With GR’s recent release of FY14 Management Discussion and Analysis, we offer an in depth analysis of FY14 performance and our outlook. GR performed well amidst the regional economic slowdown, falling oil prices, and weaker GEL. Focus shifted from crude oil to more profitable oil products – a welcome diversification. We expect the top line to remain flat in FY15 on the back of weak rail volumes and slower GDP growth across the region.
Lower operating expenses helped sustain profitability, while a hike in finance costs depressed the bottom line. Net debt-to-adjusted EBITDA improved to 2.7x, creating comfortable headroom up to the Eurobond covenant. We expect the ratio to come down further to 2.5x by the year-end. The Baku-Tbilisi-Kars (BTK) line is expected to bring new freight from Turkey-CIS traffic starting in 2016. The modernization project is proceeding at a slower pace, while a final decision on the bypass project is expected in September 2015.
Improved operating performance
Despite the slowing regional economies and declining rail volumes, GR’s revenue grew 0.4% y/y in FY14. Revenue breakdown changed considerably, as crude oil lost its position to the more profitable oil products. A 6.5% y/y increase in dry cargoes largely offset a 6.9% y/y drop in liquid cargoes. In FY15, we expect the top line to remain flat, before rebounding in FY16 on the back of new business from the BTK line. Operating expenses decreased 4.5% y/y in FY14; with a major portion fixed, we expect them to decline slightly in FY15.
FY14 adjusted EBITDA grew 1.8% y/y to reach US$ 143.8mn. Likewise, adjusted EBITDA margin climbed to 49.6% from 48.9% in the previous year. We project largely flat adjusted EBITDA in FY15. Due to the 6.2% y/y weakening of GEL against US$ in FY14, GR booked a considerable, albeit an unrealized non-cash FX loss, undercutting net income. As a result, the net profit margin contracted to 7.7% from 13.6% in FY13. A significant further weakening of GEL against US$ in 1H15 leads us to project another substantial FX loss in FY15, pushing net income into negative territory.
Limited capex schedule
Modernization is the only ongoing project currently requiring investing outflows, which should be relatively minor on an annual basis as the project stretches through 2019. Tbilisi Railway Bypass project is under review, with a final decision expected in September 2015. The new Baku-Tbilisi-Kars rail line is funded through the Georgian government-owned SPV with no involvement from GR.
In compliance with Eurobond covenants
FY14 net debt-to-adjusted EBITDA recovered to 2.7x from 3.0x in FY13, below the 3.5x Eurobond covenant. The improvement was due to a flat debt balance and a surge in operating cash, which boosted the cash balance 34.2% y/y. We expect the FY15-end net debt-to-adjusted EBITDA to improve to 2.5x due to moderate capital spending.
A promising outlook
We remain confident in GR’s mid-term outlook due to a well-diversified freight portfolio and expected new shipments from the Baku-Tbilisi-Kars (BTK) line. In addition, the modernization project should gradually facilitate traffic and reduce expenses.
