Georgian Railway recently reported 1H14 results broadly in-line with guidance and our estimates. Revenues are showing real signs of recovery, especially in the oil products and dry cargo segments. The top line was also padded by the consolidation of freight forwarding subsidiaries Georgian Transit and Georgian Transit Line. A point of concern was the drop-off in crude oil volumes (halved to 1mn tons in 1H14 from 1H13) as regional pipelines have become more competitive and stolen business, but we remain upbeat on GR’s mid-term outlook on the back of a slate of emerging regional opportunities. New crude oil shipments are likely from Kazakhstan, Turkmenistan, and Afghanistan, while new volumes of cotton, fertilizers, and sugar are expected as Russia has eliminated discounts in the direction of Ukraine and GR’s tariffs have become more competitive. GR is also awaiting the completion of the Baku-Tbilisi-Kars (BTK) railway in 2015 – the new route is poised to boost cross-Georgia trade flows.
Top line starts recovery, shifts towards higher-margin sources
GR’s revenues increased 1.6% (6.9% in GEL terms) in 1H14 y/y to US$ 132mn (GEL 230mn). Growth was mainly driven by addition of freight forwarding margins to liquid cargo segment revenues as well as higher oil products and dry cargo transportation volumes. Oil products revenue increased by 13.1% in 1H14 y/y (19.1% in GEL terms), boosted by methanol exports from Azerbaijan and addition of freight forwarding margins from Georgia Transit and Georgia Transit Line. On the dry cargo side, GR boosted volumes of ferrous and scrap metal (8.6% y/y), construction freight (6.0%), sugar (17.2%), and grains (18.3%). Growth in the oil product and dry freight segments helped offset the effect of declining crude oil volumes that came about as a result of the expansion of the Caspian Pipeline Consortium (CPC) pipeline. The expansion re-directed Tengizchevroil (TCO) shipments from Kazakhstan via alternate routes instead of Georgia (approx. 2mn tons per year). Overall, revenue per 1,000-ton-km rose 1.1% in crude oil, 1.8% in oil products, and 3.6% in dry cargo in US$ terms. The diversification is a positive development with GR’s revenue mix shifting into higher-margin sources like oil products and freight forwarding.
Profitability remains solid despite FX losses
A more profitable mix of cargo and stable salary costs helped GR widen the EBITDA margin to 45.9% in 1H14. Net income, however, fell 22.0% y/y owing to higher finance costs as a result of a depreciation of the GEL vs. the US$. Finance costs surged to US$ 12.8mn in 1H14 from US$ 3.3mn in 1H13 as GR booked a US$ 8.2mn FX loss in 1H14. However, this loss is not monetary and not realized until the redemption of the bonds, hence in line with GEL/US$ FX rate it will post losses and gains but not pose a significant problem to GR. The GEL/US$ FX rate has stabilized recently, and we expect any reported FX losses to be much lower in the future.
