GR released 9M18 unaudited results together with Management Discussion and Analysis. Revenue increased 3.3% y/y to US$ 126.3mn, mostly due to increased logistics and freight car rental revenues, up 65.4% y/y to US$ 28.8mn. Passenger traffic also posted a 19.2% y/y growth to US$ 9.0mn in 9M18, enhanced by main line passengers. Meanwhile, operating expenses posted slight growth of 3.7% y/y to US$ 114.2mn. Adjusted EBITDA increased 3.6% y/y to US$ 49.3mn. GEL’s depreciation-related non-cash FX loss of US$ 4.2mn in 9M18 compared to US$ 31.6mn gain in the same period last year caused the bottom line to plunge to US$ 7.3mn. Fitch Ratings revised Georgian Railway’s outlook to positive from stable and affirmed the rating at “B+”, in November 2018.
Freight transportation, the largest revenue category, declined 9.9% y/y to US$ 71.0mn in 9M18 from last year’s low base of US$ 78.8mn. This decline was fully offset by logistic service revenue growth of 59.1% y/y to US$ 21.3mn. Freight car rental and passenger traffic revenues, together accounting for 13.0% of total revenue, posted significant growth of 86.4% y/y to US$ 7.4mn and 19.2% y/y to US$ 9.0mn, respectively. Other revenue was down 24.9% to US$ 2.3mn.
9M18 operating expenses increased 3.7% y/y to US$ 114.2mn. Employee benefits expense, largest expense category, remained flat at US$ 44.3mn. Depreciation and amortization expense rose 7.4% y/y to US$ 35.6mn. Other categories, accounting for just 30.0% of total expenses increased 4.1% y/y; Namely electricity, consumables, and maintenance expenses were up 3.6% to US$ 13.2mn, increased logistical service and freight car rental revenue-related costs were also up 39.1% to US$ 5.0mn and 54.6% y/y to US$ 1.8mn, respectively. Taxes (exc. Income tax) were down 9.1% y/y to US$ 7.6mn, the only category that posted a decrease both in GEL and USD terms.
The decline in freight transportation revenue was mainly attributable to decrease in liquid cargo transportation. Oil products transportation revenue, which makes up 96.3% of liquid cargo, was down 10.9% y/y to US$ 28.8mn, while crude oil transportation more than halved (-56.9% y/y) to US$ 1.1mn in 9M18. The drop in oil products transportation (635,000 tons lower) was driven by the reduced transportation volumes from Kazakhstan, while 61.2% y/y drop in crude oil transportation volumes by rail is explained by re-direction of crude oil from Azerbaijan into the pipelines going through Georgia.
Dry cargo transportation, accounting for 57.9% of total revenue, decreased 6.4% y/y to US$ 41.1mn in 9M18 explained by reduced transportation of sugar and ferrous metals. Sugar transportation fell 35.6% y/y to US$ 2.8mn and accounted for more than half of the total decline in dry cargo revenue. Reduced transportation volumes from Brazil, coupled with decreased share of cane sugar (relatively more profitable product) in product mix are to be blamed for the decline. Ferrous metals and scrap revenue shrank 16.7% y/y 9M18 to US$ 2.8mn due to decrease in transportation to profitable routes. Construction freight and grain transportation were also down 11.6% y/y to US$ 1.9mn and 5.9% y/y to US$ 2.2mn, respectively. Other dry cargo categories rose, with chemicals and fertilizers category posting the largest positive contribution to the revenue, increasing 15.7% y/y to US$ 4.2mn, while ores transportation, which contributed 20.1% of total dry cargo transportation, posted a low single-digit growth of 3.8% y/y to US$ 8.3mn.
9M18 adjusted EBITDA increased 3.6% y/y to US$ 49.3mn. As a result, the adjusted EBITDA margin rose from 38.9% in 9M17 to 39.0% in 9M18. The growth in other income to US$ 5.8mn (+74.5% y/y) was stemming from the sale of fixed assets in the reporting period. GEL’s 5.6% depreciation against US$ in Sep-18 vs Sep-17 led to a non-cash FX loss of US$ 4.2mn compared to US$ 31.6mn gain in the same period last year. This caused net income to drop to US$ 7.3mn in 9M18 from US$ 37.8mn in 9M17.
Operating cash increased 22.8% y/y to US$ 64.6mn in 9M18. Cash flow for investing activities came in at US$ 27.0 compared to US$ 56.8 last year, while cash flow from financing activities stood at US$ 42.0mn vs US$ 22.9mn in 9M17. This is explained by acquisition of two new Stadler trains from the proceeds of the new loan by GR in 2017.
Fitch Ratings revised Georgian Railway’s outlook to positive from stable and affirmed the rating at “B+”, in November 2018. The upgrade in outlook reflected the change in the Georgian Sovereign rating (BB-/Positive) in March 2018.
