Extract from 2024 Annual Report
Dear Fellow Shareholders,
In this, my seventh annual letter to Georgia Capital shareholders, I want to highlight the remarkable quality of our management team and portfolio businesses during a year characterised by a very challenging political and geopolitical environment, both in Georgia and neighbouring countries. Despite the significant external challenges and ongoing uncertainties, our portfolio companies have delivered very strong performances, culminating in a 15.7% growth in Net Asset Value per share in 2024, to GEL 95.95. This, together with the combination of the sale of the beer and distribution business and our ongoing share buyback programme, is an exceptional performance, again underpinned by our three fundamental drivers – strong corporate governance; access to management; and access to capital. My firm belief is that the best companies and management teams distinguish themselves in challenging times – reflecting on that, our management and employees truly distinguished themselves during 2024.
I am particularly pleased that we achieved a very consistent level of NAV growth across both our private portfolio businesses and in our listed investment. Our listed investment, Lion Finance Group PLC (formerly known as Bank of Georgia Group PLC) had an exceptional year, both in Georgia and in Armenia following the March 2024 acquisition of Ameriabank. I’ll comment on this in more detail later. In our portfolio businesses, we have completed a number of senior management changes, and delivered a very successful restructuring of our healthcare businesses, whilst also ensuring the businesses weathered the significant storm of external political uncertainty. They have successfully absorbed all these pressures and delivered outstanding operational success. In short, I am delighted with the resilience of Georgia Capital and our businesses – conservative businesses in relatively defensive sectors.
Our aim has always been: to invest in high-quality businesses with great market positions, high returns and the ability to deliver sustainable earnings growth through the cycle. This focus continued to guide us in 2024 and will continue to do so in the future, whilst at the same time the Board always seeks to ensure the sound, prudential management of our balance sheet. This conservatism has ensured that, as Georgia Capital has developed over the last few years throughout a prolonged period of significant geopolitical challenge, the Board has maintained a conservative approach in the management of our portfolio companies, and a very strong balance sheet, characterised by further deleveraging during 2024. We are maintaining this conservative posture as we move into 2025.
The discount of our share price to our NAV per share has remained too wide, despite our share price increasing by 17.4% during 2024, and we responded to this by buying back more of our shares, through our ongoing share buyback and cancellation programmes, while at the same time reducing leverage at both the HoldCo and individual portfolio business levels. I will talk more about this later.
In last year’s annual letter, I highlighted that our strategy during 2024 was to reduce leverage faster than our originally planned NCC ratio target of 15% by December 2025, deliver our targeted reduction in the management expense ratio, ensure we focus on the opportunities to sell businesses in our “other” portfolio, and maintain our policy of opportunistic share buybacks. In each of these aspirations for 2024 we delivered. I will address each aspect of our 2024 aspirations in this letter. Over time, we aim to develop into a sustainable permanent capital vehicle, investing mainly in capital-efficient/ capital-light sectors and opportunities, in association with the regular return of capital to shareholders.
Our macroeconomic environment
From a macroeconomic perspective, Georgia sustained strong economic momentum in 2024, demonstrating resilience and flexibility despite external shocks and domestic political uncertainty. Real GDP expanded by an estimated 9.5%, following 7.8% growth in 2023, driven by robust domestic demand and recovering foreign exchange inflows. Credit expansion remained strong, with the commercial bank loan portfolio growing 17% y-o-y, while fiscal policy remained expansionary, with current and capital expenditures rising 16% and 12% y-o-y, respectively. This sustained economic growth supported significant deleveraging, leading to notable improvements in the external balance sheet. The IMF modified fiscal deficit narrowed to 2.5% of GDP, while government debt declined to 36% of GDP.
Georgia’s external position improved significantly, with the current account deficit narrowing to -3.5% of GDP in 9M24, primarily due to strong growth in the services sectors, particularly tourism and transport. Tourism revenues reached US$ 4.4 billion, exceeding pre-pandemic levels by 35%, although visitor numbers remained below 2019 levels, indicating further growth potential.
Inflation remained below the 3% target since April 2023, averaging 1.1% in 2024, allowing the NBG to further ease its monetary policy by reducing the refinancing rate to 8%. However, the Georgian Lari depreciated as negative sentiment increased demand for hard currency. In response, the NBG actively intervened in the foreign exchange market to manage expectations. While it was a net buyer of US$ 287 million from January to April, it became a net seller, offloading US$ 874 million between May and October. As a result, international reserve assets declined by 11.2% year-on-year, reaching US$ 4.4 billion by December 2024.
Looking ahead, growth in 2025 is expected to moderate from the high levels of real GDP growth delivered over the last few years, partly due to the heightened levels of geopolitical uncertainty.
Delivering on our strategic priorities
This Annual Report will go into greater detail later, but let me highlight here how we continued to deliver on our key strategic priorities in 2024.
2024 was an outstanding year for the Group.
- In December 2024, we completed another milestone transaction, selling an 80% holding in our beer and distribution business to Royal Swinkels, a high-quality international investor and strategic buyer. The net sale proceeds of c.US$ 63 million, represented a substantial premium to the independently valued Net Asset Value of the business, and significantly strengthened GCAP’s liquidity position and reduced net debt at the GCAP Holding Company level. Our remaining 20% holding in the business remains subject to a put/call structure.
- We continued to make disciplined capital allocations. In May 2024, we increased the consolidation of Georgia’s Health Insurance market, by acquiring the Ardi medical insurance business.
- We almost doubled the level of share buybacks in 2024, compared to 2023, via our ongoing share buyback and cancellation programmes, under which US$ 48.1 million was allocated to share buybacks. In May 2024, we announced the Board’s intention to make available at least GEL 300 million for share buybacks and dividends through the end of 2026, with the programmes to be funded from expected cash flows.
- We significantly delevered the business and, notwithstanding allocating US$ 48.1 million to share buybacks, the Net Capital Commitment ratio reduced to 12.8%, from 15.6% a year earlier. This is a significant achievement, comfortably ahead of out initially targeted 15% by December 2025.
- We completed two significant business restructurings – in the retail (pharmacy) and hospitals businesses – including the enhancement of the senior management teams in both businesses. Both businesses are now delivering significant performance improvements moving into 2025.
Capital allocation, share buybacks and dividends
During 2024, we allocated capital in a number of key areas, with an investment of GEL 16.9 million in our private portfolio companies. This included: GEL 11.3 million allocated to the renewable energy business for the ongoing development of pipeline projects; and GEL 5.6 million allocated to the education and other businesses.
In addition to these investments in our private portfolio companies, we also continued to invest in Georgia Capital shares to take advantage of the discount to NAV at which the shares currently trade. During 2024, 3,669,889 shares with a total value of GEL 131.9 million were bought back under our buyback and cancellation programmes. In addition, we continued our buyback and cancellation programme into 2025 and, in the first quarter of 2025 to date, an additional 1,512,332 shares, at a cost of GEL 68.5 million, have been repurchased for cancellation.
Consequently, the capital returned to shareholders since our demerger in 2018 totalled US$ 151.7 million, or 12.6 million Georgia Capital shares, representing 26.2% of GCAP’s share capital at its peak. As a result, the gross number of issued shares, including those held by the management trust, now stands at 38.0 million, below the 39.4 million shares in issue at the time of the demerger. In essence, this reflects the repurchase of more shares than we issued in 2019-2020 to purchase the then outstanding minority stake in Georgia Healthcare Group.
During 2024, Georgia Capital collected GEL 201.8 million in dividends, including one-off dividends of GEL 22.6 million (2023: GEL 235.9 million, which included GEL 56.1 million of one-off dividends). Excluding the one-off dividends, GEL 122.2 million was received from Lion Finance Group, reflecting a combination of regular cash dividends and our participation in their share buybacks, GEL 25.4 million from our insurance businesses, GEL 10.0 million from retail (pharmacy), and GEL 21.5 million from renewable energy and other businesses. Looking forward to 2025, we currently anticipate receiving in excess of GEL 180 million in regular dividends from our portfolio companies.
Portfolio valuation
Our total portfolio value increased by GEL 89.5 million, or 2.4%, to GEL 3.8 billion during the year.
- The value of GCAP’s holding in Lion Finance Group was up by GEL 195.2 million, reflecting the net impact of GEL 340.0 million value creation and GEL 144.8 million cash and buyback dividend income from the Bank during 2024.
- The value of the water utility business increased by GEL 29.0 million, reflecting its strong operating performance during the year.
- The value of the private portfolio decreased by GEL 134.6 million in 2024, mainly reflecting the divestment of an 80% holding in the beer and distribution business and the collection of GEL 57.0 million dividends from the private portfolio companies. The decrease was partially offset by GEL 66.3 million value creation and GEL 16.9 million investments in the portfolio companies.
Value creation
The total portfolio value creation amounted to GEL 435.3 million in 2024.
- An 18.5% increase in Lion Finance Group’s share price, supported by a 3.3% appreciation of GBP against GEL in FY24, led to GEL 340.0 million value creation.
- GEL 29.0 million value was created in our water utility business.
- The value creation in the private portfolio amounted to GEL 66.3 million, reflecting a net impact of: a) a GEL 671.5 million operating performance-related increase in the value of our private assets, and b) a GEL 605.1 million value reduction from changes in valuation inputs, largely reflecting the negative impact from the increased country risk premium during the year.
Our listed investment – Lion Finance Group – continued to deliver strong balance sheet growth in both customer lending and deposits, and high profitability, with an annualised ROAE of 30.0%, underpinned by its continued focus on digital transformation, and delivering strong growth in the payments business. The Bank is clearly making significant progress, which has led to sustainable customer franchise and revenue generation growth. Reflecting the strong performance, Lion Finance Group’s share price increased by 18.5% in 2024, strongly supporting our NAV growth with GEL 340.0 million value creation. In addition, the Bank has a robust capital distribution policy, including share buybacks and regular dividends and, on 25 February 2025, the Bank announced its board’s intention to recommend a final dividend for 2024 of GEL 5.62 per ordinary share at the Bank’s 2025 Annual General Meeting. This will make a total dividend paid in respect of the Bank’s 2024 earnings of GEL 9.00 per share (a 12.5% increase y-o-y). In addition, in February 2025, the Bank announced an extension of the buyback and cancellation programme by an additional GEL 107.7 million. Overall, the Bank’s dividend and share buyback payout ratio for 2024 was 31% of total earnings.
In March 2024, Lion Finance Group completed its acquisition of 100% of Ameriabank CJSC, a leading universal bank in Armenia with an attractive franchise. The transaction has already started to deliver significant earnings enhancement for Lion Finance Group, with Ameriabank delivering high levels of growth and profitability. We expect this acquisition to continue to enhance earnings for Lion Finance Group over the next few years, supporting significant value creation.
The value creation of the water utility business amounted to GEL 29.0 million in 2024 and the equity value increased to GEL 188.0. This reflects the strong operating performance of the business on the back of the increased tariffs for corporates effective from 1 January 2024, and the application of the put option valuation to GCAP’s 20% holding, where GCAP has a clear exit path through a put and call structure at pre-agreed EBITDA multiples. GCAP’s put option is exercisable in 2025 or 2026.
As mentioned above, the operating performance of our various private portfolio investments was extremely strong against the backdrop of significant regulatory changes reflecting the impact, in particular, of management changes and restructuring programmes in the retail (pharmacy) and healthcare businesses. I was particularly pleased with the exceptional GEL 671.5 million operating performance related value creation in our private portfolio businesses, prior to the negative impact from, in particular, the increased country risk premium.
The individual performances of our private businesses are described in greater detail later in this report.
Environmental, social and governance
We have continued to focus on reducing our impact on the environment, with environmental, social and governance (ESG) issues remaining at the forefront of our thinking and business operations. Our progress in this regard during 2024 was excellent and, while there is significantly more detail in this report and in our Sustainability Report, I want to draw out a few particularly noteworthy aspects of our ESG commitment.
- Georgia Capital was awarded the Impact Award by the Asian Development Bank (“ADB”), in recognition of our longstanding commitment to responsible investment.
- For the first time in Georgia, we successfully obtained third-party assurance on our greenhouse gas emissions.
- We continued to invest in capital-light businesses and industries that have a positive impact on people and our planet.
Our people are our business
We never lose sight of the fact that our people are our business. They remain critical to our ongoing success and we have excellent people throughout the business, at both the holding company level and in all of our portfolio businesses. During 2024, we continued to enhance the quality of our management teams, through a combination of internal development, combined with some high quality external hires.
Over the last 12 months, I have continued to dedicate much of my time to supporting and developing our people. As always, I deeply appreciate the considerable efforts of our management teams and employees in driving the continued success of Georgia Capital.
Outlook
I am delighted with how Georgia Capital rose to the challenges of 2024. The excellent performance of our portfolio companies, coupled with our unwavering focus on delivering on our strategic priorities with the sale of our beer and distribution business, were instrumental to our outstanding 2024 results. I am particularly pleased that we have delivered very strong levels of cash generation; made substantial further progress in reducing our Net Capital Commitment ratio; and continued to focus on significant capital repatriation to our shareholders via the ongoing share buyback and cancellation programme. This performance was underpinned in 2024 by the resilience of the Georgian economy, which has demonstrated consistent and substantial growth over the past few years, despite ongoing political and geopolitical tensions and uncertainties. In 2025, we aim to further optimise our portfolio by pursuing selective divestments, executing buybacks, strengthening our balance sheet, and seizing new investment opportunities aligned with our long-term vision. While macroeconomic and political uncertainties persist, we are confident in our ability to create long-term value for our shareholders through our resilient investment platform, and to progress further towards achieving our key strategic priorities.
Irakli Gilauri
Chairman and CEO
21 March 2025