Georgian Railway is on track to deliver growth in the coming years after striking a new agreement to transport oil from Kazakhstan and expand into Black Sea ferry operations and truck cargo transportation via intermodal stations. GR also decided to re-visit its capex-heavy Tbilisi Bypass Project, which will boost profitability and free up cash if put on hold. Meanwhile, 9M13 financials were disappointing as the company failed to deliver growth and margins were lower due to higher salary costs. The drivers of the top-line weakness are temporary and we expect the rebound in sales which started in 3Q13 to continue through 4Q13, leaving annual revenues flat y/y. We see 2014F revenues up 19% y/y on the back of newly announced projects and agreements.
Flat 2013 ahead but stronger prospects in the future
9M13 revenues were flat at US$ 212mn. The largest revenue segment, freight transport, added just 4% y/y to US$ 188mn, while a 20% y/y increase in liquid cargo transportation was offset by a 15% y/y decrease in dry cargo. A new agreement to ship crude oil and mazut from Kazakhstan is the basis for our revised FY14 volume growth projection of 27% for the liquid cargo segment. In addition, the new Black Sea ferry and intermodal station projects should add 4-5% annual growth to dry cargo volume from FY14 onwards.
The major capex program is being re-visited
The Tbilisi Bypass Project (TBP) project is being re-visited by the company as the project may result in increased operational costs and lower benefits than initially thought. Additional research is being done by the government and there is no clarity on the capex required for the project for the next three years. Due to the lack of clarity on future plans, in our model we envisage no additional outflows from 4Q13 onwards. If TBP is put on hold, we believe it will benefit current operations through higher long-term profitability and release of additional cash flows in the short term. We will re-visit our model assumptions once a final decision on the project is made. The potential return on the US$ 223mn in capex already spent is unclear, but GR is now able to choose between completing or discontinuing the project, without further commitment. Other capex projects recently announced, which are aimed at providing near-term revenue, will also help diversify revenue sources.
Liquidity remains strong and less pressured by near-term capex requirements
GR’s net debt 9M13 over LTM EBITDA stands at 2.8x. We believe GR is well-placed in terms of liquidity to meet expansion and maintenance capex and debt obligations. We expect net debt-to-EBITDA to peak at 2.9x in FY13 before gradually declining to 1.6x in 2017 and that the company will have no issues in complying with the 3.5x ceiling set by Eurobond covenants.
