GR released poor FY17 audited results. On the back of the continued decline in freight traffic volumes, the top line decreased 6.8% y/y to US$ 173.2mn, from an already low base. On the positive note, logistic service and freight car rental revenue, together accounting for 20.8% of total, were up 32.4% y/y to US$ 29.4mn and 13.5% y/y to US$ 6.7mn, respectively. Following the addition of four new passenger trains, passenger traffic revenue boosted, up 19.7% y/y to US$ 9.1mn. Ambiguity on Tbilisi Bypass Project translated into a US$ 152.2 impairment loss in 2017. As a result, FY17 net income was negative at US$ 141.2mn. Significant drop in EBITDA caused the net debt-to-EBITDA ratio to reach 4.9x, exceeding the Eurobond covenant of 3.5x. The outlook for GR’s performance slightly improved in 2018, with 1H18 revenues increasing 3.9% y/y to US$ 80.4mn.
FY17 revenue was down 6.8% y/y to US$ 173.2mn, from the low base of US$ 185.9mn in 2016. Decrease in freight transportation revenue, down 15.3% y/y, was the main reason behind the decline. Freight handling and other revenue categories declined 10.6% y/y to US$ 20.0mn and 21.3% y/y to US$ 3.3mn, respectively. On the positive note, logistic service and freight car rental revenue, which account for 20.8% of total, were up 32.4% y/y to US$ 29.4mn and 13.5% y/y to US$ 6.7mn, respectively. Passenger traffic category increased for the second consecutive year with FY17 revenue up 19.7% y/y to US$ 9.1mn. In 1H18, the downward trend reversed with revenues increasing 3.9% y/y to US$ 80.4mn helped by the increased freight car rental and logistic service revenue categories.
Operating expenses (excluding impairment loss on PPE), which are mostly GEL-denominated, declined 3.7% y/y to US$ 148.0mn in 2017. The decrease is mostly attributed to GEL’s 6.0% depreciation against US$ in 2017 vs 2016 (in GEL terms operating expenses increased 2.1% y/y). Reduction of the revenue, coupled with reduction in other income from continuing operations were the main reasons behind the 12.3% y/y decrease in adjusted EBITDA to US$ 72.3mn in 2017.
US$ 152.5mn impairment loss was recognized on Tbilisi Bypass Project reflecting ambiguity on the project. Considering the significant uncertainties related to the future of the project and the associated potential economic benefits, the carrying value of the project (GEL 397.3mn) was written down to its recoverable amount (GEL 14.7mn). This resulted in GEL 382.6mn or US$ 152.5mn impairment loss recognition, hitting the bottom line, which came in at US$ -141.2mn.
Main Line Modernization Project is the only ongoing capital project by Georgian Railway. A US$ 95.0mn is expected to be spent over 2018-21, while the project finalization is anticipated for end-2019. The company plans to finance the capital expenditures with its internal sources.
FY17 net debt-to-EBITDA ratio came in at 4.9x, exceeding the Eurobond covenant of 3.5x. According to the terms and conditions of the 2012 Eurobond prospectus, GR and any of its subsidiaries are not allowed to incur, directly or indirectly, any financial indebtedness if net debt-to-EBITDA ratio exceeds 3.5x. We expect the ratio to remain above the Eurobond covenant in the medium term which will limit GR’s borrowing capacity under Eurobond covenants.
