Fully state-owned Georgian Railway reported 9M12 financial results. Revenues remained flat at US$ 213mn. The company’s adjusted EBITDA (excluding Batumi Tower disposal and other nonrecurring items) also remained largely flat at US$ 116mn. GR reported 82% y/y decrease in net income to US$ 15mn due to US$ 21mn one-off cost related to disposal of Batumi Tower and reversal of net finance income to net finance cost of US$ 28mn as of 9M12. Georgian Railway remains compliant with debt covenants; however the company performance was below our expectations.
Dry cargo increase supports diversification; revenues remain flat
Georgian Railway’s 9M12 revenues were flat at US$ 213mn. The largest revenue contributor (85% of total revenues) – freight traffic, decreased 1.1% to US$ 181mn, as 17% y/y increase of dry cargo transportation volume was outweighed by 13.3% y/y decline of liquid cargo. We see the increase in dry cargo transportation as positive since it supports diversification and lowers dependency on oil and oil products. Both freight car rental (10% of total revenues) and passenger transportation (4% of total revenues) increased by 11% y/y and 22% y/y, respectively. Scrap sales constitute only 1% of revenues.
One-off cost boosts operating expenses
In 9M12, operating expenses were up 19% y/y to US$ 162mn, due to disposal of Batumi Tower (cost of US$ 21mn or 11.7% of operating expenses). Adjusted operating expenses (excluding Batumi tower disposal) increased only 4% to US$ 142mn. The increase was on the back of higher depreciation charges (+18.9% y/y to US$ 48mn) and electricity and material costs (+18.7% y/y to US$ 23mn). The company’s staff costs were almost unchanged at US$ 47mn.
Higher finance costs and asset disposal affect net income
The company’s adjusted 9M12 EBITDA (excluding Batumi Tower disposal and other non-recurring items) declined 1% y/y basis reaching US$ 116mn. Adjusted EBITDA margin was 54.6% vs 55.1% in 9M11. Net income of US$ 15mn was affected by the one-off cost of US$ 25mn related to the buy-back of a 5 year note at a premium price and disposal of Batumi Tower. As a result, net margin was 7.2% representing a 33ppts decline on y/y basis (adjusted net margin was 25.6% down 14.7ppts).
We revise our forecasts; compliant with debt covenants
Following the release of 9M12 results, we have revised our FY12 revenues forecast from US$ 325.8mn to US$ 286.8mn. We have also reduced our operating costs from US$ 243mn to US$ 230mn for FY12 on the back of lower revenue. We expect adjusted EBITDA margin at 54.8% vs previous forecast of 56.3% in FY12. We expect adjusted net margin to be at 25.6% (down 14.7ppts y/y). We see the company’s net debt (excluding deposits held as a separate balance sheet item) to adjusted EBITDA ratio of 3.3x in FY12, below the Eurobond covenant ceiling of 3.5x.
