of 3.3% y/y in GEL terms in 2014 and 3.4% y/y in 2015, on our conservative estimates. Top line will be slightly challenged by the volatile GEL (2.0% y/y higher) in 2015. However, GR’s FX risk is partially mitigated through mostly US$-denominated freight tariffs. In 2015, net income will increase 1.6% y/y to US$ 62.4mn from US$ 61.5mn in 2014. EBITDA is set to grow 1.7% y/y and reach US$ 145.7mn in 2015 from US$ 143.3mn in 2014. We expect net debt to EBITDA at 2.6x in 2015 vs. 2.7x in 2014, below the Eurobond covenant of 3.5x.
Solid performance expected in FY15
We expect growth of revenues in 2015 at 3.4% y/y in GEL terms and at 1.4% y/y in US$ terms, respectively, to reach US$ 284.8mn (GEL 512.6mn) thanks to new agreements in freight of oil products. Due to revenue shift to a more profitable oil products segment, EBITDA and EBIT margins will both improve slightly in 2015 to reach 51.2% and 30.2% against 51.0% and 30.1% in 2014. Net profit margin will remain largely unchanged at 21.9%, in our view. Consolidation of freight forwarding subsidiaries (8.0% of total freight in 9M14 and 5.4% in 9M13) will further boost revenues in 2014 to reach US$ 280.8mn (GEL 495.5mn), down 2.7% y/y in US$ and up 3.3% in GEL terms, respectively, due to depreciated (6.1% higher y/y) GEL. In 2014, freight transportation will hold a lion’s share of revenues at 87.2%, followed by car rental and passenger segments with 7.8% and 4.1% shares, respectively. Other revenue accounts for 0.9%.
Employee benefits to increase 1.1% y/y in FY14
As a result of negotiations, GR and the professional union of employees reached an agreement regarding the staff strike which started in November. The latter seems to be mainly caused by miscommunication as most of the costs had already been budgeted. As a result, employee benefits will increase only by 1.1% y/y in FY14. The strike has caused a minor delay in cargo transportation. However, the delayed cargo is expected to be transported with an increased flow before the year-end.
Further, on the 9th of December, Fitch Ratings revised Georgian Railway’s Outlook to Stable from Negative and affirmed its Long-term IDR (Issuer Default Rating) at ‘BB-‘. The Outlook revision mirrored GR’s better-than-expected 9M14 performance and the commencement of freight forwarding services.
