Hi there! Read through all of your articles on GCEO, and I had a few thoughts.
1. How did you value NAV? Did you use the investor toolkit on the website? If so, how do you feel about the multiples the businesses were rated?
I personally think their NAV is inflated, and many of their multiple ratings were unfair. I've been through a couple of their annual reports, and find that their peer comp group is invalid. For example, a 16x multiple on an education business, or 14x on a hospital business. One example would be, Overseas Education Limited in Singapore being used as a comp set. Firstly, comparing schools in Singapore to Georgia is a large stretch IMO. Secondly, Overseas Education Limited trades at around a 10 PE range for a public business - How does a private education business in Georgia get 16x?
2. I believe that there's a non-zero chance of this investment going bust if any geopolitical risk rises. Alongside Moldova, and the Baltic states(less so), I believe that Georgia is next on their mind, and Russia has clearly proven so in recent events.
I've done a DDM, and worked on my model, and am looking at a base case 50% upside on this. What's your target price? Do you have an excel sheet/pdf write up? Would love to see it.
Overall, love the work that you've done. I think this is a great pitch aside from my second point (which I believe the risks to be relatively negligible).
1. Regarding the private holdings I've only used the NAV as calculated/provided by CGEO.
1b. I note your view on inflated multiples. I suppose the first point I'd make is these valuations are subject to internal review then external review by PWC. These aren't just dreamed up numbers.
1c. Comparing your Education example: the YOY P/E is 16.1X FY22, then 12.7X for FY23, no forward PE is given. CGEO is 16.2X with a forward multiple of 11X for FY2024/FY2025.
Both examples are of a comparable size and profitability. Arguably CGEO's growth and FCF is higher/faster. Arguably the competition in Georgia is lower than Singapore and the opportunity to consolidate a fragmented market far higher.
There are 14 Georgian vs 66 Singapore international schools (CGEO part own 4 of the 14)
1d. There are plenty of education examples with higher multiples. CGEO's private education achieved a 27.2% Net Profit margin in 1Q24 which is impressive, alongside a 15% CAGR for over a decade is impressive too. Plus this is in a country with strong economic growth 7% vs Singapore's 2.7% - so there's a strong counter case too. A forward PE of 11 feels cheap not expensive!
2. Moving to your point two, well there's a non-zero chance to most things!
But I disagree with you about the threat to Georgia and disagree it's clearly proven. In fact recent events are that Ukraine was uppermost in Russia's mind, not Georgia. There is no end to the Ukraine invasion any time soon. But before that, Russia went to war with Georgia in 2008 - they took 20% which held Russian minority populations. Then they stopped. Putin stopped. Georgia has moved towards the West since 2008 and provoked Russia for years afterwards. If the Russians wanted to invade Georgia why wouldn't they have already done it?
In fact if any country is in future danger of invasion after the Ukraine conflict it would be Kazakhstan. Think of the mineral riches Russia would obtain.
Or would they invade Azerbaijan who humiliated and beat its ally Armenia, over Nagorno Karabakh and have killed (probably accidentally) Russian journalists and a number of Airforce personnel?
But actually post-Ukraine I think Russia will need to lick its wounds and will need to work hard to hold its vast country together. Moscow vs the rest of Russia is a schism far greater than the UK's London vs the rest.
To your final point I don't have a specific target price beyond knowing the discount is unwarranted and I recognise deep value alongside risk is far more moderate than the price suggests. There is no write up other than my already-published articles.
The CEO describes paying for a multiple around 6x for certain businesses. 6-10x seems reasonable for me as someone who is investing into private businesses (illiquidity discount). In comparison, there are big public companies you can pay 6-7x EV/EBITDA in America for which I argue, are much safer of an investment (I'm not American).
2. They sold their water business to Aquila at 9x (if i recall correctly). As a water business consolidating, they would be willing to pay a higher multiple as they would believe in synergies. You'll also have to think that at that point of time, Georgia was in a much "safer" geopolitical space than it is now. Paying a higher multiple as a foreign investor isn't too difficult when Georgia's economy looks safe + potential synergies.
3. Currently on their website all of their businesses have >10x multiple on them. Do you truly believe if they were to liquidate all of their businesses today they could do so at a 10x+ multiple? For a proper NAV, I think if you did your found your own multiples, numbers and comps it would be better. Personally, I feel safer at a 7x multiple on all of their businesses and got around a $16 price target(NAV) and my DDM is at about $15. So I feel fairly confident in my price targets.
4. Here is quick and dirty way to get a feel on the multiples to use for NAV:
5. So based on probability, even if I believe there's a 5% chance of it going to zero (war etc), and there's a 95% chance of it going to $15. My overall base case target is around = 0.95*15 ~ $14.25
Thank you very much for your comments. It's been interesting to reflect on what I agree and disagree with and why. It truly helps us understand our investments when we have these interactions.
1. I think the "correct" multiple depends on the growth and the opportunity. In the same video Gilauri speaks of buying fragmented industries and consolidating. CGEO has already unlocked value through the water company sale. The same would be true of its other private businesses. Also the businesses are generally highly cash generative and cash drives down the EV value and therefore flatters that multiple over time. Stripping out water from FY21 and FY20, and comparing 4 years of data the private portfolio earnings growth (outside of water) is fairly flat (which I didn't expect), although noting various investments being made and progress being spoken of.
However if we use top down analysis and if you take the current NAV (£966.2m) - deduct debt (£94.3m) - deduct publicly listed holdings (£407m) you arrive at £549m. If you take the market cap (£425m) deduct publicly listed holdings (£407m) you arrive at a simple conclusion.
That is that you are paying £18m net for £549m of private assets after you pay off debts.
2. Yes the water co sale was EV/EVITDA 8.9X. But it was also the case that CGEO's 80% stake in GGU (the water business) was for 2.7X multiple of invested capital and a 20.1% IRR. (Bought for 214m GEL and pro rata sold for 697m). Also I notice its implied valuation at 4Q21 was 697m GEL but 1Q24 it is 810m GEL (20% is valued 162m GEL). So evidence of a private asset which was **UNDERVALUED** relative to its private valuation (or at least whose value has grown).
3. The answer would be no, probably not able to liquidate at over 10X multiples. But I would also contend that CGEO doesn't face liquidation so applying that kind of valuation to a going concern seems harsh. If you shut down and liquidated NVidia tomorrow would its valuation achieve its current multiple? In fact show me a business whose valuation is liquidation proof. I'm struggling to think of one.
4. Your link is to an interesting and valuable web site - very esoteric. I just downloaded the emerging markets average valuations and I see the EV/EBITDA for Educational Services based on 60 results is 11.83X.
This reduces the NAV by £16.7m (£966.2m -> £949.5m).
The other private businesses are already on lower multiple at or around 11x
5. Your weighting of total loss and weighted return of $15 puts CGEO as 12% undervalued. (£11.20 ~$14.25). 12% of £425 market cap is £51m.
Put another way instead of paying £18m net for £549m of private assets after you pay off debts, you are prepared to pay £18+£51 = £69m for £549m of private assets. Which equates to an 87.4% discount to their NAV.
Or put another way, (£549m - £69m = £480m. So you think £480m of what CGEO say are its assets are worth zero. My question would be which parts are worth so much less?
Particularly when there's evidence a private holding once sold and listed is actually worth more, both at point of realisation, and subsequently.
The Georgian currency is a very big risk here and if the GEL was to return to the same average exchange rate against the USD and GBP as in 2021 then these shares would fall by about 30%
In May 2021 the USD bought 3.45 GEL but it only buys about 2.75 now
And in May 2021 the GBP bought about 4.80 GEL but it only buys about 3.50 now
There does not seem to be any good reason for this huge rise in the GEL against the USD and GBP in the last 3 years and so it is likely that the GEL will return to a more normal level against these currencies
I already cover this in the article - don’t see that USD is relevant, but I show the long-term average of GBP:GEL going back to 2004 is on average about what it is today. 2021 appears to be the outlier. Why are you so convinced it will return to 2021 levels?
Because the huge rise in the GEL over the last 3 years seems to have been mainly because of the war in Ukraine and that in itself is not a good reason for the GEL to massively outperform the USD and almost every other currency in the world
There is no reason why it should have increased by 40% against other currencies in Europe such as the Hungarian currency or the Polish currency
It has even soared against the Swiss Franc and that is supposed to be the strongest currency in the world
And now with this new Russian law and increasing friendship with Russia it looks like EU membership will not happen for many years and perhaps it will never happen now
So it would not be very surprising to see the GEL falling by 30%
The rise in the GEL I wouldn't describe as huge. Its strengthening is partly due to the Ukraine war not widening to include Georgia, but more to do with the strength of Georgia's economic growth and export performance which is stronger than in all the countries and currencies you mention.
I've not been able to find a single source speaking to a 30% fall in the Lari. In fact Bloomberg speaks to the Lari being a top 10 strong currency, Fitch speaks to the continuing economic growth forecast and export strength (including significant tourism into Georgia) and strong remittances from ex-patriate Georgians as reasons for Lari strength. Once a compromise is found the pressure on the currency will dissipate and it will strengthen.
I also see that Georgia has large reserves ($5bn) and is willing to use them e.g. 2 days ago:
I also note if sanctions do follow against Georgia, and EU membership chances recede, that imports from the EU greatly outweigh exports to the EU from Georgia. Reduced trade with the EU could actually support and strengthen the currency.
Trading Economics sees a 3% movement to 2.81 GEL:GBP in the next 12 months.
The only source is the chart showing a big rise in the GEL against almost every currency in the world and I think that this rise was largely due to the Ukraine war and the fact that many Russians have moved to Georgia with their skills and their savings and their spending
No wonder the Georgian economy and currency have received a big benefit in the same way that Armenia has benefited
But what happens when the Ukraine war ends as it will? How much of the growth and spending will end when many if not all of the Russians take their skills and their savings and their spending home again?
Then there is the new Russian law and the increasing friendship with Russia
It is quite possible that Georgia will seek closer ties with Russia and it is quite possible that it will never join the EU
So I have no idea where the GEL will go from here and that is the same for all of the economists and experts and everyone else
But given the big rise of the GEL over the last few years against almost every currency in the world I would not be surprised to see the GEL fall quite a long way as the Ukraine war ends and as the friendship between Georgia and Russia increases
I am 100% in equity and see CGEO as offering great value.
The protestors are now focusing on the election, along the lines of what I thought. The US has sanctioned dozens of people connected with the Georgia Dream party.
I agree! I've added a BGEO vs CGEO 5 year comparison chart to this article which shows how CGEO is cheap even relative to BGEO which is at least the same amount exposed.
Hi there! Read through all of your articles on GCEO, and I had a few thoughts.
1. How did you value NAV? Did you use the investor toolkit on the website? If so, how do you feel about the multiples the businesses were rated?
I personally think their NAV is inflated, and many of their multiple ratings were unfair. I've been through a couple of their annual reports, and find that their peer comp group is invalid. For example, a 16x multiple on an education business, or 14x on a hospital business. One example would be, Overseas Education Limited in Singapore being used as a comp set. Firstly, comparing schools in Singapore to Georgia is a large stretch IMO. Secondly, Overseas Education Limited trades at around a 10 PE range for a public business - How does a private education business in Georgia get 16x?
2. I believe that there's a non-zero chance of this investment going bust if any geopolitical risk rises. Alongside Moldova, and the Baltic states(less so), I believe that Georgia is next on their mind, and Russia has clearly proven so in recent events.
I've done a DDM, and worked on my model, and am looking at a base case 50% upside on this. What's your target price? Do you have an excel sheet/pdf write up? Would love to see it.
Overall, love the work that you've done. I think this is a great pitch aside from my second point (which I believe the risks to be relatively negligible).
Hi Yj,
1. Regarding the private holdings I've only used the NAV as calculated/provided by CGEO.
1b. I note your view on inflated multiples. I suppose the first point I'd make is these valuations are subject to internal review then external review by PWC. These aren't just dreamed up numbers.
1c. Comparing your Education example: the YOY P/E is 16.1X FY22, then 12.7X for FY23, no forward PE is given. CGEO is 16.2X with a forward multiple of 11X for FY2024/FY2025.
(https://oel.listedcompany.com/financial_ratios.html)
Both examples are of a comparable size and profitability. Arguably CGEO's growth and FCF is higher/faster. Arguably the competition in Georgia is lower than Singapore and the opportunity to consolidate a fragmented market far higher.
There are 14 Georgian vs 66 Singapore international schools (CGEO part own 4 of the 14)
(see: https://www.international-schools-database.com/country/georgia)
1d. There are plenty of education examples with higher multiples. CGEO's private education achieved a 27.2% Net Profit margin in 1Q24 which is impressive, alongside a 15% CAGR for over a decade is impressive too. Plus this is in a country with strong economic growth 7% vs Singapore's 2.7% - so there's a strong counter case too. A forward PE of 11 feels cheap not expensive!
2. Moving to your point two, well there's a non-zero chance to most things!
But I disagree with you about the threat to Georgia and disagree it's clearly proven. In fact recent events are that Ukraine was uppermost in Russia's mind, not Georgia. There is no end to the Ukraine invasion any time soon. But before that, Russia went to war with Georgia in 2008 - they took 20% which held Russian minority populations. Then they stopped. Putin stopped. Georgia has moved towards the West since 2008 and provoked Russia for years afterwards. If the Russians wanted to invade Georgia why wouldn't they have already done it?
In fact if any country is in future danger of invasion after the Ukraine conflict it would be Kazakhstan. Think of the mineral riches Russia would obtain.
Or would they invade Azerbaijan who humiliated and beat its ally Armenia, over Nagorno Karabakh and have killed (probably accidentally) Russian journalists and a number of Airforce personnel?
But actually post-Ukraine I think Russia will need to lick its wounds and will need to work hard to hold its vast country together. Moscow vs the rest of Russia is a schism far greater than the UK's London vs the rest.
To your final point I don't have a specific target price beyond knowing the discount is unwarranted and I recognise deep value alongside risk is far more moderate than the price suggests. There is no write up other than my already-published articles.
OB
By the way, I hope you know I'm not here to criticize, I'm here to pursue the truth and actual valuation together with you.
Hi OB.
Thanks for the reply.
My take is that the NAV multiples are inflated. Here's why I believe so:
1. Georgia Capital says so themselves in this video at the "Defining cheap" section at 19min 50sec.
https://www.youtube.com/watch?v=LjZAJUspeRk&ab_channel=GoodInvestingTalks
The CEO describes paying for a multiple around 6x for certain businesses. 6-10x seems reasonable for me as someone who is investing into private businesses (illiquidity discount). In comparison, there are big public companies you can pay 6-7x EV/EBITDA in America for which I argue, are much safer of an investment (I'm not American).
2. They sold their water business to Aquila at 9x (if i recall correctly). As a water business consolidating, they would be willing to pay a higher multiple as they would believe in synergies. You'll also have to think that at that point of time, Georgia was in a much "safer" geopolitical space than it is now. Paying a higher multiple as a foreign investor isn't too difficult when Georgia's economy looks safe + potential synergies.
3. Currently on their website all of their businesses have >10x multiple on them. Do you truly believe if they were to liquidate all of their businesses today they could do so at a 10x+ multiple? For a proper NAV, I think if you did your found your own multiples, numbers and comps it would be better. Personally, I feel safer at a 7x multiple on all of their businesses and got around a $16 price target(NAV) and my DDM is at about $15. So I feel fairly confident in my price targets.
4. Here is quick and dirty way to get a feel on the multiples to use for NAV:
https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/vebitda.html
5. So based on probability, even if I believe there's a 5% chance of it going to zero (war etc), and there's a 95% chance of it going to $15. My overall base case target is around = 0.95*15 ~ $14.25
Let me know what you think!
Hi YJ
Thank you very much for your comments. It's been interesting to reflect on what I agree and disagree with and why. It truly helps us understand our investments when we have these interactions.
1. I think the "correct" multiple depends on the growth and the opportunity. In the same video Gilauri speaks of buying fragmented industries and consolidating. CGEO has already unlocked value through the water company sale. The same would be true of its other private businesses. Also the businesses are generally highly cash generative and cash drives down the EV value and therefore flatters that multiple over time. Stripping out water from FY21 and FY20, and comparing 4 years of data the private portfolio earnings growth (outside of water) is fairly flat (which I didn't expect), although noting various investments being made and progress being spoken of.
However if we use top down analysis and if you take the current NAV (£966.2m) - deduct debt (£94.3m) - deduct publicly listed holdings (£407m) you arrive at £549m. If you take the market cap (£425m) deduct publicly listed holdings (£407m) you arrive at a simple conclusion.
That is that you are paying £18m net for £549m of private assets after you pay off debts.
2. Yes the water co sale was EV/EVITDA 8.9X. But it was also the case that CGEO's 80% stake in GGU (the water business) was for 2.7X multiple of invested capital and a 20.1% IRR. (Bought for 214m GEL and pro rata sold for 697m). Also I notice its implied valuation at 4Q21 was 697m GEL but 1Q24 it is 810m GEL (20% is valued 162m GEL). So evidence of a private asset which was **UNDERVALUED** relative to its private valuation (or at least whose value has grown).
3. The answer would be no, probably not able to liquidate at over 10X multiples. But I would also contend that CGEO doesn't face liquidation so applying that kind of valuation to a going concern seems harsh. If you shut down and liquidated NVidia tomorrow would its valuation achieve its current multiple? In fact show me a business whose valuation is liquidation proof. I'm struggling to think of one.
4. Your link is to an interesting and valuable web site - very esoteric. I just downloaded the emerging markets average valuations and I see the EV/EBITDA for Educational Services based on 60 results is 11.83X.
https://pages.stern.nyu.edu/~adamodar/pc/archives/vebitdaGlobal11.xls
This reduces the NAV by £16.7m (£966.2m -> £949.5m).
The other private businesses are already on lower multiple at or around 11x
5. Your weighting of total loss and weighted return of $15 puts CGEO as 12% undervalued. (£11.20 ~$14.25). 12% of £425 market cap is £51m.
Put another way instead of paying £18m net for £549m of private assets after you pay off debts, you are prepared to pay £18+£51 = £69m for £549m of private assets. Which equates to an 87.4% discount to their NAV.
Or put another way, (£549m - £69m = £480m. So you think £480m of what CGEO say are its assets are worth zero. My question would be which parts are worth so much less?
Particularly when there's evidence a private holding once sold and listed is actually worth more, both at point of realisation, and subsequently.
OB
The Georgian currency is a very big risk here and if the GEL was to return to the same average exchange rate against the USD and GBP as in 2021 then these shares would fall by about 30%
In May 2021 the USD bought 3.45 GEL but it only buys about 2.75 now
And in May 2021 the GBP bought about 4.80 GEL but it only buys about 3.50 now
There does not seem to be any good reason for this huge rise in the GEL against the USD and GBP in the last 3 years and so it is likely that the GEL will return to a more normal level against these currencies
This would mean a fall of about 30% in the shares
I already cover this in the article - don’t see that USD is relevant, but I show the long-term average of GBP:GEL going back to 2004 is on average about what it is today. 2021 appears to be the outlier. Why are you so convinced it will return to 2021 levels?
Because the huge rise in the GEL over the last 3 years seems to have been mainly because of the war in Ukraine and that in itself is not a good reason for the GEL to massively outperform the USD and almost every other currency in the world
There is no reason why it should have increased by 40% against other currencies in Europe such as the Hungarian currency or the Polish currency
It has even soared against the Swiss Franc and that is supposed to be the strongest currency in the world
And now with this new Russian law and increasing friendship with Russia it looks like EU membership will not happen for many years and perhaps it will never happen now
So it would not be very surprising to see the GEL falling by 30%
The rise in the GEL I wouldn't describe as huge. Its strengthening is partly due to the Ukraine war not widening to include Georgia, but more to do with the strength of Georgia's economic growth and export performance which is stronger than in all the countries and currencies you mention.
I've not been able to find a single source speaking to a 30% fall in the Lari. In fact Bloomberg speaks to the Lari being a top 10 strong currency, Fitch speaks to the continuing economic growth forecast and export strength (including significant tourism into Georgia) and strong remittances from ex-patriate Georgians as reasons for Lari strength. Once a compromise is found the pressure on the currency will dissipate and it will strengthen.
I also see that Georgia has large reserves ($5bn) and is willing to use them e.g. 2 days ago:
https://www.reuters.com/world/europe/georgias-central-bank-spends-60-mln-support-lari-amid-political-crisis-2024-05-16/
I also note if sanctions do follow against Georgia, and EU membership chances recede, that imports from the EU greatly outweigh exports to the EU from Georgia. Reduced trade with the EU could actually support and strengthen the currency.
Trading Economics sees a 3% movement to 2.81 GEL:GBP in the next 12 months.
https://tradingeconomics.com/georgia/currency
Do you have any actual sources for this forecasted 30% fall you say "would not be very surprising"?
The only source is the chart showing a big rise in the GEL against almost every currency in the world and I think that this rise was largely due to the Ukraine war and the fact that many Russians have moved to Georgia with their skills and their savings and their spending
No wonder the Georgian economy and currency have received a big benefit in the same way that Armenia has benefited
https://www.fdiintelligence.com/content/data-trends/the-currencies-beating-the-us-dollar-82701
But what happens when the Ukraine war ends as it will? How much of the growth and spending will end when many if not all of the Russians take their skills and their savings and their spending home again?
Then there is the new Russian law and the increasing friendship with Russia
It is quite possible that Georgia will seek closer ties with Russia and it is quite possible that it will never join the EU
So I have no idea where the GEL will go from here and that is the same for all of the economists and experts and everyone else
But given the big rise of the GEL over the last few years against almost every currency in the world I would not be surprised to see the GEL fall quite a long way as the Ukraine war ends and as the friendship between Georgia and Russia increases
are you buying more? any reasons why the share price is dropping? i'm looking for news, but i cant find any.
I am 100% in equity and see CGEO as offering great value.
The protestors are now focusing on the election, along the lines of what I thought. The US has sanctioned dozens of people connected with the Georgia Dream party.
https://www.rferl.org/a/georgian-protesters-elections-october-foreign-agent-law/32972822.html
Looks like a good deal at today's price around 880p. I'm can't see any more news except for the fact that currency is about 1.8% weaker this week
I agree! I've added a BGEO vs CGEO 5 year comparison chart to this article which shows how CGEO is cheap even relative to BGEO which is at least the same amount exposed.