Fully state-owned Georgian Railway (GR) recently placed US$ 500mn in Eurobonds, the country’s first EMBI-eligible benchmark corporate bond, which helped broaden GR’s investor base and increase liquidity. The nature of GR’s operations is dictated – mostly to the company’s benefit – by Georgia’s geographical position as a key transit corridor linking oil- and commodity-rich Central Asia to the powerful European market. Operationally, the company is marked by impressive profitability thanks to stable revenue streams and subdued cost growth, while its debt servicing ability is solid. Georgian debt issuers are also benefiting from active investor interest due to the country’s prospects for continued economic growth and its low debt profile.
Superior profitability versus peers
With an impressive 54% EBITDA margin in 2011, Georgian Railway stands well above regional rail peers (Russian Railways: 21%, Deutsche Bahn 9%), and boasts a solid net margin of 37%. Operating profit margins are well-placed to improve further as operating costs are largely fixed and lag revenue growth. We see GR’s EBITDA margin widening to 60% as of 2017. Moreover, ongoing investments into infrastructure and the rolling stock fleet will help subdue the operating cost base.
Safe on debt covenants
We see GR’s end-2012 net debt-to-adjusted EBITDA at 2.5x, safely below the new Eurobond’s 3.5x covenant. We also expect the ratio to decline gradually to 1.5x as of 2017. GR’s leverage is below that of Deutsche Bahn and Hungarian Railways and in-line with Kazakh and Russian peers. In 2012, we expect net debt-to-equity of 0.4x. We also believe the company has a strong capacity for servicing debt, with adjusted interest coverage ratio of 3.6x in 2012E, set to increase further to 4.5x by 2017F.
On-track growth
Dry cargo, in our view, will be the key driver of mid-term revenue growth. In 1H 2012, dry cargo volumes increased 20% y/y to 5.2mn tonnes, while liquid cargo volumes fell 14% y/y to 4.6mn tonnes. Management attributed the decrease to a shortage of tank cars. In order to eliminate the bottleneck GR has signed a 1,000 tank car lease agreement with AS Spacecom. We expect total freight transportation to grow at 7% of CAGR reaching 30.6mn tonnes in 2017.
Georgia’s first EMBI-eligible corporate bond
In early July GR sold US$ 500mn in Eurobonds with a 7.750% coupon due 2022. This was Georgia’s first EMBI-eligible benchmark corporate bond, which helped broaden the company’s investor base – the issue was 4x oversubscribed. A portion of the proceeds were used to refinance GR’s US$ 250mn Eurobonds due 2015, while the balance will be used to finance large-scale capex programs and to pay dividends in respect of cumulative profits.
