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About Georgia Capital PLC – Your Ground
Floor Investment Opportunity in Georgia
Georgia Capital PLC (“Georgia Capital” or “the Group” – LSE: CGEO LN) is a UK listed
holding company of a diversified group of companies following completion of its demerger
from BGEO Group PLC on 29 May 2018.
Georgia Capital is focused on investing and developing in
businesses in Georgia with holdings in industries that are
expected to benefit from the continued strong growth and
diversification of the Georgian economy. The Group seeks
to create value by driving the development of high-growth
potential and structurally attractive businesses in Georgia,
aiming to consolidate fragmented or underdeveloped
markets. We either acquire our businesses during their early
development stage or establish them on a greenfield basis.
Strategy
Chairman and CEO
Statement
Portfolio
Read about Georgia Capital
Strategy on page 14
Read our Chairman and CEO
Statement on page 10
Read about our Portfolio
Companies on page 32
Georgia Capital PLC Annual Report 2018
STRATEGIC REVIEW
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
Overview
Discussion of Results
Alternative Performance Measures
Reconciliation of Adjusted IFRS
Measures to IFRS Figures
159
168
Independent Auditor’s Report
241 Abbreviations and References
Consolidated Statement of
Financial Position
243 Glossary
244 Shareholder Information
valuation Methodology
169 Consolidated Income Statement
2
4
6
Performance Highlights
Operating Highlights
Georgia Capital At a Glance
10
Chairman and CEO Statement
Our Business
82
85
89
91
102
Georgia Capital Strategy
Market and Industry Overview
Capital Allocation and Managing
Portfolio Companies
Three Fundamental Enablers
Solid Track Record Demonstrated
by Management
14
16
23
26
28
30
32
66
70
73
Financial Review
Discussion of Investment Portfolio
IFRS Results
GOVERNANCE
118 Directors’ Governance Statement
120 Board of Directors
122
Executive Management
170
171
173
175
176
Consolidated Statement of
Comprehensive Income
Consolidated Statement of
Changes in Equity
Consolidated Statement of
Cash Flows
Separate Statement of
Financial Position
Separate Statement of Changes
in Equity
124 Corporate Governance Framework
177 Separate Statement of Cash Flows
value Creation
Portfolio Companies
Risk Management
128 Nomination Committee Report
130 Audit Committee Report
135
Investment Committee Report
Principal Risks and Uncertainties
137 Shareholder Engagement
Resources and Responsibilities
138 Directors’ Remuneration Report
154
Statement of Directors’
Responsibilities
155 Directors’ Report
178
Notes to the Consolidated
Financial Statements
Vineyards in Kakheti – Georgia’s wine region
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For more information on Georgia Capital visit:
georgiacapital.ge
2
Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
3
PERFORMANCE HIGHLIGHTS
Double-digit revenue growth coupled
with strong operating cash flow generation
Overview (management accounts)
Georgia Capital NAV Overview (management accounts)
GCAP net operating income (GEL millions)
48.7m
Net income (GEL millions)
164.4m
Leveraged ROI (%)
37.9%
Total attributable income of portfolio companies
(GEL millions)
187.9m +100.1%
of which, income from
listed investments
of which, income from
private investments
112.6m
75.3m
Group Consolidated (IFRS)
Revenue
1.3bn +13.8%
Gross profit
486.7m +12.8%
Portfolio value (GEL millions)
Private | Early stage
14.4%
Listed
51.9%
Total portfolio value (GEL)
1.9bn
Private | Late stage
33.4%
Listed
Georgia Healthcare Group
Bank of Georgia Group
Private Late Stage
Water Utility
Housing Development
P&C Insurance
Private Early Stage
Renewable Energy
Hospitality and
Commercial Real Estate
Beverages
Pipeline
Education
Other
977.8
520.3
457.5
628.3
431.0
66.8
130.5
271.3
61.2
149.1
61.0
5.9
7.1
(1.2)
Total portfolio value (GEL billions)
1.9bn +1.8%
Listed equity investments (GEL millions)
977.8m +4.8%
Private investments (GEL millions)
905.5m
-1.3%
Net Asset Value per share (GEL)
47.13 +0.9%
Investment Portfolio Performance Highlights (IFRS)
LSE Listed
Adjusted net income, BOG2
Private Late Stage
EBITDA1, Water Utility
458.3m +22.6%
83.4m +14.9%
EBITDA1, GHG
132.3m +22.3%
Gross real estate profit, Housing Development
14.9m +79.7%
Adjusted net income, P&C2
17.7m +8.8%
Read more on Our Portfolio Results on pages 102 to 116
1 EBITDA is an alternative performance measure (APM) and is defined on page 243 in the Glossary.
2
IFRS net incomes for P&C Insurance and BoG are adjusted to exclude the impact of non-recurring items and non-
recurring deferred tax remeasurement charges.
Certain financial measures presented in the Overview and Strategic Review are taken from
Georgia Capital’s unaudited management accounts. The management accounts is an
alternative performance measure (APM) and is described on page 82 and the differences from,
and the reconciliation to, the IFRS Audited financial statements are detailed on pages 85 to 88.
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewStrategic Review Overview
4
Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
5
OPERATING HIGHLIGHTS
Listed
Private Late Stage
Private Early Stage
Bank of Georgia
Georgia Healthcare Group
Retail clients (millions)
2.4 +5.4%
Digital transactions (millions)
48.4 +32.2%
Volume of internet bank/mobile bank transactions
(GEL millions)
3,991 +91.1%
Number of hospitals
37 NMF
Number of beds
3,320 +306
Number of polyclinics
16 NMF
Number of pharmacies
270 +15
Bed occupancy rate, referral hospitals1
63.3% -1.2ppt
Water Utility
For more
information
see page 40
Water sales (m3 millions)
180 +3.5%
Electricity generation (kwh millions)
324 -5.2%
Electricity consumption (kwh millions)
237 -18.4%
New connections
5,015 NMF
Housing Development
Total number of
projects completed
Ongoing
projects
2 -2
9 +2
146 -76.8%
Apartments sold
For more
information
see page 44
A leading universal bank
in Georgia
Bank of Georgia is well positioned to
benefit from the underpenetrated
banking sector in Georgia through
providing best in class services.
For more information see
page 36
Net sellable area (Square metres)1
220,876 -1.1%
P&C Insurance
New retail insurance policies written
150,246 +50.4%
For more
information
see page 48
Active retail clients
96,247 NMF
Active corporate clients
3,101 +45.9%
GHG
The largest and the only fully integrated
healthcare provider in the fast-growing,
predominantly privately-owned Georgian
healthcare ecosystem with an aggregate
annual value of GEL 3.8 billion.
For more information see
page 32
Renewable Energy
MW operating capacity pipeline
500MW
target in the medium term including
152MW existing assets of water
utility business and 410MW in
the pipeline
For more
information
see page 52
Hospitality and Commercial Real Estate
Hotel rooms pipeline
1,000
hotel rooms over the
next three years.
Currently
approximately 1,121
rooms of which 152 are
operational and c.969
are in the pipeline
Leased area
22,331
+1,854
square metres
Yield (commercial real
estate portfolio)
9.9%
+0.8ppt
Occupancy rate
(commercial real
estate portfolio)
90.1%
+1.8ppt
Vineyard portfolio target
1,000
hectares of vineyards over the next
three years, currently 436 hectares2
Wine sales (‘000 bottles)
4,346 +22.2%
Beer sales (‘000 litres)
15,983 +60.6%
For more
information
see page 56
Beverages
For more
information
see page 60
1 Excluding newly-launched facilities, Regional Hospital and Tbilisi Referral Hospital.
1 Net sellable area, representing total square metres including both sold and available for sale areas.
2 Wine business purchased seven hectares of vineyards in January 2019.
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6
Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
7
GEORGIA CAPITAL AT A GLANCE
UK listed holding company focused
on investing in and developing
businesses in Georgia.
Georgia Capital Portfolio
LSE Listed
Private
Late Stage
Georgia Capital capitalises with its
robust corporate governance on the
fast-growing Georgian economy across
the last decade, having access to capital
and management.
Georgia Capital seeks to capture growth
opportunities in the sectors in which it
currently operates and drive the development
of new structurally attractive, high-growth
businesses in Georgia, which it intends to
add either by acquiring businesses in their
early development stage or by establishing
greenfield businesses, often consolidating
fragmented or underdeveloped markets.
Georgia Capital actively manages its portfolio
companies to maturity, setting the strategy
and business plan of each business and
driving its execution. In order to unlock the
value of the companies in which it invests and
which it manages, Georgia Capital sets exit
options prior to making an investment.
Georgia Capital currently manages six private
businesses: (i) a water utility business; (ii) a
renewable energy business; (iii) a housing
development business; (iv) a hospitality and
commercial real estate business; (v) a property
and casualty insurance business; and
(vi) a beverages business and two public
investments (London Stock Exchange
premium-listed Georgian companies):
(i) Georgia Healthcare Group PLC (GHG),
(57% equity stake), a UK incorporated holding
company of the largest healthcare services
provider, the largest pharmaceuticals retailer
and wholesaler and the largest medical
insurance provider in Georgia; and (ii) Bank of
Georgia Group PLC (BoG), (19.9% equity
stake), a leading universal bank in Georgia.
First day of trading on LSE premium segment – 29 May 2018
Bank of Georgia
19.9%*
Water Utility
(managed by GGU)
100%
Housing Development
(managed by m2)
100%
P&C Insurance
(managed by Aldagi)
100%
* As long as Georgia Capital’s stake in BoG is greater than 9.9%, it will exercise its
voting rights in Bank of Georgia in accordance with the votes cast by all other
shareholders on all shareholder votes.
Early Stage
Georgia Healthcare Group
57%
Renewable Energy
(managed by GGU)
65%
Hospitality and Commercial Real Estate
(managed by m2)
100%
Beverages
(managed by Georgia Beverages)
80%
Pipeline
Education
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewStrategic Review Overview 8
Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
9
GEORGIA CAPITAL AT A GLANCE CONTINUED
Listed Portfolio
GHG
GHG (LSE: GHG LN) is the largest and the only fully integrated healthcare service provider
in the fast-growing predominantly privately-owned healthcare ecosystem in Georgia, which
has an annual aggregated value of GEL 3.8 billion. GHG is comprised of four different business
lines: healthcare services business (consisting of referral hospitals, community clinics and
polyclinics), pharmacy and distribution business, medical insurance business and recently
added diagnostics business. GHG’s shares are listed on the London Stock Exchange.
GHG’s Annual Report 2018 is available at: http://ghg.com.ge/
Bank of Georgia
Bank of Georgia Group PLC (Bank of Georgia Group or BoG or BoGG – LSE: BGEO LN) is a UK
incorporated holding company, comprising: a) retail banking and payment services; b) corporate
investment banking and wealth management operations; and c) banking operations in Belarus
(BNB). The Group targets to benefit from superior growth of the Georgian economy through both
its retail banking and corporate investment banking services and aims to deliver on its strategy,
which is based on at least 20% ROAE, 25-40% dividend payout ratio and 15-20% growth of its
loan book. BoG’s Annual Report 2018 is available at: https://bankofgeorgiagroup.com/
Private Late Stage Portfolio
Water Utility
Our Water Utility is a natural monopoly in Tbilisi and the surrounding area, where it provides
water and wastewater services to c.1.4 million residents representing more than one-third of
Georgia’s population and c.33,000 legal entities. Water Utility also operates hydro power plants
with total installed capacity of 152MW. Generated power is primarily used by the business,
with the excess amount sold to third parties.
Housing Development
Our Housing Development is a leading real estate developer on US$1.1 billion Georgian real
estate market with three business lines: (a) a residential development arm targeting mass
market-customers by offering affordable, high-quality and comfortable housing; (b) a construction
arm, engaging in construction contracts for other businesses as well as third-parties; and (c)
franchise platform for development of third-party land plots with fee sharing arrangements.
P&C Insurance
Our Property and Casualty Insurance (P&C Insurance) is a leading player in the local P&C
insurance market with a 32% market share based on gross premiums. P&C Insurance offers a
wide range of insurance products to Georgian corporates and retail through five business lines:
motor, property, credit life, liability and other insurance services.
Private Early Stage Portfolio
Renewable Energy
Our Renewable Energy is a platform for development of hydro power plants, wind power
plants and solar power plants across Georgia. The business is currently investing in
construction and development of an extensive pipeline of renewable energy projects with
500MW target operating capacity over the medium term (500MW target includes existing
energy assets of Water Utility).
Hospitality and Commercial Real Estate
Our Hospitality and Commercial Real Estate is comprised of: (a) rent-earning commercial assets
with targeted 10% yield; and (b) hotel development business across Georgia with targeted
1,000 rooms. The hotel development business has confirmed 1,121 rooms, of which 152
are operational and c.969 are in the pipeline.
Beverages
Our Beverages combines three business lines: a wine business, a beer business and
a distribution business. Our wine business produces and sells wine locally and export to
17 countries, while our beer business has a ten-year exclusive license to produce Heineken
brands in Georgia and sell them in the South Caucasus.
Pipeline
Education
We see attractive opportunities in what is currently a very fragmented, private high school
education market and expect to build a portfolio of affordable high schools to capitalise
on our scale advantage.
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewStrategic Review Overview 10
Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
11
CHAIRMAN AND CEO STATEMENT
2018 was a historic year for our Group.
As a result of the demerger of BGEO
Group PLC, Georgia Capital PLC (“GCAP”)
emerged as the only group of its size and
scale focused on investing in and developing
businesses in Georgia.
“We have developed the key principles for the
acquisition and new business development side of our
business model, which I would like to share in order to
provide an insight into our way of thinking.”
Dear Fellow Shareholders,
2018 was a historic year for our Group. As a
result of the demerger of BGEO Group PLC,
Georgia Capital PLC (“GCAP”) emerged as
the only group of its size and scale focused
on investing in and developing businesses in
Georgia. GCAP intends to capitalise on its
strong corporate governance to continue its
superior access to capital and management.
We have managed to attract a top class Board
of global independent Directors, who are
contributing substantially to the further
development of GCAP as an institution. These
pillars provide GCAP’s portfolio companies
with clear and significant advantages in the
local corporate market. Since Georgia, as we
know it, is only 25 years old, many corporate
sectors are in their early stage of development.
GCAP therefore has a unique opportunity to
participate in and shape the formation of a
number of different corporate sectors, some
of which are highly fragmented and/or with
low penetration, providing strong opportunity
for consolidation.
In addition to the demerger of the Group, 2018
will be remembered for the Group’s issuance
of a US$ 300 million six-year Eurobond with a
yield of 6.375%. This transaction once again
demonstrated our strong capabilities to
access international capital markets. In 2018,
we also kick started our US$45 million
buyback programme. At GCAP, we think of
this buyback programme as an investment.
We consider GCAP shares to be attractively
priced and we are buying an asset we very
well know and expect to be accretive. To date,
we have invested more than US$21 million in
GCAP shares.
After turning into dedicated developers and
managers of assets, we have been enhancing
our understanding of our new business and
have started to institutionalise it by further
developing our:
• capital allocation framework – I will be
describing this in greater detail below.
risk management procedures to better
manage liquidity, capital and overall risk.
•
• analytical framework of appraising
•
investment cases.
reporting and monitoring framework for
driving portfolio company value creation.
• valuation framework to mark our portfolio
companies at fair value. We identify listed
peer groups for each private business that
we own in order to value our portfolio
companies at similar multiples. Peers are
selected from frontier and emerging market
economies. In a way, we are doing deep
research of listed peer companies to make
sure that they are comparable to our
portfolio companies in aspects such as
industry, business model, company size,
economic and regulatory factors, growth
prospects and risk profiles. This research
helps us to learn and understand the key
successful strategies of our peers,
potentially to be adopted by our portfolio
companies.
• motivation system for GCAP and our
portfolio company management that aligns
the long-term interests of management and
shareholders.
• exit strategy framework. We are identifying
complementary strategies of peer
companies in the region with the desire
and potential to buy our portfolio
companies.
2018 was a year for us to get our house in
order to prepare ourselves to execute our
acquisition strategy, all the while monitoring
and developing our current portfolio
companies. We have developed the key
principles for the acquisition and new
business development side of our business
model, which I would like to share in order to
provide an insight into our way of thinking.
Who before What
Our key asset is the team of people working for
GCAP and its portfolio companies. No matter
how big the opportunity is, if we do not have the
right people managing the company following
the acquisition then it is impossible to capitalise
on the opportunity. Therefore, before we invest
in new opportunities, we make sure that we
have the right management team in place.
Clearly, developing management talent in GCAP
and its portfolio companies is the number one
priority for me. This is a key part of my KPIs
– you should expect to see personal
development as well as people development
as part of that. Apart from allocating capital,
my primary role has become to help the
management of our portfolio companies to
articulate their strategy and deliver on it. In a
way, helping others to be successful has
become very much my full-time job.
Personal development without a cultural shift
within GCAP and its portfolio companies is
difficult if not impossible. We are initiating a
cultural shift throughout the business. We
want to keep the good side of our culture
intact, such as excellence in execution,
having a clear vision, being entrepreneurial,
opportunistic learners, and fostering loyalty
to the organisation. In addition, we want to
develop other qualities in order to shift our
culture toward a constantly collaborative,
creative context. A culture where multiple
brains can work in tandem as one. The
following cultural shift will happen in next
couple of years:
• giving and receiving feedback is
considered an act of help, not criticism.
• active listening to be encouraged in order
to be open for different ideas and points
of view.
• mistakes are seen as an opportunity to
learn, rather than a source of punishment.
• developing successors will make managers
stronger, not weaker, and this will allow
further career development.
To summarise, because we refuse to invest in
any new opportunity without having the right
talent in place, we need to be proactive in
developing talent internally. Otherwise, we will
not be able to further grow and diversify our
portfolio. Personal development combined with
a cultural shift in the context of growing new
leaders is becoming a critical success factor for
growing and diversifying GCAP.
Think Twice Before Buying
Our main goal is to buy companies at affordable
prices. Although I know we are not unique
in this approach, I would stress that we have
developed a framework to estimate the optimal
price for any target. Before investing we
absolutely need to understand at what level of
discount we are buying an asset/company in
relation to listed peers. At the same time, we
want to understand at what level of discount/
premium GCAP is trading to its fair value. We
would want to buy assets/companies at a higher
discount to their listed peers than GCAP’s fair
value discount. We also need to understand
where our listed portfolio companies are trading.
We call this 360-degree analysis.
return on the total invested capital at each
portfolio company level. Different yields will
be appropriate for different industries.
We are always very mindful about the size of
any deal. We may not shy away from a large
investment if we are doing a bolt-on
acquisition with a strong existing management
team with a proven track record. However, if
we are entering a new industry we would
rather start with a small ticket size and test
and develop a management track record
before stepping up the investment size.
We obviously want to make small investments
in the sectors where we see the largest future
opportunities. We also want to use GCAP
shares as an acquisition currency when
buying assets/companies at a higher discount
to their listed peers than GCAP’s fair value
discount. Utilising GCAP shares will preserve
cash and at the same time align the interests
of participants in corporate Georgia. In general
we like the service industry as we believe that
in the long-run Georgia will become the
service hub of the region.
When investing, the following metrics are
critically important for us:
• MOIC1 combined with IRR2: we want to
know the money multiples we will achieve
with all acquisitions; however we want to
understand it in combination with the
expected IRR. We prefer to have high
MOIC with high IRR from our businesses.
Realised and unrealised MOICs are equally
important for us. We will start reporting
MOICs for our businesses from 1H19.
• ROIC3: we want to measure our expected
To summarise, buying assets at affordable prices
is part of our key investment philosophy and
we want to be very disciplined in this regard.
We are also comparing the discount level to the
fair value multiple to listed peers with the NAV
discount in GCAP. The ROIC, MOIC and IRR
combination is the key decision making matrix
used in our investment decision making process.
Cash is, was and will Always be King
We understand very well that our success will
be measured by exits we will make from our
portfolio companies/investments. An exit
strategy review is becoming one of the key
focuses of our investment decisions. However,
we also realise that exits in a small frontier
economy are not an easy exercise. Therefore,
as outlined above, our investment entry point
becomes very important, e.g. an acquisition
with a low multiple ensures that we will be able
to take money off the table by growing and
leveraging our portfolio company. In a way, for
each of our assets/investments we want to have
two potential liquidity events. One with leverage
to ensure the special dividend flow to GCAP, and
another through a trade sale or IPO.
In this context, a key focus at the portfolio
company level is the ability to grow operating
cash. At the same time management is expected
to be efficient in making capex investments by
targeting an appropriate level of ROIC. From our
perspective, monitoring of cash formation at both
GCAP and portfolio company level is becoming
1 Multiple of invested capital.
2 Internal rate of return.
3 Return on invested capital.
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Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
13
CHAIRMAN AND CEO STATEMENT CONTINUED
approximately GEL 16 million. This investment
need will be comfortably funded by the existing
liquidity of Georgia Capital, which stood at GEL
605 million at 31 December 2018.
Portfolio Valuation and Performance
Following the introduction of fair values for our
private portfolio companies on a management
account basis, our portfolio value reached
GEL 2 billion at 31 December 2018, a 1.8%
y-o-y increase. NAV per share increased by
0.9% to GEL 47.1, while NAV stood at GEL 1.7
billion, down 8.3% y-o-y. Given negative stock
market conditions during 4Q18, valuations of
our listed and unlisted companies were
unfavourably affected; however, the underlying
business performances were outstanding with
double-digit revenue growth and strong
operating cash flow generation supporting
increased earnings. This leads us to be
confident that the intrinsic values of our
portfolio companies have increased at a much
higher level than their underlying valuations
at 31 December 2018. For a detailed
performance review of each portfolio
company please refer to pages 102 to 116 of
this report.
On an IFRS basis, revenue (at GEL 1.3 billion)
and gross profit (at GEL 487 million) were
up y-o-y largely as a result of the strong
performance of GHG, our water utility and
beverages businesses. Consolidated EBITDA
remained flat at GEL 218 million. The lack of
growth reflected, in particular, the cost of
GCAP’s demerger from BGEO Group and the
cost of the launch of our beer business. Net
operating income before non-recurring
expenses and IFRS net profit were both down
for a mixture of reasons you can read about
on page 92 of this report.
Finally, I would like to thank you for your
continued support for GCAP and for Georgia.
I hope to see you all at our investor day in
Tbilisi on 27 June. I am confident that the road
ahead for GCAP will be interesting and, most
importantly, enjoyable.
This Strategic Report as set out on pages 2 to 117
was approved by the Board of Directors on 3 April
2019 and signed on behalf by Irakli Gilauri, Chairman
and Chief Executive Officer.
Irakli Gilauri
Chairman and Chief Executive Officer
3 April 2019
the key metric to watch. We are developing cash
monitoring tools which should ensure we have
a single Group-wide cash view, enabling us to
monitor and analyse cash generation across the
Group as well as measure ROICs on cash
investments for each of the projects within
our portfolio companies.
To summarise, our thinking has very much
shifted towards cash generation capabilities,
not only for GCAP but also for our portfolio
companies. Our ability to progressively
grow and generate cash will be the critical
ingredient for potential double exit routes,
which in turn is the key measurement of
our success.
As of 31 December 2018, net cash investment
in listed and late stage companies was GEL
(101) million against the fair value of GEL 1.6
billion, putting us in a strong position on both
in-place cost multiples and IRR metrics, and,
more importantly, creating optionality for our
ultimate exits given the existing cash
generation in these businesses. One key
example is GHG, where our net cash
investment was GEL 7.4 million against the fair
value of our GHG holding of GEL 520 million.
Capital Allocation
During 2018 we allocated GEL 85 million of
capital across our portfolio companies in order
to make progress towards our established
business goals. We allocated GEL 5 million to
our renewable energy business and GEL 32.9
million to the hospitality business for our hotel
pipeline development, while GEL 40.6 million
went to our beverages business for bolt-on
acquisitions to increase its scale. We also added
an education business to our pipeline by
investing GEL 6 million in land for high school
development, where we expect to build a
portfolio of affordable high schools to capitalise
on our scale advantage in what is currently a
very fragmented, private high school education
market. We aim to invest GEL 140 million equity
capital into our education business and aim to
reach 30,000 pupils by the end of 2025.
We manage our capital needs such that
we do not depend on potentially premature
liquidation of our listed portfolio companies.
Our ability to capitalise on the benefits of better
capital allocation constitutes a pathway
towards improving returns and therefore we
constantly look for favourable investment
opportunities in Georgia, preferably within
capital light service industries. Based on
our capital allocation outlook through the
end of 2022, as described on page 23,
we currently plan to invest approximately
GEL 413 million and expect to receive
dividends of approximately GEL 429 million,
leading to net expected capital inflows of
Photo Ushguli villages in
Svaneti, Georgia – sometimes
referred to as the highest
village in Europe, famous for
beautiful views, clean air and
ancient structures, that are part
of the UNESCO world heritage.
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14
Georgia Capital PLC Annual Report 2018
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15
GEORGIA CAPITAL STRATEGY
Georgia Capital aims to
deliver total shareholder returns
of 10-times over 10 years
• Investing in and developing business in Georgia for over 15 years.
• Targeting 10-times total shareholder returns in 10 years.
• LSE premium listed, with greater than 90% institutional shareholder base.
• Running efficient cost structure with no management or success fees.
#1
Georgia
Leading economy in the region
• Diversified non-commodity reliant economy with
consistently high GDP growth across the last decade.
Top-ranked in economy environment indices
• Sixth in Ease of Doing Business (2019).
• Top eight in Europe region by Economic Freedom Index
(Heritage Foundation, 2019) and #16 internationally.
• Low corruption and bribery risk (TI, 2018 and Trace
International, 2018).
Investment-led GDP growth close to 5.0% growth
expected in 2019
• Double-digit growth of tourism revenues supporting SME
development and accelerating GDP growth.
• Development of large public infrastructure programmes
backed by multilateral international funding driving potential
GDP growth.
Historically low inflation with 3% target set from 2018
by National Bank of Georgia
Georgia Capital strategy is based on three pillars
#2
#3
Capital Allocation and Managing
Portfolio Companies
Capital allocation
• Highly disciplined approach to unlock value through buying
and developing businesses.
• Clear, Company-specific, exit paths through IPO or
trade sale in five to ten years and outstanding divestiture
skills demonstrated via successful public listing of
healthcare business.
• Disciplined when investing by buying cheaply.
• 360-degree analysis to be performed when evaluating capital
returns, new investment opportunities or divestments.
• Buying assets cheaply is the first and most important element
of Georgia Capital’s investment strategy.
Harvesting investments
• Attracting and developing talent is a top priority.
• Aligned management style with institutionalised/
non-institutionalised portfolio companies.
• Share ownership plans (proxy shares) for portfolio
companies’ management.
• Track record of institutionalising and creating independently
managed healthcare business.
Three Fundamental Enablers
Superior access to capital
• Only Group of its size and scale focused on investing in and
developing businesses in Georgia.
• Uniquely positioned given the access to capital in a small
frontier economy.
• Flexibility to use own shares as acquisition currency.
Access to good management
• Reputation among talented managers as the – “best group
to work for”.
• Attracted talents have demonstrated track record of
successful delivery.
Commitment to the highest level of corporate
governance
• Outstanding track record.
• Strong Board and robust corporate governance.
• Aligned shareholders’ and management’s interests by
share compensation.
• High level of transparent reporting.
Shaori reservoir – all-season beautiful lake located in the
region of Racha with a spectacular view of snowy
Caucasus mountains. Surrounded by colourful nature,
reflected in the water creates a fairy tale land.
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17
GEORGIA CAPITAL STRATEGY – MARKET AND INDUSTRY OVERVIEW
Attractive Place for Doing Business
Georgia is an open and resilient emerging market and its ambition to transform itself
into a Regional Hub Economy has already produced tangible results: tourism is
booming and trade integration has strengthened. These, coupled with a business-
friendly environment and policies aimed at further diversifying the economy, support
to attract foreign investments and boost growth.
EASE OF DOING
BUSINESS RANKED
GEORGIA IN 2019
2ndIn protecting minority investors
2ndIn starting a business
4thIn registering property
6thOverall ranking
Up from 16th to ninth in 2017 based on
overall ranking and then up from ninth in 2018,
ahead of the US, Norway, Sweden, Ireland and
Germany
Source: World Bank Doing Business
Georgia is Favourably Placed Among Peers
Country
Armenia
Azerbaijan
Belarus
Czech Republic
Georgia
Kazakhstan
Uzbekistan
Turkey
Ukraine
Country rating
Fitch rating outlook
B+
BB+
B
AA-
BB
BBB
BB-
BB
B-
Positive
Stable
Stable
Stable
Stable
Stable
Stable
Negative
Stable
Reform-Driven Success
Georgia has carried out genuine economic
and structural improvements. As a result,
corruption has decreased, starting a business
has become second easiest in the world,
productivity has been enhanced and the
economy has been diversified – enabling the
country to withstand global financial crisis and
recent external shocks. In February 2019 Fitch
upgraded sovereign credit rating of Georgia
from “BB-” to “BB” and maintained a stable
outlook. Resilience to negative external
shocks, robust economic growth, shrinking
current account (CA) deficit, increasing
reserves and decreasing path of general
Government debt were the main factors for
the rating upgrade. Georgia is consistently
ranked as the top performer in governance
and doing business indicators. Georgia, with
a ranking of six in Ease of Doing Business,
has implemented a total of 47 reforms and it
is characterised as a top-performing economy
in the region to start a business. Furthermore,
Georgia is ranked 16th out of 180 countries
by Index of Economic Freedom measured by
Heritage Foundation in 2019 and 27th out of
200 countries in the Trace International’s 2018
Matrix of Business Bribery Risk. Georgia is on
par with the European Union (EU) member
states and top in the Eastern Europe and
Central Asia Region in Corruption Perception
Index by Transparency International 2018.
The Economic Liberty Act, effective since
January 2014, ensures the continuation
of a credible fiscal and monetary framework
for Georgia, by capping consolidated
Government expenditures at 30% of Gross
Domestic Product (GDP), fiscal deficit at 3%
of GDP and public debt at 60% of GDP.
The Economic Liberty Act also requires
electorates’ approval through a nationwide
referendum for imposing new taxes and
raising existing tax rates, subject to certain
exceptions. Furthermore, as of January 2017,
corporate income tax for non-banking and
non-insurance corporations is now applicable
to only distributed profits; undistributed profits,
which are reinvested or retained, are
exempted. Georgia has one of the friendliest
tax regimes according to the Doing Business
2019, having slashed the number of taxes
from 21 in 2004 to just six currently.
2nd
Georgia is the second country in the world,
after Switzerland, with FTAs with both the
EU and China
The EU-Georgia Association Agreement, that
came into force in July 2016, and related Deep
and Comprehensive Free Trade Agreement
ECONOMIC FREEDOM
INDEX RANKED
GEORGIA IN 2019
16th
Up from 23rd in 2016, ahead of the Netherlands,
the US and Germany
Source: Heritage Foundation.
Read more on Our Strategy on page 14
(DCFTA), effective since September 2014,
lay solid groundwork to improve governance,
strengthen the rule of law and provide more
economic opportunities by expanding the
EU market to Georgian goods and services.
A closer economic tie with the EU and a trust
in prudent policy-making are also expected
to attract foreign investments to Georgia.
A visa-free travel to the EU, granted to
Georgian passport holders in March 2017, is
another major success of the Georgian foreign
policy. FTA with China effective from January
2018 and FTA with Hong Kong effective from
February 2019 increase opportunities to
further accelerate exporting markets and to
attract investors by offering a business-friendly
environment, high governance and access
to a market of 2.8 billion customers. In 2018,
China was the third largest consumer of
Georgian wine, after Russia and Ukraine
and the sixth largest consumer of Georgia’s
exports overall. Georgia is participating in
China’s “One Belt One Road Initiative”, that
will have positive spillovers on the Georgian
economy and the region overall. The number
of countries now engaged in the Initiative
stands at nearly 70 and may reach 100 or
more and cumulative investment in the
corridors could reach US$1 trillion over the
next ten years according to International
Monetary Fund (IMF). While remaining
committed to EU integration, Georgia has also
managed to stabilise its relations with Russia,
as the latter lifted its embargo on Georgian
products in 2013.
The ongoing US$285 million three-year IMF
Extended Fund Facility (EFF) programme for
Georgia will reduce economic vulnerabilities and
promote more inclusive growth. The IMF EFF
fully supports Government’s reform programme
focusing on: improving education, investing in
infrastructure, making public administration
more efficient and further developing the
business environment to boost the private sector
as a growth engine.
A growth-oriented Government programme
(2018-2020) focuses on structural reforms,
education and large infrastructure projects to
promote Georgia as a transit and tourism hub
and to enhance long-term growth. A new
pension law was adopted in 2018 enhancing
long-term fiscal sustainability, supporting capital
market development, increasing replacement
rate, narrowing CA deficit and rising potential
output. The Government focuses on addressing
the shortcomings in employment benefit
schemes, further cutting non-essential
expenditures, consolidating public sector
institutions, making social and healthcare
spending more targeted and increasing the
efficiencies in capital expenditure. Within the
responsible lending framework, National Bank of
Georgia took macroprudential measures in order
to decrease household indebtedness and to
enhance financial stability. Continuing de-
dollarisation mechanisms and strengthened
regulation supporting financial system to
increase resilience to currency fluctuations and
to reduce cyclical and FX-induced credit risks.
Georgia held presidential elections in 2018.
It was the last direct election for a president
as the country moves to a parliamentary system
of Government. From 2024, a president will
be elected by 300 delegates from members
of parliament and local Government
representatives. Georgia had the first run-off for
president between two former foreign ministers:
Salome Zurabishvili, backed by ruling Georgian
Dream Party and Grigol Vashadze, representing
united opposition candidate. Both election
programmes supported the integration towards
EU demonstrating the country’s pro-western
politics. Salome Zurabishvili was elected as the
first woman president of any former Soviet
republic outside of the Baltic countries.
Potential to Become Regional Hub
A business-friendly environment, the best
governance in the region, well-developed
infrastructure, stable energy supply, flexible
labour legislation, stable and profitable banking
sector, strategic geography connecting
European, landlocked Central Asian and
Middle East countries and preferential trading
agreements support Georgia to become a
regional hub economy.
The Anaklia deep sea project is seen as a major
scheme to enhance the regional transit hub
potential. The Port of Anaklia sits on the
shortest route from China to Europe, the route
that has become a major focal point for Chinese
investments in infrastructure. Once completed,
it will be the first Georgian port capable of
accommodating Panamax size cargo vessels.
The Government’s ongoing infrastructure
investments and increased spending on roads,
energy, tourism and municipal infrastructure
will also reinforce the potential. To enhance
Georgia’s competitiveness the Government
continues to strengthen integration in existing
international systems as well as new transit
routes (e.g. Lapis Lazuli, Persian Gulf – Black
Sea, Baltic Sea – Black Sea). Georgia is a
regional energy corridor that accounts for
approximately 1.6% of the world’s oil and gas
supply transit volumes.
Georgia’s business-friendly environment,
coupled with its sustainable growth prospects,
attracted on average 10% of GDP Foreign Direct
Investment (FDI) over the past decade. These
capital flows boosted productivity and
accelerated growth. Public infrastructure
projects were also instrumental in driving
growth, as well as better realising the country’s
potential in logistics, transport and tourism.
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18
Georgia Capital PLC Annual Report 2018
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19
GEORGIA CAPITAL STRATEGY – MARKET AND INDUSTRY OVERVIEW CONTINUED
Faced with low domestic savings, FDI is an
important source of financing growth in Georgia,
as well as a reliable source of current account
deficit funding. Foreign Direct Investments
reached US$1.2 billion, US$662 million less
compared to 2017. Main drivers of the decrease
were the completion of the British Petroleum
gas pipeline construction project and ownership
changes from non-resident to resident
companies. Major sectors attracting FDI were
financial (25.5% of total), transport (17.0% of
total) and energy (12.8% of total). Importantly,
share of reinvestment by foreign companies in
total FDI increased to 45.3% in 2018, compared
to 34.7% in the previous year. Increasing share
of reinvestment indicates investors’ trust in
Georgia’s growth model and the success of the
profit tax reform introduced in 2017. Planned
investment and infrastructure programmes,
rising number of free trade agreements and
business-supportive environment will support
further FDI inflows in the medium term.
8.7million international travellers
up 9.8% y-o-y in 2018
Georgia is already an established tourism
destination. Tourism is an important sector of the
Georgian economy and is the fastest-growing
industry and a major source of FX inflows. This
sector is a major driver of service export and
largest contributor to shrink the CA deficit. The
number of international travellers to Georgia
increased on average 17% over 2012-2018.
Despite the tensions and economic slowdown in
our major trading countries, international traveller
trips increased significantly to 8.7 million
and brought nearly US$3.2 billion in 2018.
Tourism outlook remains positive as market
diversification continues. The Government plans
to enhance Georgia’s positioning as a four-
season tourism location through improved
connectivity of different regions with an aim to
tap into their potential. Increasing number of
direct flights and budget flight opportunities, in
line with increased recognition, supports tourism
sector to remain as one of the most important
sectors to promote SME development and
attract FX inflows.
2.8bn
Access to a market with 2.8bn
population without customs duties
Free Trade Agreements
There have been significant changes in
Georgia’s export structure and destination
markets in recent years; however, Georgia has
not yet tapped into international markets.
Georgia’s exports performance is explained
by its commodity structure, dominated by
used car re-exports and resource-based
metals and minerals, while employment-
generating processed product exports remain
secondary. One of the biggest changes in
destination markets has been a reorientation
Inflation vs Inflation Target
from the Russian market after the 2005
embargo, as the embargo forced Georgian
producers to redirect exports to other
Commonwealth of Independent States (CIS)
countries, the EU and the Middle East.
Exports to Russia picked up again in 2013 as
Russia opened its borders to Georgian
products. Since 2013, Georgia’s developed
logistics and transport infrastructure has
helped to shore up opportunities for new
re-export commodities, including copper and
pharmaceuticals. Given these trends, it is likely
that re-exports will continue to fuel Georgia’s
export growth supported by the Government
policies which aim at further enhancing the
platform for current and potential trade
partners. Access to new large markets – the
EU, China and Hong Kong – could increase
market penetration and there is also scope for
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Official Reserve Assets
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Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Jan 19
Official Reserve Assets, US$m
Net Foreign Assets US$m
millions
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diversifying agricultural exports, once the
quality and standards improve under
EUDCFTA. Georgia’s existing free trade deals
(with the EU, CIS, EFTA, Turkey, China and
Hong Kong) and the prospective free trade
agreement with India offers significant upside
potential for Georgia’s exports.
Fastest Growing Economy in the Region
Georgia continued to deliver positive results in
2018. It is the second in starting a business and
sixth to do business globally, according to the
latest World Bank Doing Business Report. Trust
in Georgia’s growth model was demonstrated by
the increasing share of reinvestment by foreign
companies on the back of 4.7% economic
growth in 2018. Tourism demonstrated a stellar
performance, with revenues in the sector
totalling US$3.2 billion. For the first time in the
history Georgian quarterly CA turned to positive
at 0.3% of GDP in the third quarter of 2018.
According to the preliminary numbers, annual
CA deficit narrowed to 7.7% in 2018. The
Government is expected to reduce fiscal deficit
to 2.5% in 2018 under an IMF-supported
programme. Despite the financial market
turbulences in trading partners’ markets,
Georgia remained resilient with inflation at 2.6%
in 2018 – very close to the National Bank of
Georgia’s (NBG) target of 3.0%. One-time
factors, like increased tariffs on electricity and
water, will place upward pressure on inflation,
but weak aggregate demand and low imported
inflation will decrease consumer price index.
Opposite factors will balance each other, and
inflation will remain close to target in the medium
term. NBG started gradual exit from moderately
tightened monetary policy in July 2018. In line
with the decreasing external risks and weak
domestic demand, NBG reduced the rate by 25
bps to 6.75% in January 2019 and then the rate
was again reduced by 25 bps in March 2019.
Currently, monetary policy rate stands at 6.5%
and according to the baseline scenario, it is
expected to return to its neutral level (around
5.5-6% according to NBG estimate) in two years.
Despite the geopolitical tensions and emerging
market turbulences, real effective exchange rate
(REER) appreciated by 3.4% y/y as of December
2018. The NBG intervened in the FX market and
purchased US$177.5 million during August-
December accumulating official reserve assets to
US$3.3 billion at the end of 2018.
In order to make interventions more predictable
and to further accumulate international reserves,
NBG introduced FX options in January 2019.
(New FX options give right to the owner to acquire
GEL in exchange for US$ or EUR within the
predetermined timeframe. Holder is able to use
the option when GEL is stronger than the
previous 20 working days’ average. FX option
makes intervention more predictable and
smoothens the intervention impact on the
currency.) The growth is expected to remain
solid in 2019 as tourism revenues continue to
grow, fiscal policy is expected to be expansionary
and growing free trade deals will boost growth
prospects. New pension system effective from
January 2019, ongoing reforms for capital market
development and business enhancing measures
– are expected to further support investments,
reinforcing the country’s economic potential. The
IMF expects growth to average 5.1% annually in
2019-2023, making Georgia the fastest-growing
economy in the region.
Individual Sector Overview
Banking
The banking sector has been one of the faster
growing sectors of the Georgian economy.
The banking sector’s assets growth rate of
16.2% (ten-year CAGR) has far outstripped the
nominal GDP growth rate for the same period.
The banking sector is entirely privately-owned
and quite concentrated, with the two largest
banks accounting for 69.5% of total assets at
the end of 2018. Despite the tensions and
financial market turbulences in the region,
prudent regulation resulted in stability and
resilience of the financial sector. Average capital
adequacy ratio was above 18%, non-performing
loans (NPL) stood at 2.7%, the Liquidity
Coverage Ratio was 124% and the sector’s
profitability has remained robust at 23.3% return
on equity at the end of 2018.
Within the responsible lending framework,
National Bank of Georgia tightened regulations
for loans issued to individuals. From September
2018, effective interest rate on loans was
capped at 50%. From January 2019, loan-to-
value (LTV) and payment-to-income (PTI) ratios
Real GDP growth forecasts, IMF
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3
.
Georgia
Armenia
Azerbaijan
Belarus
Russian
Federation
Turkey
Ukraine
Emerging market
and developing
economies
2019
2020
2021
2022
2023
Source: IMF
Current Account
30%
20%
10%
0%
-10%
-20%
-30%
0
0
0
2
1
0
0
2
2
0
0
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3
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4
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3
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8
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2
Goods, net
Services, net
Investment income, net
Current transfers, net
Current account
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Georgia Capital PLC Annual Report 2018
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21
GEORGIA CAPITAL STRATEGY – MARKET AND INDUSTRY OVERVIEW CONTINUED
BUSINESS BRIBERY
RISK IN 2018
27th
Source: Trace International.
OPEN BUDGET INDEX
IN 2017
5thUp from 16th in 2015
Source: International Budget Partnership
should not exceed maximum norms.
In line with de-dollarisation mechanisms,
mortgage loans below GEL 200,000 will not be
issued in foreign currency (before the cap was
GEL 100,000). Tightened regulations support
sustainable growth and enhance financial
stability due to lower household debt to GDP
ratio and increased resilience towards FX
induced and systemic risks.
Healthcare
The Georgian healthcare industry experienced
important transformations during the last
decades. To address high private healthcare
costs and basic healthcare coverage for the
entire population, Universal Health Care (UHC)
was introduced in 2013 and replaced previous
state-funded medical insurance plans. New
initiatives regarding the reimbursement and
differentiating coverage of Universal Health
Insurance was adopted in 2017. On average
60% of healthcare spending is funded by
private sector. The Georgian healthcare market
has shown solid growth in recent years. Output
of health and social work sector increased by
10.5% y-o-y to GEL 2.7 million. According to
Frost & Sullivan, the total healthcare market is
expected to grow at a compound annual
growth rate of 8% from 2018 to 2021. Outlook
for the healthcare sector is positive as
increasing disposable income and supportive
Government healthcare will help domestic
consumption to increase. Solid growth of
overnight visitors in line with significant
improvement in healthcare service quality
support Georgia to become a medical tourism
hub in Caucasus region and to further boost
the service export growth.
6.5% monetary policy rate
NBG continued gradual exit from moderately
tightened monetary policy and gradually decreased
its refinancing rate by 50 basis points to 6.5%
during the first quarter of 2019
Pharma
The pharmaceutical market in Georgia is
highly concentrated, with three major players
holding approximately 75% of the market
share. Medicaments and pharmaceutical
products have significant contribution in trade
turnover. Trade of medicaments increased in
measured doses is a significant source of
income. Imports of medicaments was the
fourth largest commodity group, amounting
to US$339 million (3.7% of total import),
while re-export of medicaments increased in
measured doses was the sixth largest export
commodity group, amounting to US$147
million (4.4% of total export) in 2018.
As correlation between domestic consumption
of pharmaceutical products and economic
cycles is low, this sector generates stable
revenue and is expected to continue this trend
in line with healthcare sector developments.
Energy Sector
Georgia has a developed, stable and
competitively-priced energy sector. The
country has overcome the frequent shortages
of electricity and gas supply, which were
prevalent a decade ago, by renovating and
updating energy infrastructure (including
guaranteed capacity sources), improving
transmission infrastructure and increasingly
diversifying its natural gas and electricity
importing markets. Economic growth, paired
with a transparent and investor-friendly
environment, attracts foreign investments in
the sector. Share of FDI in the energy sector
was on average 12.7% in 2007-2018 and the
trend is expected to continue due to the
sector’s potential to attract foreign funds.
Water Supply and Sanitation (WSS)
Georgia is a country rich in hydro resources, but
approximately 45% of the country’s population
still has no proper access to centralised WSS
services. The Georgian Government has
committed to provide 100% of the population
with access to WSS services by 2020 and is
actively working on upgrading the infrastructure.
Lost water remains the main challenge in the
WSS sector as a majority of the assets are
amortised and require continuous rehabilitation
and investment to achieve efficiency. The WSS
sector in Georgia has the potential to utilise
efficiency gains by reducing water loss.
Economic growth paired with transparent and
investor-friendly price control policies create a
favourable environment for investors and
international lenders to enter the sector and
capitalise on stable revenue streams. Changes
in water tariff calculation methodology
incentivise companies to invest in the sector.
During 2015-2018 the sector turnover increased
on average 11.4% y-o-y and reached GEL 264
million in 2018. Harmonisation with EU policies
following the signing of the EU Association
Agreement is contributing to the increasing
reliability of WSS service provision and
improvement of service standards for utility
customers as well as the stability of utility
operations. Unlike other utility segments
(electricity and gas), water utility sector in
Georgia is mainly state-owned, GGU
representing the only private player on the
market (natural monopoly, servicing more than
one/third of the population) with substantial
room for growth.
Renewable Power Generation
In 2008, the power generation market
witnessed significant changes to facilitate
market liberalisation. All HPPs constructed after
August 2008 have been deregulated, which
served as a first step towards establishment
of a free electricity market. In 2014, the EU
and Georgia signed an Association Agreement
and Georgia became a full contracting party
member of the Energy Community. Further,
the Electricity Law was amended in June 2017,
deregulating all HPPs below 40MW and
gradually moving the large industrial consumers
out of the regulated pricing scheme to the free
market. Up to 15 large industrial consumers
with monthly electricity consumption of 5GWh
or more are set to join the free market from
May 2019 and all consumers with 5kV+ lines
are planned to follow next year. After these
changes, direct consumers will constitute
approximately half of the total demand and
will have to secure electricity from generating
companies directly or from traders, which will
enable the development of a stable deregulated
electricity market.
Electricity consumption has been growing
significantly for the last decade on average by
5.7% (CAGR for 2009-2018) in line with overall
economic development, especially pronounced
in electricity intensive sectors, such as tourism,
HoReCa and construction. Georgia has
historically been a net exporter of electricity,
however, due to sustained consumption growth,
the trend has changed and Georgia recently
became more import-dependent. To support
consumption growth, which is forecasted at
c.5%+ for the next decade, the Government is
promoting development and construction of
domestic renewable capacities through
investor-friendly policies and different offtake
arrangements. JSC Georgian State
Electrosystem, the transmission system
operator, has already rolled out a comprehensive
plan to improve the transmission capacity over
the next decade with a planned investment of
approximately EUR 900 million and an additional
integration capacity of 4,000MW. Steps are also
taken towards diversification of electricity supply
mix, with the emphasis on development of wind
and solar photovoltaic system (PV).
Property and Casualty Insurance (P&C)
Georgian property and casualty insurance
sector have more than doubled in size between
2009 and 2018. According to the Insurance
State Supervision Service of Georgia, the total
value of gross written premiums on non-life
insurance increased by 20.0% y-o-y to GEL 318
million in three quarters of 2018. The largest six
insurance providers in Georgia accounted for
approximately 74% of the market share in the
same period. The Georgian insurance industry
has significant potential for further growth. Low
rates of insurance penetration compared to peer
countries, supportive Government policies
(introduction of compulsory local third-party
liability motor vehicle insurance in 2020) and
growing consumer awareness will further
accelerate the growth, which is expected to
provide significant opportunities for established
companies that seek to increase their relative
market share.
Real Estate
Georgia has an active real estate market. In 2018
real estate registration was 858,949 from which
25% was primary registration and 75% was
secondary registration. These transactions
include residential and commercial properties as
well as land registration.
3.3 people per household
Average household size, higher than the EU average
Residential Property
The average household size in Georgia is 3.3
people per household, which is appreciably
higher than the EU average of 2.3 according to
the United Nations survey in 2017. Households
with two to four people make up 58% of total
households, according to the 2014 census.
Home ownership is the dominant tenure
structure, with 93% of householders owning
their homes. From 2014 NBG introduced GEL
denominated mortgage loans with variable
interest rate linked to NBG’s refinancing rate,
which increased access to finance and
boosted mortgage market. In 2018 the
number of new mortgage contracts increased
to approximately 39,000, 31% higher as
compared to the previous year. Higher
housing size, Georgian’s attitude towards
home ownership, ongoing urbanisation and
increasing disposable income support
this sector to continue solid growth in
coming years.
Commercial Property
Trade has the highest share in Georgian Gross
Domestic Product (17%). The gross value added
of wholesale and retail trade sector increased by
8.3% y-o-y to GEL 6 billion in 2018. According to
the Colliers International, Tbilisi provides 94% of
the country’s office space with around one
million square metres, from which 51% is
leasable. Georgian office market’s share of
owner-occupied stock is significant, and
Georgia’s existing business centres are
characterised by their high yield when compared
to eastern European cities. Of the total leasable
office stock in Tbilisi as of 2017, 38% of the
properties are classified as “modern” and the
remaining 62% as “traditional” (old and
non-refurbished Soviet-era office stock).
According to the Colliers International
projections, leasable area of modern stocks
will reach 211,417 square metres in 2019.
Hotels
Despite the tensions and economic slowdown
in our major trading countries, international
travellers increased significantly to 8.7 million
(+9.8% y-o-y) and brought nearly US$3.2 billion
in 2018. According to the Georgian National
Tourism Administration (GNTA), 111 new hotels
(+35% y-o-y) with 3,054 hotel rooms were
opened in Georgia during 2018. Tbilisi is the
most popular destination for tourists in Georgia.
Based on the Colliers International’s research,
there has been significant growth in the number
of hotel rooms in Tbilisi supplied by international
hotel chains. Ten more international upscale
hotels are expected to open in the next few
years, with approximately 1,962 new hotel
rooms. In the mid-class segment, the proportion
of international supply is forecasted to increase
from 13% in 2016 to 18% in 2019. This rise in
demand is combined with the current
undersupply of hotel rooms in the Georgian hotel
market. ADR in international upscale brands
increased by 14% y-o-y to US$181 and
occupancy was 68% in 1H18. As for
international mid-scale brands, occupancy rate
reached 72.6% (+5.3% y-o-y) and average daily
rate (ADR) amounted to US$106.8, according
to the Colliers International’s research. Sector
outlook is positive in line with solid growth of
overnight visitors and double-digit growth of
high-income tourists in Georgia.
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GEORGIA CAPITAL STRATEGY – MARKET AND INDUSTRY OVERVIEW CONTINUED
GEORGIA CAPITAL STRATEGY – CAPITAL ALLOCATION AND MANAGING
PORTFOLIO COMPANIES
Beverages Sector
Wine Production and Distribution
The oldest wine was found in 8,000 historic jars
in Georgia describing the country as the first
wine producer in the world. Registered wine
producers focusing mostly on export. Georgia
exported 62.7 million litres of wine (+8.1% y-o-y)
in 57 countries in 2018. In terms of value, wine
export increased by 14.9% y-o-y to US$197
million in 2018. Georgian wine is more famous
in the former Soviet Union countries. Russia
represented the largest portion of former Soviet
Union exports and accounted for 58.2% of 2018
total exports. After the Russian embargo in
2006, Georgia started to diversify its export
markets. Wine export to the EU increased over
the last years and accounted 16% of total export
in 2018. China is the third largest exporting
country for Georgian wine with 10.1% share in
total wine export. Outlook for Georgian wine is
positive due to increasing tourist arrivals and
changes to local consumer tastes for domestic
bottled wine. Varieties of unique Georgian wine
and increasing export potential due to FTAs will
further accelerate the growth.
Education
Education is the key sector for boosting the
long-term potential output. In order to
decrease the skills mismatch and to boost
labour productivity, the Georgian Government
plans to reform general, higher and vocational
education and is committed to increase
education’s share in GDP significantly from
3.8% in 2018. Currently, the Government’s
share in the sector is high and only 10% of
primary schools are private, which is itself a
very fragmented market also. Even though
Government spending has been increasing
y-o-y for more than the last ten years, it is still
low compared to developed countries.
Georgia has high participation rate, at 99%
in primary, 94% in lower secondary and 84%
in upper secondary educational institutions.
However, the outcomes of the international
assessment tests show the low level of
education quality in the country. Sector outlook
is positive, as there is room for consolidation
and for increasing the education quality
through higher private sector participation,
having scale effect opportunities.
Beer Production and Distribution
During the last decade, the beer market has
shown steady growth, except for two years
(in 2010 and 2015) where sales were
negatively impacted as a result of an increase
in excise tax. In 2018 the size of Georgia’s
beer market was approximately 97 million
litres a year and based on 2017 data a per
capita beer consumption was 27.5 litres per
year. The current low base of beer
consumption per capita compared to
European peer countries is a further indicator
of the potential for market growth. Beer
consumption is expected to increase in line
with increased disposable income, growing
size of beer-consuming population, double-
digit growth of tourist arrivals and new
exporting market opportunities.
Georgia Capital’s Key Principles
On Capital Allocation and
Managing Companies
Investment and Capital Management
Highly-disciplined entry approach.
The Georgian economy entered into a period
of significant development and growth
approximately ten years ago and different
sectors and businesses are at an early stage of
formation. Access to capital and management
personnel is limited, owners of businesses are
cash poor and, as a result, Georgia Capital can
pursue attractive investment opportunities and
acquire assets on relatively attractive terms with
a view to consolidating fragmented and
underdeveloped markets, particularly targeting
high-multiple service industries. Georgia Capital
is under no time pressure to invest and as such,
it takes a selective and opportunistic approach
to new acquisitions. Georgia Capital has
a natural self-discipline for its capital
allocation decisions.
360-degree analysis when evaluating
capital returns, new acquisitions opportunities
or divestments.
Buybacks are actively considered as an
investment opportunity subject to rigorous
analyses. On 14 June 2018 the Group
announced commencement of a share
buyback programme of up to US$45 million
(up to 3,938,471 of its shares). All repurchased
shares will be held in the Group’s treasury.
Since the launch of the buyback programme,
we have bought back 1,547,329 shares.
Georgia Capital allocates capital such that
it does not depend on premature sales of
listed investments.
Georgia Capital does not have capital
commitments or a primary mandate to deploy
funds or divest assets within a specific time
frame. As such, it focuses on shareholder
returns and on opportunities which meet its
investment return and growth criteria. The
Group aims to deliver total shareholder returns
of 10-times over 10 years since the demerger
date from BGEO Group.
Capital Allocation Outlook Through 2022
A highly-disciplined approach to unlock value through investments.
GEL millions
Listed
portfolio
companies
Private
portfolio
companies,
late stage
Private
portfolio
companies,
early stage
BoG
GHG
Water Utility
Housing Development
P&C Insurance
Renewable Energy
Hospitality and Commercial
Beverages
Pipeline
Education
Total1
2018A
(23.9)
–
(28.8)
(9.8)
(10.0)
5.0
32.9
40.6
6.1
12.1
2019E
2020E
2021E
2022E
2019-2022
(25)
(4)
(30)
(10)
(12)
74
30
27
70
120
(27)
(6)
(32)
(15)
(15)
53
9
10
42
19
(29)
(8)
(34)
(20)
(18)
70
–
–
28
(31)
(11)
(35)
(25)
(22)
(20)
–
–
–
(11)
(144)
+141 million
Dividend inflows
+268 million
Dividend inflows
(253) million
Capital deployment
(140) million
Capital deployment
16 million
Net capital inflows
Together with the available GEL 605 million liquid funds and short-term loans, we are well-positioned to support the
value creation across our private portfolio businesses and take advantage of new opportunities as and when they arise.
1 Buybacks are not included within the capital allocations.
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25
GEORGIA CAPITAL STRATEGY – CAPITAL ALLOCATION AND MANAGING
PORTFOLIO COMPANIES CONTINUED
Key to Success –
Aligned Shareholder and
Management Interests
Managing Portfolio Companies
Georgia Capital sets the strategy and business
plan of each business it acquires or establishes
and then actively manages their implementation,
particularly at the early stages of development.
As the availability of management personnel is
limited, by developing top talent in Georgia the
Group can add value for its shareholders.
Investing time in growing and developing
management continues to be critical for the
success of the Group’s strategy.
Georgia Capital will apply a hands-on
management approach to the non-public
portfolio companies at early stages of their
development and acts as an advisor for the
management of the more mature companies.
Exit
As businesses mature, Georgia Capital will
normally seek to monetise its investment either
through initial public offering, strategic sale or
other appropriate exit option, typically within
five to ten years from initial investment. As
investments are monetised, Georgia Capital
performs a 360-degree analysis going through
the comprehensive decision-making process
evaluating each available option, including but
not limited to: new investment opportunities,
redeployment of the proceeds in the Company’s
existing businesses and share buybacks.
Investment stage
Sector
Early
Acquisition
/Entrance
Late
Listed
Target
to Exit
Young Portfolio Companies
Large Portfolio Companies
Mature Portfolio Companies
Possible
Completion
of Exit
Education
Renewable
Energy (managed
by GGU) 65%
Hospitality and
Commercial Real
Estate (managed
by m2) 100%
Beverages
(managed
by Georgia
Beverages) 80%
Housing Development
(managed by m2)
100%
P&C Insurance
(managed by Aldagi)
100%
Water Utility
(managed by GGU)
100%
GHG
(Healthcare Services)
57%
Bank of Georgia
(Banking)
19.9%
Portfolio company
development focus
Rapid growth organically and through
mergers and acquisitions; active
investment stage.
Focus on efficiency improvements;
diversification of revenue streams;
introduction of dividend discipline.
Sustainable shareholder value
creation and dividend distributions.
Significance
of influence
Influence
through
High
• Strategy and performance target setting.
• Active human capital management.
• Talent development.
• Executive coaching.
• Active involvement.
Institutionalisation/
Independence
Low
• Strategy approval.
• Capital allocation approval.
• Human capital management.
• Advisory and mentoring.
• Oversight.
• Board membership (if needed).
• AGM voting.
Low
High
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GEORGIA CAPITAL VALUE PROPOSITION – THREE FUNDAMENTAL ENABLERS
Superior Access
to Capital*
Access to Good
Management
Strong Corporate
Governance
Only Group of its size and scale focused
on investing in and developing businesses
in Georgia.
Uniquely positioned given the access to
capital in a small frontier economy, where
access to capital is limited:
Reputation among talented managers as
the – “Best group to work for”.
Attracted talents have demonstrated track
record of successful delivery.
Proven DNA in turning around
companies and growing them efficiently.
• c.US$500 million raised in equity
at LSE.
Strong skillset in Company exits:
• LSE IPO track record.
• Divestiture skills.
•
Issued five Eurobonds totalling
US$1.5 billion.
• US$3 billion+ raised from IFIs
(EBRD, IFC, etc.).
Flexibility to use own shares as
acquisition currency.
* Figures and statements in this section include the track record
of our predecessor company.
Outstanding track record in:
•
•
Institutionalising businesses,
creating independently run/managed
institutions.
Investor reporting transparency
and granularity.
Strong Board and robust corporate
governance.
Aligned shareholders’ and
management’s interests:
• Management compensation linked
to performance.
• Equity/Performance dominating
compensation structure.
Photo Gudauri – a mountain ski resort situated on a south-facing
plateau of the greater Caucasus mountain range in Georgia, 2,200
metres above sea level. Its skiable area enjoys the maximum exposure
to the sun, which makes Gudauri a magnificent all-year-round tourist
destination, offering exceptionally high-quality skiing opportunities.
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29
SOLID TRACK RECORD DEMONSTRATED BY MANAGEMENT
Successful Track Record
of Delivering Strong Results
Georgia Capital management team, under the BGEO Group, has a track record of raising solid
capital and executing more than 40 acquisitions. Georgia Capital has successfully integrated the
businesses in many sectors, while delivering growth and extracting targeted synergies.
Acquisitions
The Georgia Capital management team,
under the BGEO Group, has a track record
of executing more than 40 acquisitions in
banking, insurance, healthcare, utilities, retail,
FMCG and other sectors.
Capital Raise
Uniquely positioned given the access to
capital in a small frontier economy, where
access to capital is limited:
• c.US$500 million raised in equity at LSE.
•
Issued five Eurobonds totalling
US$1.5 billion.
• US$3 billion+ raised from IFIs
(EBRD, IFC, etc.).
Exit IRR
• 121% IRR from GHG IPO.
• 66% IRR from m2 Real Estate projects.
Total number of acquisitions over the years
Total amount of debt raised (US$)
IRR from GHG IPO
40+
4.5bn+
121%
Value Creation Across our Late Stage Private Portfolio and Listed Assets
Listed
Bank of Georgia
First Ever Non-Sovereign Owned Corporate International Bond Issuance from Georgia in March 2018
Notes
Listing
US$300 million, six year, 6.125% Eurobonds
Irish Stock Exchange, GEM market
Notes rating
B2 (Moody’s)/B+ (S&P)
Joint Bookrunners
Citi, J.P. Morgan
Joint Lead Manager
Renaissance Capital
Co-Manager
Galt & Taggart
Georgia Capital’s Risk Management Policy Key Measures
• Georgia Capital intends to hold liquid assets of at least US$50 million at all times.
• Net Debt to asset portfolio to be no more than 30% at all times.
Allocation by investor type
Allocation by geography
Banks/PBs 41%
Asset managers 34%
Supranational 23%
Other 2%
Private Late Stage
United Kingdom 57%
Georgia 16%
Rest of Europe 16%
United States 7%
Asia and Other 4%
GHG
Water Utility
Housing Development
P&C Insurance
Dividend per share CAGR (2010-2018)
EBITDA more than tripled from GEL 37 million in 2014-2018 (GEL)
EBITDA increase since acquisition in 2014
IRR from real estate projects
Net profit more than doubled in 2014-2018
34.3%
Outstanding ROAE performance (2014-2018)
20%+
Net Loan book CAGR (2013-2018)
20.6%
132million
Created market-leading healthcare services provider,
with an integrated, synergistic business model
Number of beds up
High-quality hospitals
55%
37
District polyclinics
Pharmacies
16
270
51%
66%
Decrease in electricity own consumption
(2014-2018)
Capital generated, fully reallocated to hospitality
and commercial real estate business (GEL)
26%
74million
2x
The return on average equity
in 2015-2018
33%+
Dividend paid in 2018 with expected CAGR of
5% through 2022 (GEL)
28.8million
Number of apartments completed, with 99.7%
sold with US$215 million sales value
Amount paid in 2018 with 22% CAGR expected
through 2022, growing dividend capacity (GEL)
2,558
10million
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31
VALUE CREATION
Georgia Capital Generated ROI 37.9% as at 31 December 2018
Listed Investments
Late Stage Portfolio Businesses
Georgia Healthcare Group Holding Period
6.1 years
41.9%
IRR1
520
38.5%
ROI1
129
Net
Investment
Market
Value
Bank of Georgia Holding Period
10.1 years
Water Utility Holding Period
2.8 years
Housing Development Holding Period
7.7 years
P&C Insurance Holding Period
9.1 years
20.8%
IRR1
457
1,341.8%
ROI1
20
Net
Investment2
Market
Value
12.3%
ROAC1
431
52.7%
ROI1
157
Net
Investment
Allocated
Capital
96.6%
ROI1
19
Net
Investment
12.7%
ROAC1
67
Allocated
Capital
389.4%
ROI1
(14)
Net
Investment2
17.2%
ROAC1
131
Allocated
Capital
We use the Management Account figures to
calculate different returns on our investments.
Internal Rate of Return (IRR) and Return on
Investment (ROI) are metrics that help us
evaluate the historical track record of each
listed and private investment, respectively.
IRR for listed investments is calculated
based on: a) historical contributions to the
listed investment; b) dividends received;
and c) market value of the investment as at
31 December 2018.
ROI for private investments is an annualised
return on net investment (gross investments
less capital returns) calculated at each
investment level. Inputs into the ROI calculation
are as follows: (i) the numerator is the
annualised attributable income of the private
portfolio company less allocated GCAP interest
expense; and (ii) the denominator, is the net
investment less allocated gross debt of GCAP.
Return on Allocated Capital (ROAC) is a
metric that provides us with a visibility into
returns on current management values for
each portfolio company. ROAC is an
annualised return on allocated capital as of
31 December 2018 and calculated at each
private investment level. Inputs into the ROAC
calculation are as follows: (i) the numerator is
the annualised attributable income of the
private portfolio company, less allocated
GCAP interest expense; and (ii) the
denominator is the management estimated
fair value, as included in the NAV statement,
less allocated gross debt of GCAP.
1 For detailed definition please refer to the Glossary on page 243.
2 Net investment amount is GEL 20 million since Bank of Georgia is a stable dividend payer over the last seven years driving
consistent decrease in net investment amount, while related attributable earnings are increasing.
1 For detailed definition please refer to the Glossary on page 243.
2
Net investment amount is negative GEL 14 million, as the investment amount was fully recovered through dividends
received from P&C insurance business over the investment holding period.
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33
PORTFOLIO COMPANIES
LISTED
Healthcare
services
Investment Rationale
Very low base: healthcare services spending per
capita only US$324 (EU average is US$3,1841).
Growing market: healthcare spending growth
estimated at 8% CAGR 2018-2021.
Value Creation Potential
High-growth potential driven by opportunity
to develop medical tourism and polyclinics
(outpatient clinics).
One of the only integrated players in the
region with significant cost advantage in
scale and synergies.
Well positioned to take advantage of the
expected long-term macroeconomic and
structural growth drivers.
Operating performance of the highest-quality
network in Georgia.
Value Realisation Outlook
Monetisation of the existing stake through sales.
Ownership
Georgia Capital owns 57.0% of GHG at
31 December 2018 (31 December 2017: 57.0%).
1 Source: World Bank, 2015 data.
Financial Metrics
Revenue (GEL millions)
849.9+13.7%
2018
2017
849.9
747.8
EBITDA (GEL millions)
132.3+22.3%
2018
2017
108.1
132.3
Profit before tax (GEL millions)
53.9 +16.3%
2018
2017
53.9
46.3
Healthcare EBITDA margin (GEL millions)
24.9% -1.5ppt
Pharma EBITDA margin (GEL millions)
10.1% +1.5ppt
Operating Metrics
Market Opportunity
Number of referral hospitals
16 NMF
2018
2017
Number of community clinics
21 NMF
2018
2017
16
16
21
21
Number of beds
3,320 +306
2018
2017
3,320
3,014
Number of polyclinics
16 NMF
2018
2017
Number of pharmacies
270 +15
2018
2017
16
16
270
255
Bed occupancy rate, referral hospitals2
63.3% -1.2ppt
Total Healthcare Market (including healthcare services and pharmacy)
GEL millions
%
1 o f 8
2
0
2
–
8
1
0
4,765
4,397
R 2
G
A
e t C
a r k
4,062
o t a l M
T
3,760
3,488
3,218
3,062
%
R 2 0 1 1 – 2 0 1 7 o f 1 4
2,464
2,034
G
A
a r k e t C
T o t al M
1,716
1,552
2011
2012
2013
2014
2015
2016
2017E
2018F
2019F
2020F
2021F
Source: Frost & Sullivan analysis 2017
Return On Invested Capital
ROIC1
11.0% +0.2ppt
ROIC adjusted3
13.9% +1.1ppt
1 ROIC is calculated as EBITDA less depreciation, plus divided by aggregate amount of total equity and borrowed fund.
2 Bed Occupancy rate for referral hospitals is stated excluding newly-launched Regional Hospital and Tbilisi Referral Hospital;
the calculation also excludes emergency beds.
3 Return on invested capital (ROIC) is adjusted to exclude newly-launched hospitals and polyclinics that are in roll-out phase.
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35
PORTFOLIO COMPANIES CONTINUED
LISTED
Healthcare Services
http://ghg.com.ge/
Georgia Healthcare Group PLC is the UK
incorporated holding company of the largest
healthcare services provider, the largest
pharmaceuticals retailer and wholesaler, and
the largest medical insurance provider in the
fast-growing, predominantly privately-owned,
Georgian healthcare market. GHG offers by
far the most comprehensive range of inpatient
and outpatient services in Georgia. GHG
targets the population of the entire country
and beyond through its vertically integrated
network of 16 referral hospitals and 37 clinics,
including 21 community clinics and 16
polyclinics, 270 pharmacies and the largest
diagnostics laboratory in Georgia as at
31 December 2018. GHG is the single largest
market participant, accounting for 24.9% of
total hospital bed capacity in the country as
at 31 December 2018. GHG is the largest
pharmaceuticals retailer and wholesaler in
Georgia, with approximately 30% market
share by revenue in 2018. Pharmacy and
distribution business has over 2.0 million
client interactions per month, with c.0.7 million
loyalty card members. GHG is also the second
largest provider of medical insurance in
Georgia with a 26.7% market share based
on gross revenue and has approximately
c.230,000 insurance customers at
February 2019.
GHG will continue to focus on building its
presence throughout the Georgian healthcare
ecosystem, while also focusing on enhancing
its margins and achieving higher intergroup
synergies through various cross-selling
initiatives. One of its long-term growth
strategies is to capitalise on opportunity that is
main advantage of GHG’s business model,
managing customers on integrated level. By
enhancing digital channels and developing a
fully-integrated health information system, that
will help GHG to manage more efficiently and
deliver better care to its customers, GHG
targets to extract much of the value of the
Group’s frontline synergies.
After completing its heavy three-year capex
programme, GHG is now focusing on
improving cash flow generation and return
on invested capital through operating
performance improvement across the Group.
Strong cash flow generation during 2018
enabled GHG Board to announce the
proposed dividend policy reflecting the intent
that 20%-30% of annual profit attributable to
shareholders will be distributed as dividends.
This reflects a combination of both higher
earnings and reduced investment
requirements over the next few years, while
management aims to manage the balance
sheet at an average less than 2.0 times net
debt to EBITDA from the end of 2020.
GHG’s strategic priorities are set out below.
•
In the hospitals and community clinics
business GHG’s aim is to:
– Continuous improvement of network
utilisation, clinical performance and
operating efficiency.
– Rebound healthcare services EBITDA
margin up to c.30% in the medium to
long term.
– Achieve a c.30% market share by
revenues by beds in the long term
(currently c.22.0% share of revenues and
c.25.0% share of hospital beds).
– Roll-out a network of polyclinics to
achieve a c.15%+ market share of
revenues in the long term (currently 3%).
– Enlarging the network by adding
polyclinics through new launches and
strategic acquisitions. Expansion is
planned both in Tbilisi and in other
regions.
– Increasing the number of registered
patients at polyclinics from current
c.150,000 to c.200,000. The increased
number of registered customers
enhances the cross-selling opportunities
within GHG’s hospitals and pharmacies.
– Developing new services: successful roll
out of dental clinics and adding other
primary care services such as aesthetic.
– Enhance digital channels.
– Medical tourism.
GHG Strategic Targets and Priorities
Segment
Referral Hospitals
Community Clinics
Polyclinics
Pharmacy and
Distribution
Medical insurance
Market share targets
by addressable markets
Now
Long-term
Profit and Loss targets in
the medium to long term
By Revenue | Beds
By Revenue
By Revenue
By Revenue
c.22% | 25%
c.30%+
c.3%
c.15%+
30%
30%+
27%
30%+
Gradually improving to c.30% EBITDA margin
9%+ EBITDA
margin
Combined ratio
<97%
Segment
Referral Hospitals
Polyclinics
Key focus areas in the
medium term and long
term
Successful ramp up
of newly-launched
hospitals
Adding new services
Footprint growth
Increase the number
of registered
patients
Medical tourism
Adding new services
Digital channels
Digital channels
Pharmacy and
Distribution
Retail footprint
growth
Medical insurance
Mega Lab
Increasing market
share
Building effective
logistics system
Margin enhancement
Increasing profitability
Growing wholesale
revenue
Digital channels and
customers loyalty
Increasing retention
rates within the
Group
Develop retail
network
Attract B2B clients
Digital channels
Inter-Group Synergies
Manage customers on integrated level
The key strategic focus in the hospital
business over the next few years will be to
successfully roll-out newly-launched facilities,
continue to fill the current gaps in medical
services in Georgia and strengthen and
expand services in elective care.
•
In the pharmaceuticals business GHG’s
aim is to:
– Achieve a 30%+ market share, whilst
targeting an EBITDA margin to 9.0%+.
– Adding new pharmacies in the chain –
intend to have over 300 pharmacies in
the next two to three years.
– Increasing wholesale revenue by signing
new corporate accounts and engaging
in state programmes and medical
disposable and devices market.
– Staying focused on gaining additional
discounts from manufacturers,
subsequently reducing our costs of
medicines and products.
– Enhance the retail margin by launching
private label initiatives, increasing the
number of loyalty programme users and
expanding sales to hospitals.
– Enhance digital channels.
In the medical insurance business GHG’s
aim is to:
– Maintain the combined ratio to less than
97% over the next few years (currently
94%).
– Improve synergies by seeking to retain
the number of claims of more than 50%
(currently c.40.0%).
•
• Diagnostics:
– Diagnostics is an important new
business line for the Group, where
the main goal as of now is to build an
effective logistics system for the Group’s
chain of clinics and hospitals. In the
medium to long term GHG will develop
retail network, with around 50 blood
collection point countrywide and to work
on additional B2B contracts.
• Medical Tourism:
– After improving facilities and standards
of care, GHG started developing health
tourism by attracting the citizens of
neighbouring countries and, conversely,
retaining the Georgians currently seeking
treatment abroad.
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36
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37
PORTFOLIO COMPANIES CONTINUED
LISTED
Banking
Investment Rationale
The first entity from Georgia to be listed on the premium
segment of the Main Market of the London Stock
Exchange (LSE: BGEO) since February 2012.
High standards of transparency and governance.
Leading market position1 in Georgia by assets (34.7%),
loans (33.5%), client deposits (33.9%) and equity (29.2%).
Market with stable growth perspectives.
Strong brand name recognition and retail banking franchise.
Sustainable growth combined with strong capital,
liquidity and robust profitability.
Outstanding ROAE performance.
Dividend per share growing at 34.3% CAGR over the
last eight years.
Value Creation Potential
Loan book growth 15-20%.
Maintenance of dividend pay-out ratio within 25-40%.
Value Realisation Outlook
Monetisation of the existing stake through sales.
Ownership
Georgia Capital owns 19.9% of Bank of Georgia Group
PLC. As long as Georgia Capital’s stake in BoG is
greater than 9.9%, it will exercise its voting rights in
Bank of Georgia in accordance with the votes cast by
all other shareholders on all shareholder votes.
Financial Metrics
Operating Metrics
Market Opportunity
ROAE2
26.1%
NIM
6.5%
NPL coverage
90.5%
Retail clients (millions)
2.4 +5.4%
2018
2017
2.4
2.3
Digital transactions (millions)2
48.4 +32.2%
2018
2017
48.4
36.6
Banking business loan book (GEL millions)
9,398 +21.4%
2018
2017
9,398
7,741
Volume of internet bank/mobile bank
transactions (GEL millions)
3,991 +91.1%
2018
2017
2,088
Retail banking growth
24.2%
Cost/Income
36.7%
Tier 1 capital adequacy ratio
12.2%
1 Market data based on standalone accounts as
published by the National Bank of Georgia (NBG) at:
www.nbg.gov.ge.
2 Adjusted for demerger related expenses and one-off
impact of re-measurement of deferred tax balance.
Banking Sector Assets, Loans and Deposits
GEL billions
7
.
9
3
6
.
4
3
1
.
0
3
6
.
6
2
0
.
3
2
3
.
2
2
8
.
9
1
2
.
5
2
9
.
8
1
0
.
7
1
0
.
6
1
3
.
4
1
2 5.4 % C A G R
6
.
0
1
9
.
8
3
.
8
3
.
6
5
.
5
0
.
6
6
.
3
2
.
5
0
.
4
2
.
7
6
.
4
2
.
3
2
.
4
7
.
2
1
.
2
6
.
0
2
3
.
7
1
0
.
3
1
6
.
1
1
5
.
0
1
7
.
9
4
.
4
1
7
.
2
1
7
.
8
6
.
7
7
.
7
7
.
6
3
.
1
8
.
0
7
.
0
7
.
1
9
.
0
0
.
1
5
.
2
7
.
1
3
.
1
0
2003
0
2004
2005
0
2006
0
2007
0
2008
0
2009
0
2010
0
0
2011
0
2012
0
2013
0
2014
0
2015
0
2016
0
2017
2018
As sets, GEL bn
Loans, GEL bn
Deposits, GEL bn
3,991
Source: NBG
Dividend Record
GEL millions
Payout ratio
10%
15%
30%
36%
33%
34%
32%
30%
30%
3.21
124
3.1
2.6
122
102
4 . 3 %
) – 3
L
E
2.4
98
G
R (
G
A
e C
r
a
h
r s
e
d p
n
e
D i v i d
2.1
80
2.0
72
1.5
51
0.7
24
2011
2012
2013
2014
2015
2016
2017
2018F
0.3
2010
9
Total dividend paid for the year
Dividend per share
1 Adjusted for 19.9% BOG share issuance, actual dividend per share was 2.44 in 2017 and expected to be 2.55 in 2018.
2 Excluding transactions through tellers/operators and express pay (self-service) terminals.
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39
PORTFOLIO COMPANIES CONTINUED
LISTED
Bank of Georgia (BoG) Overview
https://bankofgeorgiagroup.com/
Bank of Georgia Group is a Georgia-focused
banking business with an impressive track
record of delivering superior returns and
maximising shareholder value. JSC Bank
of Georgia, the systemically important and
leading universal Georgian bank, is the core
entity of Bank of Georgia Group that offers
Retail Banking, Corporate Investment
Banking and Wealth Management
services. Among the ancillary business lines
are leasing, payment services and banking
operations in Belarus through BNB. BoG is
well positioned to benefit from the superior
growth of Georgian economy. The key metrics
to measure Banking Business performance
are: (1) Return on Average Equity (ROAE)
targeted at 20%+; (2) 15-20% growth of its
loan book; and (3) regular dividends with
targeted 25-40% dividend payout ratio.
BoG is also well positioned in terms of both
capital and liquidity to deliver on its growth
strategy.
BoG has two primary segments, of which Retail
Banking has been the major driver of the Banking
Business growth. In Retail Banking BoG aims to
harness an optimised branch operating model to
effectively serve each target segment of its
emerging, mass and affluent clients based on
their needs. In Corporate Investment Banking
BoG has successfully achieved its risk de-
concentration and loan portfolio repositioning
targets by the end of 2017 and continues its
corporate loan book growth, as well as increasing
the share of fee and commission income in
the medium term. Going forward, BoG expects
the growth of the total loan book to be more
balanced between Retail Banking and Corporate
Investment Banking. In Wealth Management,
under Corporate Investment Banking, BoG is
focused on strengthening and promoting its
regional private banking franchise. BoG is well
positioned to become a regional finance centre,
where high net worth individuals are confident
to place their funds.
BoG’s strategic priorities are:
• 20%+ ROAE.
• Loan book growth of 15-20%.
• Robust capital management.
Capital Position
Aiming to maintain +200bps buffer over
minimum regulatory requirement; maintenance
of regular dividend payouts, aiming 25-40%
dividend payout ratio; track record of GEL 500
million+ cash dividend paid since 2013, with
payout ratio above 30% over past six years.
The Bank had management trust buybacks
of GEL 52.0 million in 2018.
DELIVERING ON BoG STRATEGY
SUCCESSFUL TRACK RECORD OF DELIVERING STRONG RESULTS
BANKING BUSINESS KEY TARGETS
ROAE
20%+
25.2%
26.1%
21.9%
22.2%
Loan Book Growth
15-20%
24.5%
21.4%
20.8%
15.9%
2015
2016
2017
2018*
2015
2016
2017
2018
ROBUST CAPITAL MANAGEMENT TRACK RECORD
Capital position: aiming to maintain +200 bps buffer over minimum regulatory
requirement
Regular dividends: linked to recurring profitability. Aiming 25-40% dividend
payout ratio
+200bps
25-40%
GEL 500 million+ cash dividend paid since 2013, with payout ratio above 30%
over past six years
Management trust buybacks: GEL 52.0 million share buybacks in 2018
30%+
52.0m
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41
PORTFOLIO COMPANIES CONTINUED
PRIVATE LATE STAGE
Water
Utility
Investment Rationale
Natural monopoly in Tbilisi and surrounding area.
Utilities sector represents 3% of total Georgian
economic output with c.8.2% CAGR (2006-2017).
Stable regulatory environment with fair return on investment
Stable cash collection rates.
Value Creation Potential
EU harmonisation reforms in progress in utilities sector
in accordance with Georgia’s undertaking under the
Association Agreement with the EU, expected to drive
water tariffs up.
High GDP growth combined with rapid tourism growth
drives high demand from corporates.
Energy market deregulation expected to positively
affect electricity sales price and market liquidity.
Upside opportunity from pursuing cost efficiencies by
targeting decrease in self-consumption of electricity in
order to free up energy for third-party electricity sales.
Growing dividend payment capacity.
Value realisation outlook
Potential IPO together with the renewable
energy business.
Ownership
Water Utility is 100% owned through GGU.
Financial Metrics
Operating Metrics
Return On Invested Capital1
Water sales (m3 thousands)
Electricity consumption (kwh thousands)
ROIC1,2
179,819 +3.5%
237,145 -18.4%
10.3% -1.9ppt
2018
2017
179,819
173,820
2018
2017
237,145
290,714
1 ROIC is calculated as EBITDA less depreciation,
divided by aggregate amount of total equity
and borrowed funds.
2 Regulated WACC of 15.99% set for a
three-year regulatory period (2018-2020),
up from previous 13.54%.
Electricity generation (kwh thousands)
New connections
323,847-5.2%
5,015 NMF
2018
2017
323,847
341,528
2018
2017
2,347
5,015
Total revenue (GEL millions)
149.1 +10.5%
2018
2017
149.1
135.0
Utility revenue (GEL millions)
131.8 +10.9%
2018
2017
131.8
118.9
Energy revenue (GEL millions)
9.1 -7.2%
2018
2017
9.1
9.8
Other revenue (GEL millions)
8.3 +30.3%
2018
2017
8.3
6.3
Total EBITDA (GEL millions)
83.4 +14.9%
2018
2017
83.4
72.6
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43
PORTFOLIO COMPANIES CONTINUED
PRIVATE LATE STAGE
Water Utility Overview
The water utility business has a significant
opportunity to increase its operational cash
flow over the next few years through cost
efficiencies. The business reduces self-
consumption of energy, hence freeing up
energy for third-party sales. The efficiency
combined with the electricity market
deregulation is leading to more favourable
electricity sales tariffs.
The Electricity Law was amended in June 2017,
deregulating all HPPs below 40MW and
gradually moving the large industrial consumers
out of the regulated pricing scheme to the
free market. More than ten large industrial
consumers with monthly electricity
consumption of 5GWh or more are expected to
join the free market in 1H19 and all consumers
with 5kV+ lines are planned to gradually follow.
After these changes, direct consumers will
constitute approximately 40-50% of the total
demand and will have to secure electricity from
generating companies directly or from traders,
which will enable the development of a liquid
deregulated electricity market.
GGU has been investing heavily in its
infrastructure, thereby replacing the
depreciated asset base over time and
achieving continuous growth in the Regulatory
Asset Base (RAB). 2017 and 2018 have been
the most capital-intensive years for the
business, which invested more than GEL 300
million in the upgrade of existing and the
development of substantial new water utility
infrastructure. GGU’s investment in
infrastructure significantly improves the
rendering of water supply and wastewater
services to customers and contributes to
achieving operational efficiencies.
In 2017, GGU’s regulatory body approved
increased tariffs for water supply and
wastewater services for a three-year
regulatory period based on a new
methodology, which is in line with international
best practices. New tariffs provide fair return
on investment, as well as compensating for
eligible operating expenses. Tariffs in Tbilisi
have increased by 23.8% for residential
customers and decreased by 0.4% for legal
entities, serving as a first step towards
gradually unifying WSS tariffs. Regulated
WACC of 15.99% has been set for a three-
year regulatory period (2018-2020), up from
previous 13.54%.
The water utility business is preparing for a
potential IPO together with the Renewable
Energy and plans to use IPO proceeds to fund
new renewable energy projects.
GGU has been successfully growing EBITDA
and reaching its targets for several years in a
row and the Company is well on track to further
increase on the back of organic business
growth and by tapping into additional
efficiencies in the self-consumption of electricity.
Efficient management of capital and strong and
stable cash flow generation is expected to
enable the water utility business to sponsor
steadily increasing dividend payouts to
shareholders and to prepare the combined
water utility and renewable energy business
for a potential IPO in the medium term.
Electricity Consumption
KW/H millions
350
325
330
321
322
313
291
237
2011
2012
2013
2014
2015
2016
2017
2018
Projected Dividends Distribution
GEL millions
CAGR 2017-2022E +5%
28
29
30
32
34
35
2017A
2018A
2019E
2020E
2021E
2022E
EBITDA Track Record
GEL millions
55
62
2 0 1 4 - 2 0 1 8 + 5 1 %
69
73
83
2014
2015
2016
2017
2018
Capex1 Forecast Through 2022 (GEL millions)
Maintenance capex
Development capex
Total capex
1
Including VAT.
2017A
2018A
2019F
2020F
2021F
2022F
23
114
137
23
148
171
23
23
23
22
65–75
45–58
35–50
30–48
88–98
68–81
58–73
52–70
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45
PORTFOLIO COMPANIES CONTINUED
PRIVATE LATE STAGE
Housing
Development
Investment Rationale
The shortage of housing from Soviet-era combined with
Georgian tradition of multi-generations living under one
roof, average household size is significantly higher at 3.3
compared to Eastern or Western Europe.
Most of the housing stock dates back to the Soviet era
and is amortised.
In line with the economic growth, urbanisation levels are
increasing from the current low level.
Value Creation Potential
Asset light strategy.
Unlock land value by developing housing projects.
Development of third-party land – franchise m2 brand
name. Undisputed market leading platform of at least
2,5002 apartments to be delivered in four to five years.
Earn Construction management fees from third-party
projects and bring construction works in-house.
Value Realisation Outlook
Cash out by transformation into real estate asset manager.
Ownership
Housing Development is 100% owned through m2 .
Financial Metrics1
Return On Invested Capital
Market Opportunity
Average Household Size and Home Ownership (2016 data)
93%
3.3
90%
90%
96%
83%
82%
86%
2.8
2.7
2.7
2.6
90%
81%
69%
2.4
2.3
2.3
2.2
2.1
0
1
a
0
i
2
g
r
o
e
G
a
i
t
a
o
r
C
a
i
k
a
v
o
l
S
d
n
a
l
o
P
a
i
n
a
m
o
R
a
i
r
a
g
l
u
B
y
r
a
g
n
u
H
a
i
n
o
t
s
E
U
E
a
i
n
a
u
h
t
i
L
Average household size
Home ownership
Gross revenue from apartment sales (GEL millions)
ROIC1
4.1% -6.4ppt
1 ROIC is calculated as EBITDA less depreciation,
divided by aggregate amount of total equity and
borrowed funds.
94.9 +2.5%
2018
2017
EBITDA (GEL millions)
8.9 -59.6%
8.9
2018
2017
94.9
92.6
22.0
Operating Metrics
Number of apartments sold
146 -76.8%
2018
146
2017
629
NSA (square metres)3
220,876
2018
2017
220,876
223,272
Number of ongoing projects
2
2018
2017
2
4
1 Housing development business’ functional
currency is US dollars.
2 2,500 apartments relate to the signed Tblisi Airport
Highway deal.
3 Net sellable area, representing total square metres,
including both sold and available for sale areas.
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47
PORTFOLIO COMPANIES CONTINUED
PRIVATE LATE STAGE
Housing Development Overview
For the past couple of years, m2 has
established itself as one of the most
recognisable and trustworthy residential
housing brands in the country. The vertical
integration of the construction arm into m2’s
business model enables the Company to
generate fee income from construction
management from franchised deals and
third-party constructions. m2 focuses on
franchising the m2 brand and uses its platform
to develop third-party land plots as part of its
“asset light” strategy. m2 has sold 2,822
apartments worth US$244.7 million since 2011
with 99.7% of apartments sold in nine
successfully completed projects and 86.6%
sales in two ongoing projects.
• Developing remaining residential land
bank. As a residential real estate
developer, m2 targets mass market
customers by introducing high-quality and
comfortable living standards in Georgia
and making them affordable through its
well-established branch network and sales
force. The total value m2 is aiming to unlock
from the remaining residential land bank
by 2020 is US$23.0 million with 3,397
apartments (in addition to 49 remaining
apartments to be sold in the existing 11
projects, both completed and ongoing). m2
does not expect the land bank to grow, as
the Company’s strategy is to utilise its
existing land plots within three to four years
and, in parallel, start developing third-party
land plots under franchise agreements.
• Franchising real estate development
in Georgia. m2 focuses on franchising its
well-established brand to develop
third-party land plots and generate a fee
income. While following its “asset light”
strategy, m2 will capitalise on its:
– Strong brand name. m2 enjoys 92%
customer brand awareness among real
estate developers in Georgia.
– Pricing power. Under m2 brand
apartments can sell at a higher
price than under other brands. m2
has development expertise that the
Company uses to achieve efficiency
in planning and design stages, which
drives revenues as well as margins.
Moreover, owing to a vertical integration
of its construction arm, m2 has control
over the largest part of a development’s
cost base, which enables m2 to achieve
construction and project development
efficiencies.
– Sales. m2 is distinguished by its ability
to accomplish strong sales performance
through dedicated sales personnel and
access to finance. Pre-sale reduces the
equity needed to finance the projects.
– Execution. m2 has an excellent track
record for projects completed on time
and to budget. The Company manages
the entire process from development
and construction through to apartment
handover and property management
services.
– Access to finance. m2 has successfully
cooperated with Development Financial
Institutions (DFIs), has also been active
in local fixed-income instruments market
and has issued US dollar-denominated
bonds in the local market. Since 2012,
m2 has raised approximately US$100
million of debt financing, of which US$45
million is from international financial
institutions.
• Construction management. m2
historically outsourced construction and
architecture works and focused on project
management and sales. In 2017, m2
acquired BK Construction LLC, a local real
estate construction company, with the aim
to bring the construction works in-house
and achieve cost and project development
efficiencies. m2 plans to fully utilise the
benefits of this vertical integration and
boost fee income generation from
franchise deals and third-party
constructions.
Projected Dividend Distribution Through 2022
GEL millions
25
20
15
2020
2021
2022
10
2018
10
2019
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49
PORTFOLIO COMPANIES CONTINUED
PRIVATE LATE STAGE
P&C
Insurance
Investment Rationale
Significantly underpenetrated insurance market
in Georgia.
Market leader with a powerful distribution network
of point of sale and sales agents.
Value Creation Potential
Compulsory border TPL effective from
1 March 2018.
Local TPL expected to kick in from 2019 and
provide potential to access untapped retail
CASCO insurance market with only 4% existing
penetration.
First mover advantage on underpenetrated
SME segment.
Growing dividend payout capacity.
Value Realisation Outlook
Potential trade sale or IPO.
Ownership
P&C Insurance is 100% owned through Aldagi.
Financial Metrics
Operating Metrics
Return On Average Equity
Earned premiums, gross (GEL millions)
90.4 +5.2%
2018
2017
90.4
85.9
Net income1 (GEL millions)
17.7 +8.8%
2018
2017
17.7
16.3
Combined ratio
75.4%
Loss ratio
38.2%
1 Adjusted for non-recurring items.
Active corporate clients
3,101 +45.9%
Corporate insurance policies written1
60,277 -8.6%
ROAE2
34.4% -3.8ppt
2018
2017
3,101
2,125
2018
2017
60,227
55,448
Active retail clients
96,247 NMF
Retail insurance policies written
150,246+50.4%
2018
2017
45,598
96,247
2018
2017
150,246
99,884
Market Opportunity
1 Excluding credit life insurance.
Georgia P&C
Penetration 0.6%, Density US$25
9.6% 8.5% 9.0%
6.1% 6.0% 4.9%
6,811
3.0% 2.2% 1.4% 1.4% 1.2%
3,810
3,446
2,655
2,687
0
1
0
2
K
U
d
n
a
l
r
e
z
t
i
w
S
e
c
n
a
r
F
m
u
i
g
l
e
B
y
n
a
m
r
e
G
Insurance density
Insurance penetration
ROAE Track Record
1184
,
a
i
n
e
v
o
l
S
421
d
n
a
l
o
P
175
a
i
r
a
g
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u
B
149
y
e
k
r
u
T
152
a
i
s
s
u
R
46
a
i
g
r
o
e
G
37%
37%
38%
34%2
28%
2014
2015
2016
2017
2018
2 Adjusted for non-recurring items.
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51
PORTFOLIO COMPANIES CONTINUED
PRIVATE LATE STAGE
P&C Insurance Overview
Over nearly three decades in the Georgian
P&C insurance market, Aldagi has achieved
almost universal brand awareness, leading
positions in retail insurance services, the
largest product portfolio and exceptional
financial strength. The Company has doubled
its retail portfolio over the last three years,
outperformed market growth by 6% and
achieved a ROAE of 34%. Based on the latest
available market data as at 30 September
2018, Aldagi continues to be the most
profitable insurance company in the local
market with 38% share of the insurance
industry profit and a market share of 32.4%
based on gross premiums earned.
The current low level of insurance market
penetration in Georgia (1.2%, of which 0.6%
relates to P&C insurance and 0.6% to medical
insurance) provides enormous potential of
growth and Aldagi is well-equipped to capture
these opportunities.
The Company plans to increase the insurance
business profitability by strategically focusing
on each of its three main business lines set
out below:
• Retail customers. The Georgian retail
insurance market offers ample room for
growth, as most of its potential is yet to be
unlocked. Motor insurance accounts for
58% of the total retail insurance market in
Georgia, of which Aldagi’s share is 32%.
The motor insurance segment has great
potential to increase, as only 4% of
registered cars are insured on the local
market. Moreover, compulsory Border
Motor Third Party Liability (MTPL)
insurance has recently become effective
from March 2018. Furthermore, a new law
requiring a mandatory local MTPL for all
vehicles registered in Georgia is expected
to launch in 2H19 and significantly boost
retail market penetration. In 2017, Aldagi
actively worked on developing new
products and introduced livestock
insurance to underpenetrated rural areas.
The Company came up with an online
travel insurance product, with a unique
combination of coverage and competitive
pricing. Aldagi partnered with Public
Service Hall, whose clients can
electronically acquire affordable insurance
for any property registered on the public
registry. Aldagi aims to further strengthen
its market leadership position by
harnessing its digital insurance platform.
The Company intends to execute all of its
processes and procedures, including
issuance of e-policies, remote claims
regulation and building web/mobile
customer profiles, principally through
digital channels.
• SME segment. Georgia’s insurance
market for small and medium-sized
enterprises is currently in its infancy.
Aldagi’s strategy is to focus the attention
of its experienced retail sales force (in
addition to the corporate sales department)
towards entering this underpenetrated
segment. Aldagi sees significant potential
to grow this segment of the portfolio by
developing tailor-made products and
providing them through digital portals,
created especially for SME clients, and
its multi-channel distribution network.
• Large corporates. Although the level of
insurance penetration within the corporate
segment is relatively high compared to
retail and SME segments, a combination
of favourable Georgian macroeconomic
conditions, a good investment climate,
stable economic growth and an increase in
infrastructure projects will further increase
customer demand for insurance products.
Expansion Into Car Service Business –
Opportunity to Develop Unique Platform
with Significant Synergy Potential
In July 2018, we launched another greenfield
project when the Georgia Capital entered the
periodic vehicle inspection business, a
regulated service industry, which is expected
to become a GEL 50-55 million market from
2019. The business ramp up, fully financed
by debt, was completed in the beginning of
March, 2019 and the business targets to reach
35%+ market share once fully operational,
while supporting environmental sustainability
and road safety across the country. In the first
year of operations the business aims to serve
between 250,000 to 300,000 vehicles, while
targeting 400,000 to 450,000 vehicles
annually from 2020. The compound annual
growth rate for registered vehicles in Georgia
during the years 2012-2016 was 8.6%, which
makes vehicle inspection an attractive
emerging service business. Georgia Capital
expects to report the business separately
within Georgia Capital’s earnings releases
starting from 1H19.
Going forward Aldagi group will be focusing
on automotive business by creating car
ecosystem – moving from concentrated
business to a diversified model combining
many different car-related services, such as,
insurance, technical inspection, auto service,
car import, car washes, auto leasing, and auto
and parts auction. By combining several areas
of expertise and exploiting synergies between
the businesses, Aldagi will be able to offer its
clients a full range of solutions specifically
adapted to the diversity of their requirements.
Creating this ecosystem of partnerships, highly
interdependent by product or service network
will be our strategic key success factor.
Projected Dividends Distribution Through 2022 (GEL millions)
10
12
7
22
18
15
2017A
2018A
2019E
2020E
2021E
2021E
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53
Financial Metrics
Development capex (GEL millions)
68.3 -10.9%
2018
2017
68.3
76.6
Return On Invested Capital1
ROIC1
-0.9% +3.4ppt
1 ROIC is calculated as EBITDA less depreciation,
divided by aggregate amount of total equity and
borrowed funds.
Market Opportunity
GWh
5 . 7 %
C A G R :
5
7
3
,
9
2
9
8
,
7
7
1
4
,
7
3
2
2
,
7
1
7
2
,
8
4
3
3
,
8
4
5
4
,
8
7
5
8
,
0
1
5
3
4
,
0
1
3
3
0
,
0
1
8
3
3
,
9
8
9
2
,
9
6.6 TWh
6
1
0
,
6
1
2
0
7
,
5
1
9
6
1
,
5
1
5
4
2
,
5
1
n , 5 %
p ti o
m
u
s
n
o
C
6
2
0
,
4
1
6
9
0
,
4
1
8
7
3
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4
1
7
8
4
,
3
1
8
1
0
,
3
1
5
9
8
,
1
1
Projected Dividends Distribution
GEL millions
2 %
5
E +
2
2
0
30
2
-
0
2
0
R 2
G
A
C
21
13
2020E
2021E
2022E
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
8
1
0
2
9
1
0
2
0
2
0
2
1
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0
2
2
2
0
2
3
2
0
2
4
2
0
2
5
2
0
2
6
2
0
2
7
2
0
2
8
2
0
2
9
2
0
2
0
3
0
2
Generation, actual
Generation, forecast
Consumption, +5%
PORTFOLIO COMPANIES CONTINUED
PRIVATE EARLY STAGE
Renewable
Energy
Investment Rationale
Underdeveloped energy market with potential for
significant growth – low per capita power usage.
Cheap to develop – up to US$1.5 million for hydro and
up to US$1.4 million for wind development per 1MW.
Value Creation Potential
Opportunity to establish a renewable energy platform
with 500MW operating capacity over the medium term
(500MW target includes existing energy assets of water
utility business).
Energy consumption has grown at c.5.7% CAGR in
last ten years. We expect energy consumption to grow
further at least by CAGR 5%, translating into doubling of
the consumption over the next 10-15 years, while supply
growth has been slower and electricity deficit
is anticipated to continuously increase.
Stabile dividend provider capacity in the medium term.
Value Realisation Outlook
Potential IPO together with the water utility business.
Ownership
Georgia Capital owns 65% in energy business,
remaining 35% is owned by Austrian company RP
Global – an independent power producer with 30 years
of experience of developing, building, owning and
operating renewable power plants globally.
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55
PORTFOLIO COMPANIES CONTINUED
PRIVATE EARLY STAGE
Renewable Energy Overview
Renewable Energy continues to build ground
for its 500MW1 operating capacity target,
developing greenfield renewable projects and
in parallel seeking acquisition opportunities
among existing projects, which are either
commissioned or under feasibility stage.
Renewable Energy is on track to fully
commission 50MW Mestiachala HPPs in
1H19. In addition, the Company has 46MW
of hydro projects and 110MW of wind projects
at advanced stage of development, while
c.74MW of HPPs and 100MW of wind are
also in the pipeline to be further developed.
The management foresees growing electricity
deficit in Georgia and favourable regulatory
conditions, considering steps taken towards
full market deregulation, the Company targets
further expansion by seeking acquisition
opportunities and new greenfield projects.
On this basis, renewable energy business aims
to establish renewable energy platform with
strong cash flow generation and profitability,
expected to enable renewable energy business
to sponsor steadily increasing dividend payouts
to shareholders and to prepare the combined
water utility and renewable energy business for
a potential IPO in the medium term.
1
Includes existing energy assets of water utility business.
Renewable Energy Project Pipeline as of 31 December 2018
Project
MWs
Construction
commencement
Target
commissioning3
Target ROIC
Mestiachala HPPs
Zoti HPPs
Bakhvi 2 HPP
Racha HPPs
Wind Tbilisi
Wind Kaspi
Wind (other)
Solar
Total
50
46
36
38
57
54
99
30
410
1H17
2H19
1H20
1H21
2H19
2H19
1H21
TBD
1H19
1H21
1H22
1H23
2H20
2H20
1H22
TBD
13.2%
12.9%
13.5%
14.7%
13.3%
14.1%
12.5%
10.1%
Generation
capacity
(GWh)2
171
164
127
165
179
215
306
64
1,391
Renewable Energy Capex4 Forecast
New MWs
50
50
Installed MWs
50
157
161
112
237
173
372
38
116
301
155
402
0
202
105
0
0
2
74
2017
0
3
70
2018
60
2019E
2020E
2021E
84
0
0
2022E
Hydro
Wind
Solar
2 Generation capacity refers to target net annual generation.
3 Target commissioning dates are indicative and subject to regulatory procedures.
4 Capex figures are presented including VAT.
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57
PORTFOLIO COMPANIES CONTINUED
PRIVATE EARLY STAGE
Hospitality
and Commercial
Real Estate
Investment Rationale
Record number of tourists visiting Georgia every
year: 4.8 million visitors in 2018, up 16.9% y-o-y,
10.5% CAGR over the last five years; tourism
inflows up 18.4% y-o-y from US$2.7 billion to
US$3.2 billion in 2018; 13.2% CAGR over the last
five years.
Value Creation Potential
Grow Portfolio of rent-earning assets through
real estate developments and opportunistic
acquisitions.
Reach more than 1,000 hotel rooms over the next
three years. Currently approximately 1,121 rooms
of which 152 are operational and c.969 are in the
pipeline. Targeting mostly 3-star and 4-star hotels.
Value Realisation Outlook
We aim to spin-off yielding properties as a listed
REIT managed by m2.
Ownership
Hospitality and Commercial Real Estate is 100%
owned through m2.
Financial Metrics1
Operating Metrics
Market Opportunity
Gross profit from operating leases (GEL millions)
Yield
Arrivals of tourists and tourism revenue, Georgia
4.6 +50.8%
2018
2017
4.6
3.0
Gross profit from hospitality services (GEL millions)
1.9 NMF
2018
2017
0
1.9
Total net operating income (GEL millions)
31.5 NMF
2018
2017
3.4
31.5
Commercial real estate portfolio (GEL millions)
112.0 +45.1%
2018
2017
112.0
77.2
1 Hospitality and commercial real estate business
functional currency is US dollars.
9.9% +0.8ppt
Occupancy rate
90.1% +1.8ppt
Leased area (square metres)
22,331+1,854
square metres
4.8
3.2
4.1
2.7
2.9
2.9
3.0
1.8
1.9
1.7
3.3
2.1
2.5
1.4
1.8
1.0
0
1
0
2
2011
2012
2013
2014
2015
2016
2017
2018
2018
2017
22,331
20,477
Arrivals of tourists (mln)
Tourism revenue (US$ bln)
Source: Georgian National Tourism Administration
Return On Invested Capital1
Hotel Rooms Pipeline as of 31 December 20182
ROIC
16.4% +12.5ppt
Hotel
Location
Rooms
Target
opening
date
Current
stage
Total
cost
Target
ROIC
US$ ‘000
Ramada Encore
Kazbegi
Capital
152
Q1-2018
Operational
12,066
18.0%
1 ROIC is calculated as EBITDA less depreciation,
plus divided by aggregate amount of total equity
and borrowed fund.
2 Target opening dates remain subject to adjustment
following passing of the design stage.
Gudauri
Regions
121
Q2-2019
Construction
10,809
12.8%
Seti Square
Mestia, Svaneti
Ramada
Melikishvili
Regions
72
Q4-2019
Design
5,915
16.2%
Capital
125
Q1-2020
Construction
12,352
15.7%
Gergeti
Capital
100
Q3-2020
Construction
23,473
13.7%
Ramada Kutaisi
Regions
121
Q4-2020
Design
9,535
17.5%
Mestia, Svaneti
Regions
120
Q1-2021
Design
10,096
15.8%
Telavi
Regions
130
Q2-2021
Design
12,735
13.4%
Javakhishvili
Capital
120
Q2-2021
Design
14,144
13.8%
Kakheti Wine
and Spa
Regions
60
Q3-2021
Design
7,500
17.3%
Total
1,121
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59
59
PORTFOLIO COMPANIES CONTINUED
PRIVATE EARLY STAGE
Hospitality and Commercial
Real Estate Overview
m2 manages a yielding real estate asset
portfolio, which it accumulated through its
developments under the housing development
business, as well as opportunistic
investments. The tourism sector in Georgia
has demonstrated significant growth and it
has potential to place itself on the world map
as a high-quality tourist destination. To
capitalise on growing touristic activities in
the country, m2 plans to increase its presence
in the hospitality sector and reach the total
combined room count of more than
1,000 rooms.
Growing yielding business. m2 will continue
growing its yielding asset portfolio through:
• Commercial space. enhancing the
income-generating asset portfolio by
incorporating commercial elements in
its residential developments and
opportunistically acquiring and/or
developing high street retail, commercial
and office space. In addition to rental
income, these assets can also deliver
capital appreciation.
• Hotel development. m2 launched a 3-star
Ramada Encore hotel in Tbilisi in March
2018 under a development agreement with
Wyndham. The business has three hotel
projects under construction – a luxury hotel
on Gergeti street in Tbilisi with an expected
100 rooms, Melikishvili Avenue hotel in Tbilisi
with an expected 125 rooms and a hotel
in the leading ski resort of the Caucasus
region, Gudauri, with an expected 121
rooms. Additionally, there are six hotels in
a design stage: (a) a hotel in Telavi with an
expected 130 rooms; (b) a hotel in Kutaisi
with an expected 121 rooms; (c) a hotel in
Akhasheni village, Kakheti, in eastern part
of Georgia well-known to tourists for wine
destination with an expected 60 rooms;
(d) a business style 4-star hotel in old Tbilisi
with an expected 120 rooms; and e) two
hotels in mountainous Svaneti region with
an expected 192 rooms in total. The total
capital needs to complete the construction
and development of the hotels in the current
pipeline is estimated at GEL 247.5 million.
The Hospitality Business’ Hotel Rooms Development Pipeline
Rooms to target
Design stage
Telavi
Javakhishvili, Tbilisi
Kakheti Wine & Spa
Mestia Hotel in Svaneti
430
1,121
Construction stage
Ramada Meliskishvili
Gergeti Hotel
Design stage
Ramada Kutaisi
346
Construction stage
Gudauri
Design stage
Seti Square Hotel
in Mestia, Svaneti
193
Operational stage
Ramada Encore
Kazbegi
152
2018
2019
2020
2021
2021
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61
PORTFOLIO COMPANIES CONTINUED
PRIVATE EARLY STAGE
Beverages
Investment Rationale
High growth sector, which has doubled during
the last five years to GEL 1.9 billion market.
Beer consumption at one of the lowest levels in
the wider region at 27.5 litres per capita.
50% CAGR growth in soft drinks export over the
last three years.
Georgia’s favourable trade regimes (free trade
agreements with EU and China) provide potential
for export growth.
Value Creation Potential
Best-in-class distribution network platform.
Ten-year special right from Heineken to produce
and sell beer in Georgia, Armenia and Azerbaijan.
Grow vineyard base to 1,000 hectares, from
current 436 hectares, over the next three years.
Grow production capacity from current 6.1 million
wine bottles per year up to 16.6 million at the end
of 2019.
Value Realisation Outlook
Trade sale either of the whole business or parts.
Ownership
Georgia Capital owns 80% of Beverages.
Financial Metrics
Operating Metrics
Market Opportunity
Wine revenue (GEL millions)
29.4 +43.7%
2018
2017
29.4
20.4
Beer revenue (GEL millions)
29.3 +63.5%
2018
2017
29.3
17.9
Wine EBITDA (GEL millions)
7.2 +31.8%
2018
2017
7.2
5.4
Beer EBITDA (GEL millions)
(13.8) NMF
-13.8
2018
2017
-5.5
Wine sales (bottles ‘000)
4,346 +22.2%
2018
2017
4,346
3,557
Beer sales (litres ‘000)
15,983 +60.6%
2018
2017
15,983
9,951
Per Cap Beer Consumption Shows Room for Growth
Beer consumption per capita, litres; 2017
109
105
92
79
79
71
67
53
51
49
42
34
32
28
27
y
n
a
m
r
e
G
a
i
r
t
s
u
A
a
i
n
a
m
o
R
a
i
r
a
g
l
u
B
y
r
a
g
n
u
H
a
i
b
r
e
S
n
i
a
p
S
d
n
a
l
r
e
z
t
i
w
S
a
i
s
s
u
R
l
a
g
u
t
r
o
P
e
n
i
a
r
k
U
e
c
e
e
r
G
e
c
n
a
r
F
a
i
g
r
o
e
G
y
l
a
t
I
Source: Euromonitor
Return On Invested Capital1
Wine Exports in US$ Millions
ROIC
-11.4% -7.8ppt
1 ROIC is calculated as EBITDA less depreciation,
plus divided by aggregate amount of total equity
and borrowed fund.
Georgia’s Favourable Trade Regimes Provide Potential for Export Growth
197
171
180
128
114
96
65
54
41
32
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: Geostat
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63
PORTFOLIO COMPANIES CONTINUED
PRIVATE EARLY STAGE
Beverages Overview
• Wine business. Our beverages business
sells around 4.3 million bottles of wine
annually, with about 72% of sales coming
from exports. The beverages business
intends to not only retain its leading
position on the local wine market, but also
to become a top exporter by 2019 and
aims to grow its domestic and international
wine sales by benefiting from favourable
market trends in Georgia and expanding
exports through new sales channels in
high-growth countries, including China.
In 2018, Georgia Capital has acquired
Kindzmarauli Marani, LLC (Kindzmarauli),
a producer of exquisite Georgian wines
and spirits, which owns 350 hectares of
vineyards in Georgia’s Kakheti region. With
this acquisition, beverages business made
a major step towards its wine business
development to reach a vineyard base of
1,000 hectares over the next three years
and has reached 436 hectares of
vineyards. This supports the beverages
business’ wine production, which has
been further helped by significant growth
opportunities in international markets
provided by Georgia’s various free trade
agreements, including those with China
and the European Union. Our wine
business is now in the top three wineries
in Georgia in terms of the vineyard base.
Therefore, management expects to
minimise reliance on purchased grapes in
the coming years and as a result, manage
gross profit margin levels. In the medium
term wine business plans to produce
premium priced wine and further diversify
its exports, retaining the leading position
locally, while also maintaining high
double-digit growth in revenue from
export markets.
population of c.17 million people. The
construction of the beer brewing facility
completed in 2016 and local mainstream
beer and lemonade production was
launched in June and August 2017,
respectively. Beverages is on track to brew
Heineken and Amstel beers in 1H19, while
Krusovice production started in June 2018.
With a strong management team and a
proven track record, Beverages aims to
become a leading beverages producer and
distributor in South Caucasus.
The Company’s target is to achieve 20% beer
production market share by the end of 2019,
by improving channel mix, launching new
products, enhancing distribution platform
and targeted marketing. In December 2018
the beer business started exporting lemonade
to Russia and the Company’s management
also expects to start exporting local beer to
CIS countries.
• Distribution business. Beverages
has an established distribution franchise,
which has contracts with a number of
international beverage brands. The
business plans to diversify the products
in its distribution portfolio and eventually
become the largest third-party distribution
company. The strong production and
distribution franchise led the Company
to establish a partnership with Heineken.
• Beer business. Beer business produces
beer and lemonade in the local market,
while also owning ten-year exclusive
license to produce Heineken, Krusovice
and Amstel in Georgia and sell in Georgia,
Armenia and Azerbaijan – a total
Beverages Targets and Priorities
Goal
Become Leading Beverages Producer and Distributor in Caucasus
Wine business
Distribution business
Beer production business
Russian Federation
Black
Sea
Poti
Batumi
Georgia
Turkey
Caspian
Sea
AAAA
Azerbaijan
Baku
• Launched local mainstream beer
under Aragveli Brand in May 2018
and globally well-known licensed
Czech beer Krusovice in June
2018.
In February 2018, Georgia Capital
acquired a 100% equity stake in a
leading Georgian craft beer
producer – Black Lion LLC.
• Beer and Lemonade sales
•
amounted GEL 27.5 million and
GEL 1.8 million in 2018,
respectively.
• Ten-year exclusivity with Heineken
to produce beer to be sold in
Georgia, Armenia and Azerbaijan
(c.17 million population).
• Local production – 14.1% market
share based on litre sales at the
end of 2018.
• Heineken is the highest equity
valued brand in Georgia – 8.3 (out
of 10).
• c.6,843 sales points.
• Exporting wine to 17 countries,
including all former Soviet Union,
Poland, Sweden, the US, Canada,
China and Singapore.
• C.4.3 million bottles sold in FY18
(up 22% y-o-y).
• GEL 29.4 million revenue in FY18
(up 43.7% y-o-y).
• 72% of sales from export.
•
In 2018, Georgia Capital acquired
a 100% controlling interest in
Kindzmarauli Marani LLC, a
producer of exquisite Georgian
wines and spirits, which owns 350
hectares of vineyards. With this
acquisition, a major step was
made towards increasing our
vineyard base to the targeted
1,000 hectares, from the 86
hectares, over the next three
years.
• Total and spontaneous awareness
shows high recognition of Teliani
Valley as a brand on the local
market (total awareness 99.3%
and spontaneous awareness
65.5%).
• Export sales – c.8% market share
of exported wine from Georgia,
excluding Russia.
• Wine and Sparkling Wine
distribution – market leader.
• Other products distribution –
second largest distributor on
the market.
• Lavazza coffee distribution –
market leader in ground coffee
and in HoReCa distribution.
• Enhance product portfolio,
• Achieve 20% market share.
becoming the leading FMCG
distributor in Georgia.
• Targeting to retain lead position on
a domestic market and maintain
high double-digit growth of
revenue per strategic export
market.
• Add a premium priced wine and
diversify the export markets.
• Grow vineyard base from current
436 hectares up to 1,000 hectares
(2019-2022).
Strategic Sale
Business
segments
Market
share 2018
Priorities
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64
Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
65
PORTFOLIO COMPANIES CONTINUED
PIPELINE
Education
We see attractive opportunities in what
is currently a very fragmented, private
high school education market and
expect to build a portfolio of affordable
high schools to capitalise on our
scale advantage.
Industry Investment Rationale
Large and Growing Market
Growing private school market.
Government expected to double spending over the
next five years.
Low base – 3.8% of GDP, compared to 5.4% of
peers (2016 data).
Government incentivised to support private
schools development.
Access is High, but Quality is Poor
Compulsory education lasts nine years from age
six to 14 years, literacy level – 99.8%.
Low supply of quality educators.
Poor international pupils assessment results – 60th
among 72 countries.
High Trading Multiples
Due to its high-quality revenue and high demand
for good-quality affordable education schools are
trading at a very high multiples even amongst the
service industry.
Market Opportunity
Government Spending on Education as GDP ‘%’
GDP% 2016
7.1
6.9
6.6
6.4
6.1
5.9
5.6
5.5
5.4
5
4.9
4.9
4.7
4.7
4.5
4.2
3.8
3.7
We expect to deploy
GEL 140 million of equity
capital and by 2025
we are aiming to reach
30,000 pupils.
d
n
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a
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e
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t
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S
Source: Eurostat, World Bank
Secondary Private School Enrolment
% 2016
23.6
22.1
14.8
14.7
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Source: World Bank
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Medium-term demand outlook for private high schools
Currently: 10% private
In five years: 20% private
10%
20%
90%
80%
Private
State
Currently
10%private
In five years
20%private
We aim to build a portfolio of
affordable high schools to capitalise
on scale advantages in Georgia.
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Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
67
RISK MANAGEMENT
We believe that effective risk management underpins the successful delivery of our
strategy. We identify, evaluate, manage and monitor the risks that we face through an
integrated control framework supported by formal policies and procedures, clearly
delegated authority levels and comprehensive reporting. The Board confirms that our
framework has been in place throughout the year under review and to the date of
approval of this Annual Report and is integrated into both our business planning and
viability assessment processes.
Overview
Our Board, supported by our Audit and Investment Committees and
executive management, is ultimately responsible for the Group’s risk
management and internal controls.
As an investor, Georgia Capital is in the business of taking risks in order
to seek to achieve its targeted returns for investors and shareholders.
The Board approves the strategic objectives that determine the level
and types of risk that Georgia Capital is prepared to accept and
reviews the Company’s strategic objectives and risk appetite at least
annually. We believe that, in order to have an effective risk management
framework, there needs to be a strong risk management culture within
the Group. We have worked to ensure that managing risk is ingrained
in our everyday business activities. We seek to create an environment
where there is openness and transparency in how we make decisions
and manage risks and where business managers are accountable for
the risk management and internal control processes associated with
their activities. Our culture also seeks to ensure that risk management
is responsive, forward-looking and consistent. Georgia Capital’s risk
culture is built on rigorous and comprehensive investment procedures
and disciplined capital management.
Risk Appetite
Our risk appetite is defined by our strategic objectives. We invest capital
and develop businesses that will have strong capital returns. Georgia
Capital applies the following investment criteria:
• Geographic focus: only investing in and developing businesses in
Georgia, the country we know – diversified resilient fast-growing
economy across the last decade.
• Sector focus: mostly consolidating fragmented and underdeveloped
markets, particularly targeting high-multiple service industries.
• Return target: individually assessed, subject to a minimum 25% IRR
at exit.
Investments made by Georgia Capital need to be consistent with our
overall aim of total shareholder returns of 10-times over 10 years since
the demerger date from BGEO Group.
Capital Management
Georgia Capital adopts a highly-disciplined approach to managing its
capital resources as follows:
• 360-degree analysis, when evaluating capital returns, new
investment opportunities or divestments.
• Georgia Capital allocates capital such that it does not depend on
premature sales of listed portfolio companies. Georgia Capital does
not have capital commitments or a primary mandate to deploy
funds or divest assets within a specific time frame. As such, it
focuses on shareholder returns and on opportunities which meet
its investment return and growth criteria.
• The Board regularly reviews any major investment and divestment
opportunities.
Our Framework and Approach to Risk Governance
The Board is responsible for setting the right tone and encouraging
characteristics and behaviours which support a strong risk culture and
effective risk management process across the Group. The Board’s
mandate includes determining the Group’s risk appetite and risk tolerance
as well as monitoring risk exposures to ensure that the nature and extent
of the main risks we face are consistent with our overall goals and
strategic objectives. Non-executive oversight is also exercised through
the Audit Committee which focuses on upholding standards of integrity,
financial reporting, risk management systems, going concern and internal
control. The Audit Committee’s activities are discussed further on pages
130 to 134. The Investment Committee ensures a centralised process-led
approach to investment; and the overriding priority is to protect the
Group’s long-term viability and reputation and produce sustainable,
medium to long-term cash-to-cash returns. The Investment Committee’s
activities are discussed further on pages 135 to 136.
At the Board, Committee and executive management levels, we develop
formal policies and procedures which set out the way in which risks are
systematically identified, assessed, quantified, managed and monitored.
Our Investment Committee, which has oversight of the investment
pipeline development and approves new investments, significant
portfolio changes and divestments, is integral to embedding our
institutional approach across the business. It ensures consistency and
compliance with Georgia Capital’s financial and strategic requirements,
cultural values and appropriate investment behaviours. Each business
participates in the risk management process by identifying the key risks
applicable to its business. The principal risks and uncertainties faced by
the Group are identified through this process, as are the emerging risks.
On a day-to-day basis, management is responsible for the implementation
of the Group’s risk management and other internal control policies and
procedures. Based on our risk culture, managers “own” the risks relevant
to their respective function. For each risk identified at any level of the
business, the risk is measured and mitigated (if possible) in accordance
with our policies and procedures and monitored. Managers are required to
report on identified risks and responses to such risks on a consistent and
frequent basis. Executive and senior management regularly review the
output from the bottom-up process by providing independent challenge
and assessing the implementation of the risk management and internal
control policies and procedures.
Our reporting process enables key risks and emerging risks to be
escalated to the appropriate level of authority and provides assurance
to the Committees and the Board. Key developments affecting our
principal risks and associated mitigating actions are reviewed quarterly
(or more often if necessary on an ad hoc basis, outside of the regular
reporting process) by the Audit and Investment Committees, as
appropriate, as well as the Board.
A description of these principal risks and uncertainties, including
recent trends and outlook, as well as mitigation efforts, can be found
on pages 70 to 72 of the Strategic Review.
Risk Governance Structure
BOARD
• Determines the Group’s risk appetite as part of strategy setting.
• Overall responsibility for maintaining a system of internal controls that ensure an effective risk management and oversight process across
the Group.
• Assisted by the Board Committees with specific responsibility for key risk management areas.
Audit Committee
Investment Committee
Remuneration Committee
Nomination Committee
Responsible for ensuring that the
Board has the necessary, skills,
experience and knowledge to
enable the Group to deliver its
strategic objectives.
• Responsible for managing
financial reporting risk and
internal control and the
relationship with the
external auditor.
• Reviews and challenges risk
management reports from
Group Finance and
Internal Audit.
• Specific and primary
responsibility for the valuation
policy and valuation of the
Group’s investment portfolio.
• Provides oversight and
challenge of underlying
assumptions on the valuation
of the private investment
portfolio (54% of net assets at
31 December 2018).
• Direct engagement with the
external auditor.
• Principal Committee for
managing the Group’s
investment portfolio and its
most material risks.
• Strict oversight of each step
of the investment lifecycle.
• Approves all investment,
divestment and material
portfolio decisions.
• Monitors investments against
original investment case.
• Ensures investments are in
line with the Group’s
Investment Policy and risk
appetite.
Reviews and recommends to
the Board the Directors’
Remuneration Policy to ensure
that remuneration is designed to
promote the long-term success of
Georgia Capital (and to see that
management is appropriately
rewarded for their contribution to
the Group’s performance in the
context of wider market
conditions and shareholder
views). It approves variable
compensation schemes for our
investment professionals that are
in line with market practice and
enable the Group to attract and
retain the best talent. The
Committee ensures that their
remuneration is aligned with
shareholder returns.
MANAGEMENT BOARD
The Management Board is led by the Chief Executive Officer and has:
• Delegated responsibility for management of the Group.
• Delegated responsibility for investment decisions.
• Delegated responsibility for risk management.
Bodies Implementing the Risk Management System
As mentioned above, our Board is responsible for reviewing and
approving the Group’s system of internal control and its adequacy and
effectiveness. Controls are reviewed to ensure effective management
of strategic, financial, market and operational, among other risks we
face. Certain matters, such as the approval of major capital
expenditure, significant acquisitions or disposals and major contracts,
among others, are reserved exclusively for the Board. The full schedule
of matters specifically reserved for the Board can be found on our
website, at: https://georgiacapital.ge/governance/cgf/schedule.
With respect to other matters, the Board is often assisted by both the
Audit and Investment Committees.
The Management Board has the overall responsibility for the Group’s
assets, liabilities, risk management activities, respective policies and
procedures. In order to effectively implement the risk management
system, the Management Board delegates individual risk management
functions to each of the various decision-making and execution bodies
within the Group, as described below.
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69
RISK MANAGEMENT CONTINUED
Internal Audit Department
The Group has an established Internal Audit department, which is
responsible for the regular review/audit of the Group’s operations,
activities, systems and processes, in order to evaluate and provide
reasonable, independent and objective assurance and consulting
services designed to add value and improve the Group’s operations.
The Group’s Internal Audit department is independent of the
Management Board. The Head of the Group’s Internal Audit department
is appointed by and reports directly to the Group’s Audit Committee.
The Group’s Internal Audit department discusses the results of all
assessments with the Group’s Management Board and reports its
findings and recommendations to the Group’s Audit Committee.
The purpose of the Internal Audit department is to determine whether
the Group’s risk management, internal controls and corporate
governance processes, which are designed and implemented by the
Management Board, are adequate such that:
• material risks including strategic, market, liquidity and operational
risks, are appropriately identified, measured, assessed and
managed across the Group including its outsourced activities;
interaction with the various internal governance groups occurs
appropriately;
•
• significant financial, managerial, and operating information is
•
•
accurate, reliable and timely;
the Group and its employees act with integrity and their actions
are in compliance with the policies, standards, procedures and
applicable laws and regulations;
resources are acquired economically, used efficiently, and
protected adequately;
• programmes, plans and objectives are achieved; and
• significant legislative or regulatory issues that impact the
organisation are recognised and addressed in a timely fashion
and properly.
In order to fulfil its function, the Group’s Internal Audit department has
unrestricted access to all the Group’s functions, records, property and
personnel and the Head of Internal Audit has a direct reporting line to
the Chairman of the Audit Committee.
Legal Department
The Legal department’s principal purposes are to ensure that the
Group’s activities conform to applicable legislation and to minimise
losses from the materialisation of legal risks. The Legal department is
responsible for the application and development of mechanisms for
identifying legal risks in the Group’s activities in a timely manner, the
investigation of the Group’s activities in order to identify any legal risks,
the planning and implementation of all necessary actions for the
elimination of identified legal risks, participation in legal proceedings on
behalf of the Group where necessary and the investigation of
possibilities for increasing the effectiveness of the Group’s legal
documentation and its implementation in the Group’s daily activities.
The Legal department is also responsible for providing legal support to
structural units of the Group.
Finance Department
The Group’s risk management system is implemented primarily by the
Finance department, which is supervised by the Chief Financial Officer
and is responsible for the Financial Risks Management function. It
implements the Group’s financial and tax risks policies by ensuring
compliance with: established open currency position limits; limits on
possible losses for the foreign currency risks; tax legislation and all
policies and procedures set by the Management Board. The Finance
department, which reports to the Management Board, also focuses on
the Group’s relationship with the tax authorities and provides practical
advice and tax optimisation plans for the Group and also assesses the
entire Group’s tax risks and exposures.
The Finance department also manages foreign currency exchange,
money market and derivatives operations and monitors compliance
with the limits set by the Management Board for these operations.
The Finance department is also responsible for the management
of the long-term and short-term liquidity and cash flow and monitors
the volumes of cash on the Group’s accounts for the purposes of
sufficiency. Further, the Finance department monitors the active
investment portfolio performance on a regular basis and delivers
monthly management reports to the Management Board. The
Management Board reviews performance of each portfolio business
company on a monthly basis and takes actions, as necessary.
IFRS Technical Accounting Unit
The IFRS technical accounting unit, part of the Finance department,
is responsible for monitoring the Group’s compliance with relevant
International Financial Reporting Standards. The IFRS technical
accounting unit is involved in the development process of the Group’s
accounting policies by leading new accounting standards
implementation projects, monitoring of new IFRS developments,
preparing an impact assessment on reporting, systems and processes
across the Group. In order to increase the understanding of IFRS and
to ensure that consistent accounting policies are applied across the
Group the IFRS technical accounting unit delivers trainings on new
IFRS standards, issues Group accounting policies, general guidance
memos on application of IFRS and memoranda on complex, one-off
transactions and also prepares quarterly RADAR reports to the Audit
Committee summarising material transactions across the Group,
including its subsidiaries with respective financial impact. The IFRS
technical accounting unit is also involved in the communication
processes of Group entities with external auditors.
Internal Control
With respect to Internal Control over financial reporting, including the
Group’s consolidation process, our financial procedures include a
range of system, transactional and management oversight controls.
Our businesses prepare detailed monthly management reports that
include analyses of their results along with comparisons, relevant
strategic plans, budgets, forecasts and prior results. These are
presented to and reviewed by executive management. Each quarter,
the CFO of the Group and other members of the Finance Team discuss
financial reporting and associated internal controls with the Audit
Committee, which reports significant findings to the Board. The Audit
Committee also reviews the quarterly, half-year and full-year financial
statements and corresponding press releases and provides feedback
to the Board. The external and internal auditors attend each Audit
Committee meeting and the Audit Committee meets regularly both
with and without management present.
Going Concern Statement
The Group’s business activities, objectives and strategy, principal
risks and uncertainties in achieving its objectives and performance
are set out on pages 2 to 117. After making enquiries, the Directors
confirm that they have a reasonable expectation that Georgia Capital
and the Group, as a whole, have adequate resources to continue in
operational existence and, therefore, the Directors consider it
appropriate to adopt the going concern basis of accounting in
preparing the Financial Statements.
Viability Statement
In accordance with the Corporate Governance Code, the Directors are
required to assess the prospects of the Company to meet its liabilities
by taking into account its current position and principal risks. The
Group seeks to create value by driving the development of high-growth
potential businesses in Georgia, aiming to consolidate fragmented or
underdeveloped markets, by either acquiring businesses during their
early development stage or by establishing on a greenfield basis.
Georgia Capital capitalises on its access to capital, access to
management and commitment to the highest level of corporate
governance, which is as strong foundation for greater future business
success and increase in Group’s value. Georgia Capital runs in-depth
annual business planning process, involving operating subsidiary
management and Group management with Board input and oversight.
In line with the UK Corporate Governance Code, the Board conducted
this review over a three-year period beginning 1 January 2019, being
the first day after the end of the financial year to which this report
relates. In determining the appropriate period over which to make their
assessment, the Directors considered the duration of strategic plans,
financial forecasts, the diverse nature of the Group’s activities, the
evolving nature of the regulatory environment in which the Group’s
businesses operate and future capital allocation projections. A period
of three years beyond the balance sheet date was therefore considered
the most appropriate viability period for the Company.
In order to consider the Group’s viability, the Board considered a
number of key factors, including:
•
•
•
•
the Board’s risk appetite;
the Group’s business model and strategy as set out on pages
14 to 27;
the Group’s principal risks and uncertainties, principally those
related to regional instability, portfolio company strategic and
execution risk, investment risk, adverse economic conditions, the
depreciation of the Lari, lack of liquidity and how these risks and
uncertainties are managed, as set out on pages 70 to 72;
the effectiveness of our risk management framework and internal
control processes; and
• stress testing, as described below.
The key factors above have been reviewed in the context of our current
position and strategic plan. Since there are no legal guarantees or
constructive commitments in place for Georgia Capital to fund losses
or activities at subsidiary level, a stress test analysis was prepared on
a Holding Company level.
The viability assessment involved a risk identification process which
included recognition of the principal risks to viability (risks that could
impair the Group’s business model, future performance, solvency or
liquidity), excluding risks not sufficiently severe over the period of
assessment for the Group. Principal risk and uncertainties identified
by the Group are regional instability, regulatory, investment, liquidity,
portfolio company strategic and execution, and currency and
macroeconomic environment risks. We also identified other risks
which, while not necessarily severe in themselves, could escalate
when combined with others.
For those risks considered sufficiently severe to affect our viability, we
performed stress testing for the assessment period, which involved
modelling the impact of a combination of severe and plausible risks in
combined adverse scenario. The stress test scenario was then reviewed
against the Group’s current and projected liquidity position. The stress
testing also took into account the availability and likely effectiveness of
the mitigating actions that could be taken to avoid or reduce the impact
or occurrence of the identified underlying risks to which the Group is
exposed. The Group prepared single reasonably worst case scenario
which assumes inability of private portfolio companies to pay dividends
or meet any other obligations towards the Holding Company, the reason
for which can be GEL depreciation against the dollar, market
competition, operational underperformance, inability to receive
construction permits (for our housing development business), delay in
energy market deregulation and project cost overruns for water utility
and energy business. Partial suspension of share buybacks and capital
allocations were used as mitigating action, while no inflows from the sale
of listed portfolio companies were assumed.
The Directors have also satisfied themselves that they have the
evidence necessary to support the statement below in terms of the
effectiveness of the Group’s risk management framework and internal
control processes in place to mitigate risk. As at 31 December 2018
Georgia Capital owned GEL 142 million cash and GEL 157 million
marketable debt securities and equity holdings worth GEL 978 in
London Stock Exchange listed companies GHG PLC and BOGG PLC,
therefore even in a worst case scenario, with risks modelled to
materialise simultaneously and for a sustained period, the likelihood of
the Group having insufficient resources to meet its financial obligations
is remote. Based on the analysis described above, the Directors
confirm that they have a reasonable expectation that the Group will be
able to continue operation and meet its liabilities as they fall due over
the three-year period from 1 January 2019 to 31 December 2021.
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71
PRINCIPAL RISKS AND UNCERTAINTIES
Understanding Our Risks
The table below describes the principal risks and uncertainties faced by the Group and their potential impact, as well as the trends and outlook
associated with these risks and the mitigating actions we take to address these risks. If any of the following risks were to occur, the Group’s
business, financial condition, results of operations or prospects could be materially affected. The risks and uncertainties described below may not
be the only ones the Group faces. Additional risks and uncertainties, including those that the Group is currently not aware of or deems immaterial,
may also result in decreased revenues, incurred expenses or other events that could result in a decline in the value of the Group’s securities.
Matter Considered
Action Taken
REGIONAL INSTABILITY
Principal Risk/
Uncertainty
Key Drivers/
Trends
The Georgian economy and our business may be adversely affected by regional tensions. Georgia shares borders with
Russia, Azerbaijan, Armenia and Turkey and has two breakaway territories, Abkhazia and the Tskhinvali Region/South
Ossetia. Countries within the region, including Azerbaijan, Armenia, Russia and Turkey are key trading partners of
Georgia. There has been ongoing geopolitical tension, political instability, economic instability and military conflict in
the region, which may have an adverse effect on our business and financial position. The ongoing, prolongation or
escalation of political instability, geopolitical conflict, economic decline of Georgia’s trading partners and any future
deterioration of Georgia’s relationship with Russia, including in relation to border and territorial disputes, may have a
negative effect on the political or economic stability of Georgia, which in turn may have an adverse effect on our
business including putting adverse pressure on our business model, our revenues and our financial position.
Russia imposed economic sanctions on Georgia in 2006, and conflict between the countries escalated in 2008 when
Russian forces crossed Georgian borders and recognised the independence of Abkhazia and the Tskhinvali/South
Ossetia regions. Russian troops continue to occupy the regions and tensions between Russia and Georgia persist.
The introduction of a preferential trade regime between Georgia and the EU in July 2016 and the European Parliament’s
approval of a proposal on visa liberalisation for Georgia in February 2017 may intensify tensions between the countries.
The Government has taken certain steps towards improving relations with Russia, but, as of the date of this report,
these have not resulted in any formal or legal changes in the relationship between the two countries.
Ongoing conflict between Russia and Ukraine, and Russia’s and Turkey’s worsening relations with the US increase
uncertainties in the region.
There is an ongoing conflict between Azerbaijan and Armenia which impacts the region.
Mitigation
The Group actively monitors significant developments in the region and risks related to political instability and develops
responsive strategies and action plans. One of the most significant changes in the Georgian export market was a shift
away from the Russian market after Russia’s 2006 embargo.
Despite tensions in the breakaway territories, Russia has continued to open its export market to Georgian exports since
2013. While financial market turbulences and geopolitical tensions affect regional trading partners, Georgia’s preferential
trading regimes with FTAs with both the EU and China support the country to enhance resilience to external shocks.
REGULATORY RISK
Principal Risk/
Uncertainty
The Group operates across a wide range of industries healthcare services, pharmacy and distribution, property and
casualty insurance, real estate, water utility and electric power generation, hydro power, wine and beverages. Many of
these industries are highly regulated. The regulatory environment continues to evolve. We, however, cannot predict what
additional regulatory changes will be introduced in the future or the impact they may have on our operations.
Key Drivers/
Trends
Mitigation
Each of our businesses is subject to different regulators and regulation. Legislation in certain industries, such as healthcare,
energy, insurance and utilities is continuously evolving. Different changes, including but not limited to, Governmental funding,
licensing and accreditation requirements and tariff structures may adversely affect our businesses.
Continued investment in our people and processes is enabling us to meet our current regulatory requirements and
means that we are well placed to respond to any future changes in regulation. Further our investment portfolio is well
diversified, limiting exposure to particular industry specific regulatory risks.
In line with our integrated control framework, we carefully evaluate the impact of legislative and regulatory changes as
part of our formal risk identification and assessment processes and, to the extent possible, proactively participate in the
drafting of relevant legislation. As part of this process, we engage in constructive dialogue with regulatory bodies, where
possible, and seek external advice on potential changes to legislation. We then develop appropriate policies, procedures
and controls as required to fulfill our compliance obligations. Our compliance framework, at all levels, is subject to
regular review by Internal Audit and external assurance providers.
Matter Considered
Action Taken
INVESTMENT RISK
Principal Risk/
Uncertainty
Key Drivers/
Trends
Mitigation
The Group may be adversely affected by risks in respect of specific investment decisions.
An inappropriate investment decision might lead to a poor performance. Investment risks include in appropriate
research and due diligence of new investments and unexpected timing of the execution of both the acquisition and
divestiture of investments in order to optimise shareholder value.
The Group manages investment risk with established procedures for thorough evaluation of target acquisitions. Investment
opportunities are subject to rigorous appraisal and a multi-stage approval process. Target entry and exit event prices are
monitored and updated regularly, in relation to market conditions and strategic aims. The Group performs due diligence on
each target acquisition including financial and legal matters. Subject to an evaluation of the due diligence results an
acceptable price and funding structure is determined and, the pricing, funding and future integration plan is presented to the
Investment Committee (or directly to the full Board) for approval. The Committee (or the full Board) reviews and approves or
rejects proposals for development, acquisition and sale of investments and makes recommendations to the Board on all
major new business initiatives, especially those requiring a significant capital allocation.
Principal Risk/
Uncertainty
Risk that liabilities cannot be met or new investments made due to a lack of liquidity. Such risk can arise from not being
able to sell an investment due to lack of demand from the market or from not holding cash or being able to raise debt.
LIQUIDITY
Key Drivers/
Trends
Mitigation
The Group predominantly invests in private portfolio businesses, potentially making the investments difficult to realise at
any one point in time. There is a risk that the Group will not be able to meet its financial obligations and liabilities on time
due to lack of cash or liquid assets. The risk involves the inability to generate sufficient cash and cash equivalents to
meet all payment obligations; this may be caused by numerous factors, such as inability to refinance its long-term
liabilities, or excessive investments in long-term assets and respective mismatch in maturity of funding, liabilities and
assets or failure to comply with the creditor covenants causing Event of Default or Default.
Liquidity Management process is a regular process, where the framework is approved by the Management Board and
monitoring is done by the Chief Financial Officer. The framework models the ability of the Group to fund under both normal
conditions (Base Case) and during stressed situations. This approach is designed to ensure that the funding framework is
sufficiently flexible to ensure liquidity under a wide range of market conditions. The finance department is actively involved in
the liquidity management on a weekly basis and monitors, on a daily basis, the liquidity measures that are analysed by the
Management Board at least once a month. Such monitoring involves review of the composition of the cash buffer, potential
cash outflows and management’s readiness to meet such commitments. It also serves as a tool to revisit the portfolio
composition and take necessary measures, if required. The Board also monitors liquidity on a regular basis. JSC Georgia
Capital successfully issued holding company US$300 million bonds in March 2018. The debt is actively managed so that
Georgia Capital maintains a maximum loan to value (LTV) ratio of 30%.
The Group has adopted the following measures to manage its standalone credit profile:
•
•
•
•
the Group depends on its ability to realise its listed securities on the public markets, which are highly liquid. To limit this
risk, the Group has adopted a policy to maintain a cash buffer of at least US$50 million in highly-liquid assets in order to
always have sufficient capacity for potential downside scenarios as well as for potential acquisition opportunities.
Additionally, the Group will maintain at least US$50 million in marketable securities which can be converted into cash
within three to four weeks (this would include BOG and GHG shares);
the cash expense coverage ratio (defined as the sum of annual cash inflows from dividends and interest income from
on-lent loans divided by sum of annual cash outflows in bond interest payments and cash operating expenses)
should be in excess of 1.25 at all times;
the ratio of extra cash (defined as cash in excess of liquid assets of US$50 million) divided by expected cash outflows
over the next 180 days should be in excess of 1.0 at all times; and
the Net Debt to Asset Portfolio should be no more than 30% at all times, where ‘‘Net Debt’’ is defined as borrowings
plus guarantees issued and commitments from financial institutions minus liquid assets and ‘‘Asset Portfolio’’ is
defined as the sum of fair values of portfolio company investments and loans issued.
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PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED
RESOURCES AND RESPONSIBILITIES
PORTFOLIO COMPANY STRATEGIC AND EXECUTION RISKS
Matter Considered
Action Taken
Principal Risk/
Uncertainty
Market conditions may adversely impact our strategy and all our businesses have their own risks specific to their industry.
Our businesses have growth and expansion strategies and we face execution risk in implementing these strategies.
Our aim is to achieve an internal rate of return of at least 25% from investments. The Group will normally seek to
monetise its investments, including through initial public offering, strategic sale or other appropriate exit, typically within
five to ten years of acquisition.
Key Drivers/
Trends
Each of our private portfolio investments (Water Utility; Renewable Energy; Housing Development; Hospitality and
Commercial Real Estate; Property and Casualty Insurance; Beverages;) and our public portfolio investments (Georgia
Healthcare Group and Bank of Georgia) face their own risks. These include risks inherent to their industry, or to their industry
particularly in Georgia, and each face significant competition. They also face the principal risks and uncertainties referred to
in this table.
Macroeconomic conditions, the financial and economic environment and other market conditions in international capital
markets may limit the Group’s ability to achieve a partial or full exit from its existing or future businesses. It may not be
possible or desirable to divest, including whether suitable buyers can be found at the appropriate times or cases where
there may be difficulties in obtaining favourable terms or prices.
Mitigation
For each business, we focus on building a strong management team and have successfully been able to do so thus far.
Management succession planning is regularly on the agenda for the Nomination Committee which reports to the Board
on this matter. The Board closely monitors the implementation of strategy, financial and operational performance, risk
management and Internal Control framework and corporate governance of our businesses. We hold management
accountable for meeting targets.
For each industry in which we operate, we closely monitor industry trends, market conditions and the regulatory environment.
We have also sought and continue to seek advice from professionals with global experience in relevant industries.
The Group has a strong track record of growth and has accessed the capital markets on multiple occasions as part of
the BGEO Group PLC prior to the demerger on 29 May 2018. Our acquisition history has also been successful and we
have been able to integrate businesses due to our strong management with integration experience.
CURRENCY AND MACROECONOMIC ENVIRONMENT
Principal Risk/
Uncertainty
Unfavourable dynamics of macroeconomic variables, including depreciation of the Lari against the US dollar may have
a material impact on the Group’s performance.
Key Drivers/
Trends
The Group’s operations are primarily located in, and most of its revenue is sourced from, Georgia. Factors such as gross domestic
product (GDP), inflation, interest and currency exchange rates, as well as unemployment, personal income, tourist numbers and the
financial situation of companies, can have a material impact on customer demand for its products and services.
Year-end Lari depreciation against the US dollar was 3.3% in 2018. On the macro level, the free floating exchange rate works
well as a shock absorber, but on the micro level, the currency fluctuation has affected and may continue to adversely affect the
Group’s results. There is a risk that the Group incurs material losses or loses material amounts of revenue and, respectively,
deteriorates its operating solvency in a specific currency or group of currencies due to the fluctuation of the exchange rates.
The risk is mostly caused by significant open foreign currency positions in the balance sheets.
In April 2017, the IMF approved a new three-year US$285 million economic programme, aimed at preserving
macroeconomic and financial stability and addressing structural weaknesses in the Georgian economy to support
higher and more inclusive growth. Despite the turbulence in our partner countries’ markets, tourism revenues, exports
and remittances increased by double digits and supported real GDP to increase by 4.7%, whilst average inflation was
close to target at 2.6% in 2018. For the first time in our history, quarterly CA turned to positive at 0.3% of GDP and the
annual CA deficit narrowed to 7.7% of GDP in 2018. Monetary policy stance is appropriate to the current
macroeconomic environment. Official reserve assets reached a historically high level at US$3.3 billion in 2018.
Mitigation
The Group continually monitors market conditions, reviews market changes and also performs stress and scenario testing
to test its position under adverse economic conditions, including adverse currency movements.
Currency risk management process is an integral part of the Group’s activities; currency risk is managed through regular and
frequent monitoring of the Group’s currency positions and through timely and efficient elaboration of responsive actions and
measures; it starts at the Management Board level, which reviews overall currency positions of the Group several times during
the year and elaborates respective overall currency strategies; the Finance department monitors the daily currency position for
stand-alone Georgia Capital, weekly currency positions on portfolio company level and manages short-term liquidity of the
Group across different currencies. Control procedures involve regular monitoring and control of the currency gap and
currency positions, running currency sensitivity tests and elaborating response actions/steps based on the results of the tests.
Sustainability lies at the heart of our
business and reflects our contribution
to sustainable development that
meets the needs of the present
without compromising the ability
of future generations to meet their
own needs.
In order to effectively manage the Group’s
direct and indirect impact on society and the
environment, the Board of Directors adopted a
Code of Ethics, as well as policies which relate
to environmental matters, employees, social
matters, our respect for human rights and
anti-corruption and bribery. Copies of these
polices can be found on the Group’s website:
https://georgiacapital.ge/governance/
cgf/policies. We are pioneering sustainability
practices in our business activities and across
our portfolio and are constantly seeking new
ways to improve our performance across the
Group. We invite you to read more about
these policies, practices and initiatives in the
sections below, which also incorporates the
non-financial information detailed under
section 414CB of the Companies Act 2006.
As a Group, we are committed to a
long-term investment strategy and to
maintaining effective relationships with
those businesses in which we invest. We
take board seats in our private investments
and use these to maintain close
relationships with managements of those
companies as described within the
strategy section on pages 14 to 27. As a
consequence of our involved investment
style, we manage our investments in the
best interests of our shareholders. We
continue to meet with our shareholders
and listen to any concerns they may have.
With investment portfolio of GEL 1,883
million we recognise that our decisions as
a Group potentially impact a broad range
of stakeholders. Georgia Capital is
committed to achieving its strategic and
investment objectives while behaving
responsibly as an employer and as an
international corporate citizen. By
implementing a sustainable approach to
our activities, we foster long-term
relationships with our main stakeholders by
providing high returns on investment for
shareholders, developing employees and
contributing to the economic and social
welfare of local communities, while taking
into account our environmental footprint.
The Group does not invest in
environmentally and socially-sensitive
business activities and focuses upon the
environmental and social issues associated
with its commercial activities and
investments in order to maximise the
opportunities for environmentally and
socially-responsible and sustainable
economic development. We take
responsibility for our actions, carefully
consider material ESG risks and how
others will be affected by our choices and
ensure that our values and ethics are
integrated into our formal business policies,
practices and plans.
Social Matters
The Group considers the interests of its main
stakeholders when developing the strategy
and the processes to improve its operations.
We adhere to our Environmental and Social
Policy published on the Group’s website:
https://georgiacapital.ge/governance/
cgf/policies and we continuously
strive to positively contribute to society
through the entire scope of our business
activities by developing socially-oriented
products and services, implementing
responsible approaches to our business
operations, carrying out sponsorship
and charitable activities.
Socially-Oriented Products and
Services Energy
The average growth of electricity consumption
in Georgia has been 5.7% over the last ten
years. The Group is investing in renewable
energy to respond the growing demand by
developing hydro power plants, wind power
plants and solar power plants across Georgia.
In addition, the renewable energy business
has a pre-construction pipeline of 74MWs of
hydro, 210MWs of wind and 30MWs of solar,
out of a targeted 500MWs over the medium
term. The Group’s involvement in renewable
energy business supports the country’s
sustainable growth.
Tourism
The Georgian tourism sector has
demonstrated significant growth in recent
years; it has generated CAGR of 15.0% in
international visitor numbers during 2011-
2018. Georgia has potential to place itself on
the world map as a high-quality tourist
destination due to its unique nature and
cultural heritage, its tradition of hospitality and
by focusing on niche areas, for example, wine
tourism, medical and wellness tourism. The
Georgian Government, with the support of the
World Bank, has developed a tourism strategy
with target goals for 2025, including
preserving cultural heritage, developing air
and road infrastructure and attracting higher
spending markets.
The Group’s real estate business, m2, has
entered the hospitality industry, targeting to
reach a total room count of more than 1,000
rooms over the next three years. It has
obtained a development agreement with
Wyndham to develop Wyndham’s 3-star
brand Ramada Encore and 4-star brand
Ramada in Georgia. First Ramada Encore (152
rooms) was opened in Tbilisi in March 2018.
m2 is also developing a 4-star Ramada hotel
in Tbilisi (under construction, 125 rooms) and
a 4-star Ramada in Kutaisi (design stage, 121
rooms), where the international airport serves
low-cost airlines and makes the city popular
with tourists visiting Georgia. Two more hotels
are in the pipeline in Tbilisi – a luxury hotel on
Gergeti Street (under construction, 100 rooms)
and a 4-star business class hotel on
Javakhishvili Street (design stage, 120 rooms).
Apart from Tbilisi, two hotels are in the design
stage in Kakheti (City Telavi and Akhasheni
village), which is well-known to tourists as a
popular wine destination. One further hotel is
under construction in Gudauri (121 rooms), the
leading ski resort of the Caucasus region. m2
strives to contribute to the development of all
places where it initiates construction through
its CSR initiatives.
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RESOURCES AND RESPONSIBILITIES CONTINUED
Education
Education is a key sector to boost long-term
potential economic output in the country.
Currently 90% of primary and secondary
schools are public, making room for private
sector development, which is very fragmented
and unaffordable for most of the population.
The quality of education at public schools is
poor due to a low supply of quality education
professionals and teachers earning a very low
salary. Georgia Capital entered the Education
business by investing GEL 6 million in land
outside Tbilisi for a high school development
in 2018. The Group plans to introduce a chain
of affordable private high schools and aims to
reach 30,000 pupils by the end of 2025,
becoming the largest chain of affordable
private schools in Georgia. Georgia Capital
plans to develop a training centre for teachers
and retrain the recent graduates from the
university, motivating the new generation
to provide quality education through
adequate pay.
Affordable Housing
Over the last ten years, the Georgian real estate
market has experienced a significant increase
in demand. The average household size in
Georgia has dropped from 3.8 in 2005 to 3.3 in
2016, and as this figure is expected to move
closer to the EU average, which was 2.3 in
2016, demand for residential real estate is
expected to increase in the long term. Also,
around 35% of housing units in Tbilisi were built
more than 40 years ago and are reaching the
end of their usable lifecycle. At the same time,
the Georgian real estate market is vulnerable to
various economic and financial uncertainties
and numerous construction projects remain
unfinished for long periods of time. In response
to this social challenge and increasing demand,
the Group’s housing development business, m2
was established in order to offer affordable
housing to the emerging middle class in
Georgia and especially to young families.
Nowadays, m2 is a major player in Georgia’s
real estate market, offering its customers
turnkey apartments with fine-tuned
infrastructure. m2 has completed nine projects
so far and has delivered them to its customers
within, and frequently ahead of, the agreed
deadlines. The Company plans the design and
construction processes so that each square
metre is distributed efficiently. m2 uses
energy- efficient construction components,
bringing up to 43% energy efficiency of its
buildings, which in turn translates into lower
utility expenses incurred by the tenants. The
level of energy savings in m2’s buildings is
significantly above the average residential
property in Tbilisi. Starting in 2014, the
Company launched another affordable housing
product line, Optima, which allows customers
to buy a flat of desired size for a lower price,
which is achieved by distributing the space
more efficiently. As an enhancement of its
affordable housing strategy, m2 plans to
develop a neighbourhood on Marshal Gelovani
Avenue in Tbilisi, Georgia on a 114,513-square
metre-plot with approximately 3,000
apartments. In June 2017, m2 acquired BK
construction LLC, a real estate construction
company, which has reduced m2’s construction
costs and improved the design management
process through vertical integration, giving m2
the ability to reach the lower-end segment.
A large segment of m2’s customers is made
up of young Georgian families (more than 50%
of customers are 23-43 years old). The
Company believes that by continuing to offer
affordable housing products, m2 is helping
them to significantly enhance the quality of
their lives and enjoy modern living standards.
Sponsorship and Charity
As part of our sponsorship and charitable
activities, the Group continues to focus on
promoting and enhancing access to
education, conserving nature, supporting
people with disabilities and special needs, and
facilitating innovative projects that focus on
social good. The Group’s sponsorship and
charity activities encourage partnerships with
various foundations and Non-Governmental
Organisations (NGOs) to deliver sustainable
results and bring positive change. In doing so,
we follow our undertakings in respect of social
and community matters set out in our
Environmental and Social Policy. In 2018, the
Group spent a total of GEL 3.8 million to
finance different sponsorship and charitable
activities, some of which are listed below.
Total sponsorship and charitable expenditure of the
Group, 2018 (GEL millions)
3.8m
Charity 1,780
Sponsorship 2,060
Georgia Capital employees participated in
Wings for Life World Run in 2018. The Wings for
Life World Run is a running competition held
worldwide to collect funds for Wings for Life
Spinal Cord Research Foundation. The entry
fee and all donations raised through fundraising
campaigns go directly to life-changing spinal
cord research projects and clinical trials at
renowned universities and institutes worldwide.
With the support of the Caucasus Nature
Fund (CNF), we are involved in the Project of
Maintenance of Caucasus Natural and Cultural
Heritage. The fund is meant for effective
long-term management of the protected
territories of Armenia, Azerbaijan and Georgia.
In 2018, CNF announced a fundraising
campaign in connection with its tenth
anniversary to support the region’s
magnificent nature. Georgia Capital and GHG
donated US$10,000 and GEL 60,700 to the
project, respectively.
Our water utility business managed by GGU
regularly runs charitable activities for the social
service agency, Child and Environment, and
international humanitarian network, Catharsis,
in Tbilisi. The water utility business covers the
annual water supply expenses for Child and
Environment, the agency that cares for
homeless children and children with
disabilities. Twice a year, GGU sponsors the
project “Dinner for Everyone”, which is
organised by Catharsis for approximately
3,000 people.
In 2018, the renewable energy business,
managed by GGU, implemented several social
projects supporting education, tourism and
sports in Mestia, Svaneti region. Tourism is the
most important source of income for the local
population in Mestia. For the purposes of
tourism development in the region, our
renewable energy business is arranging
training for family-owned hotels to assist the
owners and managers in improving their
services and attracting more visitors.
The Group’s Property and Casualty (P&C)
Insurance business, managed by Aldagi,
supports many socially vulnerable people by
providing one-time help upon special request.
Aldagi traditionally provides a home for at least
one family every Christmas. Aldagi’s
employees are engaged in various
programmes that supply socially vulnerable
people with food and first aid kits.
As part of its sponsorship activities, the
beverage business seeks to promote a healthy
and active lifestyle. As the sponsors of the
Georgian Rugby Union and National Olympic
Committee, the Company aims to attract more
youngsters to healthy activities.
The healthcare services business of GHG
provides free regular medical examinations in
its facilities throughout the country. In 2018,
GHG carried out 23 different free screening
programmes in total, benefiting up to 73,000
patients. Such free-of-charge medical
check-up and screening programmes
include managing tuberculosis, breast cancer
screenings, prostate cancer screenings,
c-hepatitis screenings and diabetes
programmes. In addition, GHG’s specialists
deliver free medical services, including
examinations and treatments for socially
and economically disadvantaged groups of
the population. In cooperation with other
healthcare institutions, the Group arranges
free blood donations for its patients.
presentations, contributing to the youth
development and supporting education in
the country.
GGU has been involved in a dual education
system for the first time in 2018. Students
engaged in the dual educational programme
simultaneously get theoretical knowledge and
practical experience in specific professions.
Through this programme GGU is able to train
future employees with relevant knowledge of
water supply and sewerage systems. Together
with local and international partners, GGU has
successfully implemented several dual
educational programmes, among which were
the programmes for welders and locksmiths
and plumbers.
GHG traditionally participates in the
Government-subsidised Children’s Oncology
Programme, under which the Company offers
cancer treatment to children with different
oncology disorders (leukaemia, tumours and
lymphomas) in GHG’s Iashvili Pediatric Tertiary
Referral Hospital, a multi-profile pediatric
medical establishment, that is the sole
provider of pediatric oncology services in
Georgia. In 2018, more than 600 patients with
different types of cancer received treatment at
Iashvili onco-haematological department.
The water utility business has opened the
Training Centre in 2017, aiming to prepare the
professional, highly-qualified technical staff.
Training Centre programmes and teaching
modules are based on the best practice of the
world’s leading training centres and retraining
programmes. Local and international experts
have created academic projects that help the
Company to develop engineering and other
technical qualifications. By this time up to
1,600 employees of the Company have been
trained/retrained in their Training Centre.
As part of the development of educational
facilities in Svaneti, mountain region in the
North-Western Georgia, the Group’s
renewable energy business modernised a
community centre and a public school library
in Mestia. The Group believes that educating
young people is extremely important for the
development of the community as a whole.
As a leader in the industry, our P&C insurance
business, managed through Aldagi, is
responsible for insurance education, not only
in terms of professional development, but also
informing the younger generation about
insurance and its role in society. Aldagi
employees frequently attend university events
delivering information about insurance in
general, insurance products and principles.
Aldagi has developed a unique professional
development programme to give various
stakeholders and interested employees a
deeper understanding of the industry.
Promoting and Enhancing Access
to Education
In November 2018, m2, opened a college
for vocational education in the Zestaponi
Municipality (Western Georgia). The college
was built and developed as part of a
memorandum of cooperation with the Ministry
of Education and Science of Georgia, which
was signed in 2017. The college, with a total
project cost of GEL 3 million, offers 11
short-term vocational courses to more than
600 construction specialists/workers annually.
m2 expects to employ most of the college
graduates within its construction arm.
m2 financed the opening of Vazha-Pshavela
reading room and a new registration office in
the National Parliamentary Library of Georgia
as part of the memorandum signed in 2017.
The reading room features rare editions of
the famous Georgian poet and writer Vazha-
Pshavela and will host various events including
public lectures, master classes and
The healthcare services business partnered
with Educare Georgia to support their initiative
and sponsored the translation of Khan
Academy’s, a well-known international learning
platform, full biology course into Georgian.
To support the country’s new generation
and contribute to their development, the
healthcare services business cooperates
with different universities across Georgia and
operates the Students’ Programme, which
includes the following initiatives: improved
healthcare package under UHC, scholarships
and sponsoring tournaments, meetings with
motivational speakers, master classes and
outdoor activities.
GHG management believes that professional
medical education is the cornerstone of
healthcare quality in Georgia. For this reason,
GHG tries to develop a healthy learning
environment by financing international and
local medical conferences. In 2018, GHG
sponsored seven medical conferences and
two workshops, which brought together
medical scholars and healthcare practitioners
from Europe, Asia, the USA and Georgia to
share knowledge and experience that
influence and shape healthcare delivery.
Total financing to support the conferences
amounted to GEL 191,544.
Promoting and Enhancing Healthy
Lifestyle
Our beverages business produces and sells
Georgian wine locally and exports to 17
countries. The Company actively promotes
responsible drinking and have developed a
special campaign “DON’T DRINK AND
DRIVE”.
As part of its initiative to promote a healthy
lifestyle, m2 became the general sponsor
of FC Kakheti Telavi. Telavi is the largest city
in Eastern Georgia and a major tourist
destination, known as a major wine region
in Georgia. Through this sponsorship, m2
supports local sports establishments which
bring a great benefit to the local area. In 2018
FC Kakheti Telavi and m2 jointly organised a
children’s football tournament in the Kakheti
region. In 2018 m2 organised the children’s
rugby festival with eight teams and it intends
to turn the tournament into an annual event.
Aldagi started promoting safe driving with
a project organised as special crews riding
through the largest cities of Georgia and
rewarding people for their secure driving.
The project aims to motivate drivers to follow
traffic rules and to emphasise the importance
of security on the roads. Within the project,
Aldagi promoted the necessity of first aid kits
and distributed specially designed kits as
rewards for secure drivers.
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RESOURCES AND RESPONSIBILITIES CONTINUED
GHG is sponsoring a medical TV programme
reaching out to a wide range of the Georgian
population to raise health awareness and
promote healthcare practices. GHG has three
TV shows, each dedicated to a relevant health
expertise, discussing various health and
wellness issues, such as screening
programmes, allergies, cardiovascular disease,
oncology, arthritis and others, in a simple and
clear manner. The shows often include celebrity
interviews, healthcare news, healthy recipes
and helpful tips. In 2018, GEL 120,300 was
spent on financing these TV programmes.
Supporting People with Disabilities
In 2017, m2, together with Kutaisi City Hall,
took the initiative to finance the rehabilitation
course for children with autistic spectrum
disorders in Kutaisi. A rehabilitation course
for 40 children will be fully funded during
2018-2019 period (GEL 125,000 from Kutaisi
City municipality and GEL 100,000 from m2).
In 2017 m2 began construction of a specialised
family-type home for children with severe
disabilities in Tbilisi. The construction works were
implemented as part of the project with the
framework of Protection of Children with
Disabilities – a project carried out by the Ministry
of Labour, Health and Social Affairs, USAID and
United Nations Children’s Fund (UNICEF). The
project aims to create specialised family-type
services for children with severe disabilities where
they will receive care in a family environment and
will be provided with all services necessary for
their adequate growth, individual development
and smooth integration into the society. After
completion of the construction and renovation
works, seven children with severe forms of
disability were moved to live in the house in 2018.
All m2 buildings are accessible to people with
disabilities.
Conserving Nature
In 2017, m2 committed to restore around
26,000 square metres of burnt territory on
Tbilisi’s Mtatsminda slope. The works are
conducted jointly with Tbilisi City Hall,
Caucasus Environmental NGO Network
(CENN), Regional Environmental Centre for the
Caucasus (REC), the Green Movement of
Georgia (GMG), botanical institute of Ilia State
University, the Ministry of Environment and
Natural Resources Protection of Georgia. After
finalising the reforestation plan with specialists
from the National Botanical garden of Tbilisi,
the first stage of the rehabilitation process was
completed successfully in 1H18: building
terraces and tracks, planting 3,000 units of
eight varieties of plants and installation of
irrigation systems. The next stage includes
care and protection of the territory for a period
of three years. This project received the CSR
prize in the Successful Partnership for
Sustainable Development category on the
event initiated by the CSR club and UN Global
Compact Georgia.
Air quality is an immediate and acute problem
in Georgian cities. To increase awareness of
climate change and lead to a better living, m2
promotes the use of electric vehicles: 45 new
customers were gifted electric scooters in
2017. Moreover, m2 is the general partner of
the start-up company E-space and funds the
establishment of infrastructure for electric
vehicles across the country (Tbilisi, Batumi,
Kutaisi, Rustavi, Kvareli and Telavi) through the
“More Oxygen for the City” campaign aiming
to install 100 EV (electric vehicle) chargers in
Georgia – m2 has already installed 50 charging
stations during 2017 and 2018.
Employee Matters
Recruiting, developing and retaining our talent
is one of our most important priorities. We
work towards that objective by communicating
openly and consistently with our employees,
providing training and opportunities for career
advancement, rewarding our employees fairly
and encouraging employees to give direct
feedback to senior management. We
recognise the importance of providing a
supportive working environment and of
providing a healthy work/life balance for all our
employees both in Georgia Capital and in our
portfolio investments.
The Group has in place a Code of Ethics, as
well as policies which relate to environmental
matters, employees, social matters, our
respect for human rights and anti-corruption
and bribery. Copies of these polices can be
found on the Group’s website: https://
georgiacapital.ge/governance/cgf/
policies
A key factor in our success is a cohesive and
professional team, capable of accomplishing
the Group’s objectives. We are committed to
attracting and identifying the best
professionals, caring and planning for their
needs, investing in their development and
fostering their commitment.
The Group develops Human Resource (HR)
policies and procedures which promote the
key principles, areas, approaches and
methods that are crucial for building Human
Capital Management systems at each
business level and at Georgia Capital level in
line with the above mentioned policies
implemented across the Group. Examples of
some of our HR policies and procedures
include, but are not limited to:
• employee planning and recruiting;
• staff administration;
• compensation and benefits;
• code of conduct;
• employee development and training
human rights;
• grievances;
•
• anti-nepotism.
retrenchment; and
We are committed to employee engagement.
We believe that effective communication is
key and we strive to provide our employees
with a continuous flow of information, which
includes information about our corporate
culture, the Group’s strategy and performance,
risks relating to its performance, such as
financial and economic factors, and our policies
and procedures. We provide information in a
number of ways, including via managers,
presentations, email, intranet and regular town
hall and off-site meetings. We also value the
views of our employees. We consult with them
regularly and have implemented feedback
systems, such as frequent employee
satisfaction surveys, which ensure that opinions
of our employees are taken into account when
making decisions which are likely to affect their
interests. Employee feedback also helps to
improve our customer-focused approach.
In 2018 the Board nominated Kim Bradley as
the Independent Non-Executive Director on
the Company’s Board representing the
workforce.
Talent Attraction
Sustained development of the Group’s
businesses requires the strengthening of the
teams of our businesses both by using the
Group’s own significant internal resources
through staff development and rotation and by
attracting external candidates. Our Recruitment
Policy and relevant control procedures ensure
an unbiased hiring process that provides equal
employment opportunities for all candidates.
According to the HR Policy, internal candidates
have priority when filling vacant positions,
especially in situations where there are
vacancies in top and middle management. In
order to attract young talent, we actively partner
with leading Georgian business schools and
universities, participate in job fairs and run
extensive internships not only locally, but also
internationally. In 2018, an intern from Stanford
University spent one month working on different
investment projects at the Georgia Capital office
in Tbilisi. Interns are directly coached by the
Company executives and middle managers to
help them on their path to gaining their first
management position. In 2018 Georgia Capital
continued its talent acquisition project for its
Investment Officer position. The project was
launched in 2016 and selected a number of
young and talented candidates for various
investment projects within the Group.
Furthermore, the Investment Officers hired in
2017 were promoted to managerial positions
Group-wide. In 2018, GHG’s human resources
department organised job fairs for students in
leading medical universities and nursing
colleges in Tbilisi and other regions. GHG has
memoranda of understanding with various
nursing colleges and universities. In 2018,
GHG’s EVEX Learning Centre conducted
140-hour six-month free nursing courses and
165 candidates who earned the passing score
were offered jobs at GHG’s healthcare facilities.
In 2018, GHG continued its special partnership
with “Panatsea”, the biggest nursing college in
Tbilisi. GHG offers the college its medical
facilities for their students’ pre-graduation
training.
In September 2018, GHG signed an exclusive
partnership agreement with the pharmacy
college “Orientiri”. GHG offers grants to its
employees who have little or no pharmaceutical
education. After two years of college, they can
graduate with a pharmacy degree and start a
career in one of GHG pharmacies. GHG
finances 50% of the total tuition fee. 14
participants are already enrolled and are
expected to graduate in 2020. The main goal
of the project is to address the shortage of
pharmacists and increase the number of staff
qualified for this position.
Leadership Programme is one of the pillars of
GHG Human Capital Strategy. The Programme
is designed for 200 middle level managers to
further develop and improve their managerial
and leadership skills. 125 managers have
already undergone five-month 180-hour
General Management Course in 2017 and
2018. Further 75 employees will take the
course in 2019. GHG balances gender
composition in their Leadership Programme
where 59% of the participants are female and
41% are male. GHG has also developed a
Personal Development Programme, which
further builds leadership competencies through
effective performance feedback and coaching
sessions. In 2018, 65 middle managers used
the 360-degree feedback tool, developed their
personal plan and 30 of them also took part in
individual coaching sessions.
Training and Development
To manage our employees in a way that best
supports our business strategy, we seek to
help them contribute to business performance
through personal and professional
development. Following our aspiration to
develop strong leaders, we have developed an
extensive Leadership Development Programme.
The Group’s corporate learning system is
comprised of a wide range of internal and
external training sessions specifically designed
to meet the needs of front and back office
employees at the Group’s portfolio
companies. Middle and senior level employees
are given the opportunity to receive external
training in well-known training institutions
outside of Georgia.
In 2018, Georgia Capital started the Personal
Mastery and Leadership Programme and
coaching for its employees at all levels. The
Programme provides an individual approach
towards developing leadership skills.
Employees involved in the Programme gained
a greater awareness of their leadership
strengths and opportunities for future growth.
The Group’s P&C Insurance business creates
different development opportunities for
employees. To help the integration of new
employees and make them aware of the
systems and procedures, Aldagi delivers an
effective Induction Training Programme, where
participants have an opportunity to meet with
one of the top managers who share their
career stories in the company and explain
their values and approaches. In 2016, Aldagi
established an Internal Business Trainers
Programme to encourage employees to
become in-house trainers and share their
knowledge with colleagues. The P&C
insurance business has also established a
sales coaching system in the sales and retail
department in order to maximise the
performance of the staff. During the last two
years, up to 15 retail sales agents were
promoted to a head of sales position.
During the current year GGU has implemented
a 360-degree assessment for the entire
management, with the purpose of evaluating
the level of their competencies and target their
future development. Based on the results,
group and individual coaching sessions were
organised for 35 employees.
GGU concentrates on staff development as
one of the key pillars for sustainable growth
of the business. In 2018, GGU carried out an
internal project called “The Future Engineer”.
More than 300 employees had the opportunity
to work on and introduce technological
solutions to real challenges that the Company
is facing in the fields of water supply and
sewerage systems.
In 2018, GGU published the Company’s
engineering manual – Construction and
Exploitation of Water Pipes and Sewage
Systems. The aim of this manual is to increase
the qualification level of the Company’s
employees and to standardise the processes.
GHG offers continuous medical education
through EVEX Learning Centre. Apart from
modern training methods, the Centre offers
up-to-date equipment, auditoria, computer
labs and other facilities that conform to the
highest international standards. In 2018, the
Centre trained a total of 1,170 nurses, 1,669
physicians and 1,529 back office employees.
In 2018, GHG’s healthcare services business
spent about GEL 3 million on training and
development. Most of the expenditures
went towards training nurses, physicians
and pharmacists.
Professional development of GHG’s pharmacy
and distribution business employees is led by
the GEPHA Training Centre trainers. In 2018,
the GEPHA Training Centre trained a total of
4,500 participants.
To encourage continuing professional
development, GHG’s medical insurance
business has also launched its own Imedi L
Academy, offering specialised vocational
training programmes and courses to its
employees. Imedi L Academy delivered
training to 1,000 participants in 2018.
Gender Diversity
Georgia Capital is fully committed to provide
equal opportunities as an employer and prohibits
unlawful and unfair discrimination. We believe that
there are great benefits to be gained from having
a diverse and varied workforce. Although we do
not set specific diversity targets at Georgia
Capital level, we seek to ensure that our
corporate culture and policies create an inclusive
work environment that helps to bring out the best
in our employees. Georgia Capital’s Diversity
Policy establishes that commitment to the
elimination of unlawful and unfair discrimination
and values the differences that a diverse
workforce brings to the organisation. The Board
embraces diversity in all its forms. Diversity of
gender, social and ethnic backgrounds, cognitive
and personal strengths and balance in terms of
skills, experience, independence and knowledge,
amongst other factors, will be taken into
consideration when seeking to make any new
appointment within the business, whether an
employee, client, supplier or contractor. At
31 December 2018, Georgia Capital had a total
of 20,000 employees across the Group, the
breakdown by gender is on the charts on
page 78.
In late 2016, m2 committed itself to incorporate
Women Strengthening Principles internally, in
the Company’s core operations and internal
policies and externally, at the marketplace and
in the community. The Company systematised
its approach to gender equality and executed
specific goals throughout 2017 and 2018. m2
has established internal grievance mechanism
for employees to file complaints on gender-
based discrimination, also formed special
council to discuss issues related to any types
of abuse. m2 adopted gender responsive
recruitment strategies, it tracked the
percentage of women in traditionally male
roles in the company and took measures to
gradually increase this number without any
specific target set yet. For example,
construction team internships were completed
by women for the first time in m2 history.
We are supportive of the ambition shown in
recent reviews on diversity, including the
Davies Review and the Hampton-Alexander
Review, and will continue to examine ways in
which we can increase female representation
at Board and senior management level.
While we do not currently employ any formal
diversity targets at Board level, the Board will
continue to keep this approach under review.
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79
RESOURCES AND RESPONSIBILITIES CONTINUED
Human Rights Policy
The Human Resources and Human Rights
Policies are an integral part of the employee
on-boarding package at each business level. It
is available for employees and the updates are
communicated electronically. The Human
Rights Policy covers the following:
• equal opportunities and anti-discrimination;
• work environment free of harassment; and
• grievance policy.
pose, the Group carries out the following due
diligence processes: indirect investigations,
which include general research of the activities
undertaken by the proposed business
partners, their reputation and information
whether the Company is a related party. The
Compliance Officers represented by Deputy
CEO, Legal and the general counsel have the
authority to conduct periodic compliance
checks of the operations of the Group.
Gender diversity
Directors
84
Female
21
Male
63
We recognise the importance of observing
human rights and are committed to
implementing socially responsible business
practices. Our Human Rights Policy
establishes priorities and puts control
procedures in place to provide equal
opportunities and prevent discrimination or
harassment on any grounds, including
disability. Our Human Rights Policy applies to
all employees and includes procedures in
relation to employment processes (including
recruitment procedures and procedures
governing the continuity of employment of
employees who become disabled during the
course of their employment), training and
development.
Code of Ethics and Anti-Bribery and
Anti-Corruption Policy
The Group has a Code of Ethics, as well as
Anti-Bribery and Anti-Corruption Policy, which
are also applicable to the Group companies.
As an organisation that is fully committed to
the prevention of bribery and corruption, the
Group ensures that appropriate internal
controls are in place and operating effectively.
Anti-Bribery and Anti-Corruption Policy
enforcement processes include:
• operating an internal whistleblowing and
hotline system;
• disclosure of gifts or other benefits,
including hospitality offered to, or received
by, the Group’s personnel;
• voluntary disclosure of corrupt conduct;
•
third-party screening to identify the level of
risk third parties might pose;
informing the banks/partners/
counterparties about anti-corruption and
anti-bribery principles before
commencement of business relations;
•
We are pleased to confirm that there have
been no instances of violation of the anti-
bribery policy during 2018.
Occupational Health and Safety
Ensuring safety of the workplace and
providing healthy working conditions are
among the Group’s fundamental HR
management principles. The Group pays
particular attention to preventative measures,
such as conducting regular staff training and
medical check-ups, certifying workplaces and
promoting a healthy lifestyle.
Occupational health and safety is the most
critical in the construction business and
therefore to enhance the awareness of health
and safety risks associated with the
construction process, m2 conducts regular
employees and contractors training and
educational seminars. In 2017 and 2018, the
number of health and safety training hours
amounted to approximately 86 and 20,
respectively. In addition, m2 publishes safety
brochures and booklets and special rules to
be followed when working on sites.
Respective control procedures include
quarterly audits by external health and safety
consultants and monthly internal inspections
of m2 worksites. In addition, m2 has a
comprehensive reporting procedure for health
and safety concerns. m2 follows an
Emergency Management Plan to prepare and
respond to procedures. The plan outlines
possible scenarios during emergency
situations and determines specific procedures
for the Company’s employees, contractors
and visitors on how to react when in a crisis
situation. Furthermore, m2 in partnership with
NGOs is implementing fire prevention
campaigns in schools, as well as a fire risk
reduction campaigns in residential complexes.
• ensuring that anti-bribery and anti-
corruption clauses are incorporated in the
agreements with customers and third parties;
• ensuring that anti-bribery and anti-
corruption matters are included in
contractual agreements with partners/
counterparties; and
• online training programme aiming to raise
awareness of corruption and bribery issues
among employees.
As part of the Group’s third-party screening to
identify the level of risk the third parties might
Environmental Matters
The Group recognises that its operations have
both an indirect and direct impact on the
environment, and therefore has implemented
an Environment and Social Policy which
establishes the management’s approaches
which enable the Company to become a more
environmentally-friendly institution.
With fewer than 40 employees at Georgia
Capital level, as a Company we have a
relatively small direct impact in terms of the
environment and other sustainability issues.
While across our businesses, the most direct
Senior Managers
264
Female
Male
109
155
All employees*
20,000
Female
13,714
Male
6,286
Age diversity
All employees*
20,000
Over 51 years old
5,264
41-50 years old
3,655
5,231
5,650
31-40 years old
21-30 years old
Male
Under 21 years old
200
*
Excludes temporary employees.
impact on the environment is created by our
Housing Development and Hospitality and
Commercial Real Estate businesses, managed
by m2. Environmental consideration is an
integral part of m2. It delivers environmentally-
conscious products whilst being aware of
immense importance of buildings with
energy-efficient designs for sustainable
development; new buildings present an
opportunity to achieve energy savings over the
long term. m2 reduces waste and pollution by
using energy-efficient building materials which
lead to a significant reduction in energy use.
Aiming at increasing the efficient use of
energy, water and materials, m2 installs
energy-efficient lighting systems and uses low
emission window glasses and other modern
insulation materials to cover the façade of the
buildings, thus, reducing the U-value of
constructed buildings to 0.21W/m2K. The
Directorate General for Neighbourhood and
Enlargement Negotiations, European
Commission and Green for Growth Fund
(GGF) Director, visited m2 large-scale
energy-efficient project and during the visit
examined the measures that m2 is able to
implement in the buildings: improved building
insulation, modern boilers and appliances,
and better insulated windows and doors. For
the 801 apartments constructed as part of this
initiative, the total expected annual savings of
CO2 are equal to planting 210,000 trees each
year. This project was financed by
International Finance Corporation (IFC) and
Green for Growth Fund (GGF) and supported
by the EU. GGF also provided technical
assistance to conduct energy audits and
identify the most efficient manner to meet high
energy standards.
As for the direct environmental impact,
we believe that the impact of the insurance
businesses is not significant. Nevertheless, we
undertake a number of measures to reduce
electricity, paper, water and fuel consumption.
Moreover, Aldagi encourages its clients to
fulfil their environmental and social
responsibilities by offering products like
“Green Auto”. This campaign offers to insure
hybrid cars at low insurance rates.
Water utility and renewable energy businesses,
managed by GGU, are in full compliance with
the current Georgian Environmental legislation,
as well as environmental monitoring and control
procedures. GGU’s environmental activities
strongly and directly support the Georgian
Government with the implementation of a
national obligation under the EU Association
Agreement. Furthermore, GGU’s environmental
activities directly address UN Sustainable
Development Goals under the 2030 Agenda
for Sustainable Development, adopted by all
United Nations Member States in 2015. The UN
Sustainable Development Goals address the
global challenges the Company faces,
including those related to poverty, inequality,
climate, environmental degradation, prosperity,
peace and justice. It is important that each goal
and target is achieved by 2030. GGU is also
strongly committed to introducing sustainable
water management practices and carrying out
water utility business operations which
consider the principles of green economy,
which targets increasing the country’s welfare
with minimum environmental impact and
maximum resource efficiency. Since
sustainable water management encompasses
maximisation of resource efficiency, GGU
urban water management includes the
consumption and reuse of water resources, as
well as reduction in energy and material
resource consumption and lower emission
levels related to Water Utility operations. In
order to improve efficiency, GGU invests in the
upgrading of ageing infrastructure, introduces
innovative technologies and implements
continuous training of staff, as well as
awareness-raising campaigns. GGU’s specific
investments for resource efficiency
maximisation include the following:
•
•
improvement of worn-out water distribution
infrastructure;
installation of pressure regulators, with
corresponding data loggers, and
development of their live monitoring
systems at 100 different locations
throughout the city;
• hydro-modelling, which helps in minimising
the energy required for extracting and
distributing water;
• development of major water-loss
identification mechanisms and carrying out
respective repair works;
installing the new smart meters to the
customer base; and
•
• carrying out social campaigns for
educating the younger generation about
responsible water consumption.
Furthermore, GGU has specific targets for
decreasing its own electricity consumption for
its water utility business as part of the overall
KPIs set for management team. By making the
investments listed above, the Company has
successfully managed to decrease the
consumption throughout last several years
and from consumption level of 291 million kWh
in 2017. GGU reached 237 million kWh in
2018. GGU further intends to get to 220 million
kWh target over the next three years.
Our water utility business is currently
implementing an Environmental and Social
Management System (ESMS) in accordance
with the roadmap schedule presented in the
Environmental and Social Policy Framework,
adopted by the Company in 2016, which is also
in compliance with the Georgian legislation and
the IFC performance standards (Environmental,
Health and Safety guidelines for Water and
Sanitation). The Environmental and Social
Policy Statement declares that the Company is
committed to conduct business and provide
services in a thoughtful, responsible way, with a
view to preventing pollution and safeguarding
the natural and social environment. It highlights,
that the Company is dedicated to the
continuous improvement of operational
performance in order to reduce any adverse
environmental and social impact. The
Environmental and Social Policy Framework
consists of a combination of Environmental and
Social Policy Statement, legal and regulatory
review, overview of GGU’s activities and
environmental impacts, description of
management system including various
management plans, procedures and practices,
description of the monitoring programme and
the stakeholders’ engagement process.
In the framework of the ESMS, environmental
and social audit of the Company has been
performed. The environmental and social audit
report covers the environmental topics, which
are mainly associated with water treatment,
water distribution, sanitation (sewerage
system) and wastewater treatment and
discharge, as well as occupational health and
safety topics related to accidents and injuries,
chemical exposure and noise. To manage the
risks associated with GGU’s business, the
Company has elaborated ESMS procedures
and topical management plans, which are
being implemented according to the
Environmental and Social Action Plan (ESAP)
in the set timeframe. Additionally, ESMS will
facilitate the process of obtaining the
ISO14000 standard for environmental
management and the ISO26000 standard for
social responsibility.
The Group’s various implemented projects
have a direct positive impact on national and
regional environments. In particular, after the
rehabilitation of Gardabani WWTP, treated
wastewater quality discharged into the Mtkvari
River meets all applicable norms and
regulations. As a result of the improved
wastewater treatment process, water quality
in the transboundary Mtkvari River will
significantly improve, which will also support
the Government of Georgia to implement
international environmental agreements.
Projects implemented by our renewable energy
business are also in compliance with local and
international environmental standards and
legislation. In 2018, the environmental and social
management system (ESMS) was introduced,
which is applicable to all types of renewable
projects. In general, for the projects which are at
the development stage, the Company
elaborates Environmental and Social Impact
Assessment (ESIA) documentation, which also
includes a scoping report and, if need be, a
Resettlement Policy Framework (RFP) and a
respective Resettlement Action Plans (RAP).
Additionally, for wind projects at the
development stage, bird and bat monitoring is
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RESOURCES AND RESPONSIBILITIES CONTINUED
performed (bat monitoring is done according to
EuroBAT Guide). As for the projects at the
construction stage, the following management
plans are developed: campsite, dumpsite, traffic
and waste management plans, stakeholder
engagement plan, and environmental and social
management plan. The main direction of the
energy policy of Georgia is the rational use of
energy resources. In terms of hydropower
development, preference is given to the
construction of small and medium-sized
hydropower plants, as they are characterised by
comparatively low risk of negative environmental
impact. Based on the Memorandum of
Understanding signed with the Government of
Georgia, the project on the construction and
operation of HPPs cascade (Mestiachala 1 HPP
and Mestiachala 2 HPP) on Mestiachala River,
in Mestia Municipality is being implemented with
a total capacity of 50MW. In addition, small
plants, Saguramo HPP and Bodorna HPP were
also constructed with total capacity of 6.9MW.
GGU also invests in wind and solar projects.
Large-scale researches, including
Environmental and Social Impact Assessments,
are being conducted to meet technical and
environmental targets. The projects will foster
low carbon generation and contribute to
Georgia’s energy demand.
The Company’s Environmental and Social
Policy Framework and the ESMS is based on
the following principles: no pollution of water,
soil and air (including dust and noise). In order
to identify the arrangements necessary to
prevent pollution of water, air and soil, the
Pollution Prevention and Control Plan (PPCP)
was developed and adopted by the GGU
group of companies and their contractors in
compliance with the IFC PS3 and the WB
General EHS Guidelines. The PPCP consists
of the following components: Wastewater and
Storm-water Management; Spill Prevention
and Control; Hazardous Materials Storage and
Handling; Air Emissions Management; and
Dust Control and Noise Management.
during construction and operation of the
proposed development, thereby reducing
resource consumption and greenhouse
gas emissions.
GHG’s medical waste management record-
keeping standards remain at least in line with
national legislative requirements and were
amended in 2018 to be in line with the new
national regulations that came into force
during the year. GHG personnel are
responsible for registering the information on
produced hazardous waste on the state
platform and filling out waste registration and
transportation forms. To further reduce risks
and maintain regulatory compliance, GHG
regularly conduct internal trainings on waste
management procedures and issue special
certificates to the attendees who successfully
pass the test. At each of the Company’s
hospitals, there is a special storage room set
up to store waste before final disposal.
To prevent human or environmental harm,
the Company’s clinics collect and dispose of
medical and biological waste through a
specialised outsourced service. For waste
collection, GHG use plastic bags or containers
that have sufficient strength and are secured
with staples. Then steam sterilisation is used
to decontaminate biological and bio
hazardous waste, including blood. All used
sharp objects are placed in labelled,
hermetically sealed single-use containers
made of hard plastic. Waste is collected from
GHG’s sites daily or twice a day when
required. The maximum on-site storage time is
24 hours. To ensure reliability of their
contractors, GHG regularly examine their
monthly reports and impose penalties if
necessary. In total, GHG hospitals generated
600 tonnes of medical waste in 2018. The
Company will continue to look at innovative
ways of reducing medical and biological
waste, taking advantage of best practice both
in Georgia and internationally.
Since the Group’s business is very much
dependent on such climate elements as
precipitation, wind speed and air temperature,
the Group’s development will be definitely
affected by the climate change. Current climate
changes in Georgia are assessed based on the
observation data of hydro-meteorological
network. The prognostic scenarios for the
periods of 2021-2050 and 2071-2100 were
compiled using Regional Climate Model
RegCM4. The Group is strongly committed to
actively contributing to limiting climate change
through its Environmental Policy, procedures
and implementation of Environmental
Management Plans. Water, Energy and
Resources Management Plans were developed
and adopted at corporate and site-specific
levels. The objective of the plan is to ensure
efficient use of water, energy and resources
The beer production process releases
additional carbon dioxide (CO2) and wastewater
that directly contribute to environment
pollution and climate change. The emission
implications on communities, agriculture and
the availability of raw materials are complex
and challenging. The beer business
responsibly reduces these implications:
• by constructing a CO2 recovery plant, which
captures the carbon dioxide released during
the carbonated drinks production process;
• by constructing a wastewater treatment
plant, that cleans wastewater chemically,
biologically and physically to obtain
ecologically safe wastewater; and
• by having developed a Green Fridge Policy
to reduce the carbon footprint of cooling
bottled and canned products through
purchasing fridges – branded with its own
and licensed trademarks. In order to
achieve the following objective the
business cooperates with suppliers of
cooling equipment, that are able to deliver
fridges complying with the highest
standards. The beer business continuously
improves its procedures to further reduce
the energy consumption and environmental
impact of the fridges.
Methodology
We have reported on all of the emission
sources required under the Companies Act
2006 (Strategic Report and Directors’ Report)
Regulations 2013 (Scopes 1 and 2) and
additionally have reported on those emissions
under Scope 3 that are applicable to our
business. All reported sources fall within our
consolidated Financial Statements, which can
be found on pages 168 to 240. We do not
have responsibility for any emission sources
that are not included in our consolidated
Financial Statements.
In preparing our emissions data, we have
used the World Resources Institute/World
Business Council for Sustainable Development
(WRI/WBCSD), Greenhouse Gas Protocol:
A Corporate Accounting and Reporting
Standard (revised edition) and emissions
factors from the UK Government’s Greenhouse
Gas Conversion Factors for Company
Reporting 2016. For wastewater treatment
and discharge operations we used conversion
factors from 2006 IPCC Guidelines for National
Greenhouse Gas Inventories.
Our reported data is collected in respect of
six of the Group’s main businesses:
• Real Estate Development, represented by
m2, which includes its offices and
construction sites;
• Water utility and renewable energy
businesses, represented by Georgia Global
Utilities, which includes all of its offices and
operational sites;
• P&C Insurance, represented by Aldagi,
which includes all of its offices and retail
branches, where the company has
operational control;
• Beverages business, represented by
Georgian Beverages, which includes all of
its offices and operational sites; and
• Georgia Healthcare Group, represented by
EVEX and Imedi L, which includes its main
office and hospitals, where the Company
has operational control.
Data on emissions resulting from travel is reported for business-related travel only and excludes
commuting travel. Data from joint ventures, investments or sub-leased properties have not been
included within the reported figures. The data is provided by on-site delegates invoices and
meter readings.
Scope 1 (combustion of fuel and operation of facilities) includes emissions from:
• Combustion of natural gas, diesel and petrol in stationary equipment at owned and
controlled sites.
• Combustion of petrol, diesel and aviation fuel in owned transportation devices
(cars and aeroplanes).
Scope 2 (electricity, heat, steam and cooling purchased for own use) includes emissions from:
• Used electricity at owned and controlled sites; to calculate the emissions, we used the
conversion factor for Non-OECD Europe and Eurasia (average) conversion from the UK
Government’s Greenhouse Gas Conversion Factors for Company Reporting 2014.
• Used heat and steam (only applies to one site of Imedi L).
Scope 3 includes emissions from:
• Air business travel (short-haul and long-haul); information on the class of travel is unavailable,
hence, we used an “average passenger” conversion factor.
• Ground transportation, including taxis, coaches and car hire.
Total Greenhouse Gas Emissions Data for the Period Beginning 1 January 2018
and ended 31 December 2018 (Tonnes of CO2e)
Scope 1 (emissions fuel combustion and facility operations)
Scope 2 (emissions from electricity, heat, steam and cooling purchased for own use)
Scope 3 (emissions from air travel and ground transportation)
Total greenhouse gas emissions
FTEs
Total greenhouse gas emissions per FTE*
*
FTE is stated including temporary employees.
2018
18,199
40,266
13,525
71,990
21,309
3.38
Non-Financial Information Statement
This section constitutes the Group’s Non-Financial Information Statement, in accordance with
sections 414CA and 414CB of the Companies Act. The information to be disclosed under
section 414CB has been included in this section, with the exception of a description of the
Company’s business model and principal risks, which can be found on pages 24 to 25 and
70 to 72.
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83
APM Summary
In October 2015, ESMA published guidelines
about the use of APMs. These are financial
measures such as KPIs that are not defined
under IFRS. In the Strategic Review section of
the Annual Report on pages 94 to 99 Georgia
Capital describes its financial performance
under the management accounts, which
are themselves an APM. A number of other
measures are used which are also APMs,
since they are derived from the management
accounts. Further information about the use of
APMs, including the applicable reconciliations
to the IFRS equivalent where appropriate,
is provided at the beginning of the Financial
Review section on pages 82 to 88 and should
be read alongside the management accounts
to IFRS reconciliation. The table on the next
page lists all the APMs used within the
Annual Report.
Read more on financial performance
in the Strategic Review on pages
91 to 117.
Read more on about the use of APMs
in the Financial Review on pages
82 to 88.
ALTERNATIVE PERFORMANCE MEASURES
Alternative Performance Measures
(APM) Overview
Management assesses the Group’s
performance using a variety of measures that
are not specifically defined under IFRS and
are, therefore, referred to as APMs internally
and throughout this document. Management
monitors the Group’s performance on a
regular basis based on developments in the
Income Statement and Statement of Net
Asset Value (NAV) prepared under the
adjusted IFRS methodologies (management
accounts). Management believes that such
statements provide an important view on
Georgia Capital’s strategy and helpful insights
into management’s decision-making. The
management accounts are themselves
APMs and are not being audited or reviewed.
Management dedicates time to ensuring that
the Group’s APMs are reported in a consistent
and transparent way in accordance with the
European Securities and Markets Authority
(ESMA) published guidelines.
Net Asset Value (NAV) Statement
The management accounts include a NAV
Statement, which breaks down NAV into its
components and follows changes therein,
providing management with a snapshot of the
Group’s financial position at any given time.
The NAV Statement provides a value of
Georgia Capital that management uses as a
tool for measuring its investment performance.
Management closely monitors NAV in
connection with capital allocation decisions.
The following methodology underlies the
presentation of the NAV for period-end dates:
• NAV is calculated at stand-alone GCAP
level, which represents the aggregation of
the stand-alone assets and liabilities of
Georgia Capital PLC and JSC Georgia
Capital.
• Holdings in listed and private portfolio
companies are carried based on the
following methodology:
– Listed portfolio companies are carried at
the period-end market values based on
closing share prices on respective stock
exchanges.
– Private portfolio companies are
carried at fair value based on a
valuation technique believed to be
most appropriate to that investment as
described in the valuation methodology
below.
• NAV per share represents total NAV
divided by the number of outstanding
shares at the end of the period under IFRS,
i.e. issued shares less treasury shares.
Treasury shares for these purposes are the
sum of shares repurchased under the
US$45 million buyback programme and
shares held by management trust
(unawarded and/or unvested).
Management Income Statement
The management Profit and Loss Statement
is an aggregation of the bottom lines of the
attributable stand-alone IFRS Profit and Loss
Statements of listed and private portfolio
companies together with GCAP’s stand-alone
Profit and Loss Statement. Management
views Georgia Capital’s Income Statement
as a two-fold document that reflects
performance of the stand-alone GCAP
as well as the performance of each portfolio
company. The following methodology
underlies the preparation of Management
Income Statement.
• The top part of the Income Statement
(GCAP Operating Income) represents the
aggregation of the two stand-alone holding
company accounts, which we call GCAP
(i.e. the UK holding company Georgia
Capital PLC and the Georgian holding
company, JSC Georgia Capital ), the
performance of which reflects the net
result of: a) dividend income accrual based
on estimated annual dividend proceeds
from portfolio companies to be collected
during the year; b) interest income on liquid
funds, mezzanine facilities issued and
senior loans issued; c) interest expenses
on debt incurred at GCAP level (which
consists of the bonds issued); and d)
expenses incurred at GCAP level. These
amounts are derived from the IFRS
Consolidated Financial Statements, Note 7
on segment reporting under segment
name of Corporate Centre.
• Portfolio company attributable income
represents attributable recurring IFRS net
profits or losses of each portfolio
investment, i.e. stand-alone net profits
adjusted to exclude minority interests and
impact of non-recurring items. Portfolio
company attributable income is viewed
as a metric to measure the earning power
of Georgia Capital’s investments, which
itself reflects future dividend generation/
distribution capacity of portfolio
companies, indicating cash receipt
prospects of Georgia Capital.
• Within the bottom part of the Income
Statement, the double-counting impact of
dividend accrual is reversed and provisions
for interest income items is recognised,
where immediate collectability is uncertain
on instruments such as mezzanine loans.
Following these adjustments, management
net income for the period is derived.
• Below net income line, to arrive at total
comprehensive income, are presented: a)
gains or losses from foreign exchange
movements across the Group excluding
listed portfolio companies; b) non-recurring
items of both GCAP and related
attributable shares of portfolio companies;
and c) realised gains or losses from
GCAP’s sales of equity interests in
portfolio companies.
APM
Purpose
Calculation
Reconciliation to IFRS
Net Asset Value (NAV)
The metric to measure Georgia
Capital’s value, used as a tool
for monitoring investment
performance and for making
informed capital allocation
decisions.
NAV per share
The measure of per-share value of
Georgia Capital.
GCAP net operating income
A measure to reflect performance
of the stand-alone GCAP and
evaluate cash generating capacity
on a holding company level.
Total portfolio company
attributable income
A metric to measure the earning
power of Georgia Capital’s
investments.
Net Income
A performance metric to measure
the recurring earning power for
each individual company,
including GCAP.
Total comprehensive income
A performance metric to measure
the earning power for each
individual company, including
GCAP.
The equivalent balance under
IFRS and respective reconciliation
are shown in the reconciliation of
the Consolidated Balance Sheet.
N/A
Reconciles with IFRS, except for
dividends on accrual basis,
interest income on own bonds
held in treasury and research and
feasibility expenses, which are
capitalised for management
account purposes.
The equivalent balance under
IFRS and respective reconciliation
are shown in the reconciliation of
the Consolidated Income
Statement.
The equivalent balance under
IFRS and respective reconciliation
are shown in the Reconciliation of
the consolidated Income
Statement.
The equivalent balance under
IFRS and respective reconciliation
are shown in the reconciliation of
the Consolidated Income
Statement.
Total investment portfolio value
less net debt. NAV is calculated at
stand-alone GCAP level. For the
purposes of NAV, listed
investments are carried at the
period-end market values based
on closing share prices on
respective stock exchanges and
private investments are carried at
fair values, determined by
reference to market-based
multiples appropriate for the
business. Please refer to Valuation
Policy included on pages 89 to 90.
NAV per share is calculated as
NAV divided by the number of
outstanding shares at the end of
the period under IFRS, i.e. issued
shares less treasury shares.
GCAP net operating income
reflects the net result of: a)
dividend income accrual based
on estimated annual dividend
proceeds from portfolio
companies to be collected during
the year; b) interest income on
liquid funds, mezzanine facilities
and senior loans issued; c) interest
expenses on debt incurred at
GCAP level; and d) operating
expenses incurred at GCAP level.
Portfolio company attributable
income represents attributable
recurring IFRS net profits or losses
of each portfolio investment, i.e.
stand-alone net profits adjusted
to exclude minority interests and
impact of non-recurring items.
Additionally, foreign exchange
movements are also excluded
for private businesses.
Aggregation of GCAP net
operating income and total
portfolio company attributable
income less: a) reversal of double
counting impact of dividend
accrual; and b) provisions for
interest income items, where
immediate collectability is
uncertain on instruments such
as mezzanine loans.
Net income less: a) gains or losses
from foreign exchange movements
of both GCAP and related
attributable shares of private
portfolio companies; b) non-
recurring items of both GCAP
and related attributable shares
of portfolio companies; and c)
realised gains or losses from
sales of equity interests in portfolio
companies.
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85
ALTERNATIVE PERFORMANCE MEASURES CONTINUED
RECONCILIATION OF ADJUSTED IFRS MEASURES TO IFRS FIGURES
Purpose
Calculation
Reconciliation to IFRS
Reconciliation of adjusted IFRS measures to consolidated IFRS figures
APM
EBITDA
GCAP net debt
Management uses EBITDA as
a tool to measure the Group’s
operational performance and
the profitability of its operations.
The Company considers EBITDA
to be an important indicator of its
representative recurring
operations.
A measure of the available cash
to invest in the business and an
indicator of the financial risk at
GCAP level.
Internal rate of return (IRR)
A metric to evaluate the historical
track record of listed investments.
Return on net investment (ROI)
A metric to evaluate the historical
track record of private
investments.
Return on allocated capital (ROAC) A measure to evaluate recurring
performance of each portfolio
company against the allocated
capital.
Return on invested capital (ROIC)
To evaluate a company’s efficiency
at allocating the capital under its
control to profitable investments.
Return on average total equity
(ROAE)
To measure the performance of a
company based on its average
shareholders’ equity outstanding.
Total return
To measure the annual
shareholder return on each
portfolio company for
Georgia Capital.
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Earnings before interest, taxes,
non-recurring items, FX gain/
losses and depreciation and
amortisation.
Net debt is calculated at GCAP
level as follows: cash and liquid
funds plus loans issued less gross
debt; loans issued does not
include investment type
mezzanine loans.
IRR for listed investments is
calculated based on: a) historical
contributions to the listed
investment less; b) dividends
received; and c) market value of
the investment.
ROI for private investments is an
annualised return on net
investment (gross investments less
capital returns) calculated at each
investment level. Inputs into the
ROI calculation are as follows: a)
the numerator is the annualised
attributable income of the private
portfolio company less allocated
GCAP interest expense; and b) the
denominator, is the net investment
less allocated gross debt of GCAP.
ROAC is an annualised return on
allocated capital and calculated at
each private investment level. Inputs
into the ROAC calculation are as
follows: a) the numerator is the
annualised attributable income of
the private portfolio company, less
allocated GCAP interest expense;
and b) the denominator is the
management estimated fair value,
less allocated gross debt of GCAP.
Return on invested capital is
calculated as EBITDA less
depreciation, divided by aggregate
amount of total equity and
borrowed funds.
ROAE equals profit for the period
attributable to shareholders
divided by monthly average equity
attributable to shareholders for the
same period.
Aggregation of: a) change in
beginning and ending fair values;
b) gains from realised sales (if any);
and c) dividend income during
period. The net result is then
adjusted to remove capital
injections (if any) to arrive at the
total investment return.
GHG
BOG
Water
Utility
Housing
Development
P&C
Insurance
Renewable
Energy
Hospitality
and
Commercial
Beverages
Other
Corporate
Centre
Inter-Business
Eliminations/
Consolidations
Group
total
Income Statement reconciliation for FY18
21,373
91,196 43,635
6,929
17,597
(645)
28,808
(19,590)
(1,438)
48,690
– 236,555
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(72,504)
356
21,373
91,196 43,635
6,929
17,597
(645)
28,808
(19,590)
(1,438)
(23,458)
Non-recurring expense
(1,276)
(15,846)
(6,121)
(6,224)
(652)
375
(1,333)
(1,418)
24
(23,449)
–
–
(72,504)
356
– 164,407
–
(55,920)
–
–
(4,969)
(486)
137
(261)
(1,083)
(1,462)
88
(22,900)
–
(30,936)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(285)
3
(6,446)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(75,350)
23,875
–
23,875
–
–
–
–
–
26,410
(27,061)
(27,061)
(1,894)
(1,894)
(6,619)
(6,619)
(IFRS Consolidated) 53,235
– 32,545
219
17,082
(816)
26,395
(28,916)
(1,326)
(45,932)
(35,575)
16,911
GHG
BOG Water Utility
Housing
Development
P&C
Insurance
Renewable
Energy
Hospitality
and
Commercial
Beverages
Corporate
Inter-
Business
Eliminations/
Consolidations
Group
total
Income Statement reconciliation for FY17
GEL thousands,
unless otherwise
noted
Income before income
taxes, provisions and
adjustments
Adjustment for dividend
income accrual
Provision
Net income
(management
accounts)
Net foreign currency
(loss)/gain
Reversal of BoGG
attributable earning
–
(75,350)
Adjustment for BOGG
dividend income
–
Profit attributable to
non-controlling
shareholders
33,138
Reversal of hotel
revaluations for Group
consolidation
purposes
Reversal of FX gain on
preferred stock issued
by m2
Other
Profit for the period
–
–
–
–
–
–
–
–
GEL thousands,
unless otherwise
noted
Income before income
taxes, provisions and
adjustments
Adjustment for dividend
income accrual
Provision
Net income
(management
accounts)
20,890
–
–
20,890
Non-recurring expense
(2,995)
Net foreign currency
(loss)/gain
Profit attributable to
non-controlling
shareholders
Realised gain from sale
portfolio company
shares
Other
–
27,955
–
–
Profit for the period
(IFRS consolidated) 45,850
–
–
–
–
–
–
–
–
–
–
39,156
22,140
16,091
(838)
3,090
(6,619)
13,602
–
–
–
–
–
–
–
–
–
–
–
–
(35,000)
(2,039)
39,156
22,140
16,091
(838)
3,090
(6,619)
(23,437)
(1,136)
(127)
–
8
(2)
507
–
–
–
–
–
–
–
107,512
(35,000)
(2,039)
70,473
(3,745)
1,363
(482)
41
209
(741)
–
–
–
–
–
–
–
–
–
141
–
–
–
–
–
–
(5,172)
7,508
(3,957)
–
–
24,139
–
–
90,275
(90,275)
–
–
2,039
2,039
37,538
22,054
16,300
(1,430)
3,088
(15,241)
74,346
(88,236)
94,269
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RECONCILIATION OF ADJUSTED IFRS MEASURES TO IFRS FIGURES CONTINUED
Reconciliation of adjusted IFRS measures to consolidated IFRS figures continued
Reconciliation of adjusted IFRS measures to consolidated IFRS figures continued
GEL thousands, unless
otherwise noted
GHG
BOG
Water
Utility
Housing
Development
P&C
Insurance
Renewable
Energy
Hospitality
and
Commercial Beverages
Other
Corporate
Centre
Inter-Business
Eliminations/
Consolidations
Group total
Adjusted values
520,332 457,495 431,017
66,785 130,524
61,182
149,079
61,027 5,933
(195,154)
– 1,688,220
GEL thousands, unless
otherwise noted
GHG
BOG Water Utility
Housing
Development
P&C
Insurance
Renewable
Energy
Hospitality
and
Commercial
Beverages
Corporate
Centre
Inter-
Business
Eliminations/
Consolidations
Group
total
Balance Sheet reconciliation for FY18
Balance Sheet reconciliation for FY17
Fair value adjustment of
private companies
Reallocation from/to
Corporate Centre
Substitution of GHG’s
market value by book
value attributable to
shareholders
of GCAP
Reversal of hotel
revaluations for Group
consolidation purposes
Provision of interest
accrued on preferred
stock
GHG hospitals and clinics
accounted at cost for
GCAP consolidation
purposes
m2 long-term share-based
compensation
adjustment for
consolidation purposes
Transfer of market value of
19.9% in BoG to
Corporate Centre
Reversal of goodwill
recognised on acquisition
of non-controlling stake in
Kindzamarauli
Other
–
–
–
(160,531)
–
(71,949)
–
–
–
(2,341)
(224,643)
–
–
–
–
–
–
–
–
–
–
(457,495)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
22,344
–
(39,289)
–
–
–
–
–
–
–
–
(206,348)
20,777
20,853
–
–
–
–
–
–
–
(224,643)
(27,061)
(27,061)
1,103
1,103
(9,246)
(9,246)
(5,297)
(5,297)
–
457,495
–
–
–
–
–
–
(7,022)
(4,103)
(7,022)
(4,103)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total equity attributable
to shareholders of
Georgia Capital (IFRS) 295,689
– 270,486
66,785
56,234
61,182
149,079
44,082 5,933
283,118
(30,773)
1,201,815
–
–
–
–
–
–
–
–
–
498,181
75,609
141,480
51,511
78,142
72,457
(10,414)
– 1,840,447
(230,258)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(90,287)
–
(2,341)
(34,221)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(8,820)
(6)
6
(329,365)
(6,128)
34,221
8,469
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(650,976)
2,039
2,039
(2,751)
(2,751)
(9,283)
(9,283)
(2,317)
(3,131)
(2,317)
(3,131)
Adjusted values
933,481
–
–
(650,976)
–
–
–
–
–
Fair value adjustment of
private companies
Reallocation from/to
Corporate Centre
Substitution of GHG’s
market value by Book
value attributable to
shareholders
of GCAP
Provision of interest
accrued on preferred
stock
Deduction of GCAP’s
shares held by portfolio
companies
GHG hospitals and
clinics accounted at
cost for GCAP
consolidation purposes
m2 long-term
share-based
compensation
adjustment for
consolidation purposes
Other
Total equity
attributable to
shareholders of
Georgia Capital
(IFRS)
282,505
–
267,923
75,609
48,852
17,290
78,142
57,509
23,801
(6,968)
844,663
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RECONCILIATION OF ADJUSTED IFRS MEASURES TO IFRS FIGURES CONTINUED
VALUATION METHODOLOGY
Reconciliation of stand-alone IFRS net income to Management Account Income Statement
Stand-alone IFRS Income Statement
Management accounts
Net income (loss)
(1)
Net foreign currency
loss (gain)
(2)
Net non-recurring
expense (gain)
(3)
GCAP
Attributable income of listed portfolio
(69,803)
22,896
companies
of which, BoG PLC
of which, GHG PLC
Attributable income of private portfolio
companies
Late stage
of which, Water Utility
of which, Housing Development
of which, P&C Insurance
Early stage
of which, Renewable Energy
of which, Hospitality and Commercial
of which, Beverages
Pipeline
Total
431,881
378,642
53,239
45,107
50,026
32,545
399
17,082
(3,593)
(816)
26,396
(29,173)
(1,326)
–
–
–
7,426
5,139
4,970
306
(137)
2,375
(577)
1,073
1,879
(88)
Net adjusted
earnings of portfolio
companies
(4) = (1)+(2)+(3)
Attributable
income to GCAP1
(23,458)
(23,458)
513,696
458,270
55,426
69,132
68,161
43,635
6,929
17,597
2,408
(992)
28,808
(25,408)
(1,437)
112,569
91,196
21,373
75,296
68,161
43,635
6,929
17,597
8,573
(645)
28,808
(19,590)
(1,438)
23,449
81,815
79,628
2,187
16,599
12,996
6,120
6,224
652
3,626
401
1,339
1,886
(23)
1 Net adjusted earnings of portfolio companies multiplied by effective ownership stake of GCAP.
407,185
30,322
121,863
559,370
164,407
Equity investments in Georgia Capital’s portfolio companies are measured at the managements’ estimate of fair value at the reporting date. Fair value
is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction at the reporting date.
Equity Investments in Private Portfolio Companies
Equity investments in private portfolio companies are valued by applying an appropriate valuation method, which makes maximum use of
market-based public information, is consistent with valuation methods generally used by market participants and is applied consistently from
period to period, unless a change in valuation technique would result in more reliable estimation of fair value.
Fair value of equity investment is usually determined using one of the valuation methods described below:
Price of Recent Transaction
New equity investments in private portfolio companies are valued at acquisition cost for the first 12 to 24 months following their acquisition adjusted
for earnings following the acquisition. After this period, the investment is valued using the applicable valuation technique described below.
Listed Peer Group Multiples
The preferred method for valuing equity investments in private portfolio companies is comparison with the multiples of comparable listed companies.
This methodology involves the application of a listed peer group earnings multiple to the earnings of the business and is appropriate for investments
in established businesses which are profitable and for which we can determine a group of listed companies with similar characteristics.
The earnings multiple used in valuation is determined by reference to listed peer group multiples appropriate for the period of earnings calculation
for the investment being valued. The Group identifies peer group for each equity investment taking into consideration points of similarity with the
investment such as industry, business model, size of the company, economic and regulatory factors, growth prospects (higher growth rate) and
risk profiles. Certain peer-group companies can be more heavily weighted if their characteristics are closer to those of the company being valued
than are those of the other companies in peer group.
Generally, last 12-month earnings adjusted for non-recurring items will be used for the purposes of valuation.
a. Valuation based on enterprise value
Fair value of equity investments in private companies can be determined as their enterprise value less net financial debt (gross face value of
debt less cash) appearing in the most recent Financial Statements.
Enterprise value is obtained by multiplying measures of a company’s earnings by listed peer group multiple (EV/EBITDA) for the appropriate
period. The measures of earnings generally used in the calculation is recurring EBITDA for the last 12 months (LTM EBITDA). In exceptional
cases, where EBITDA is negative, peer EV/Sales (enterprise value to sales) multiple can be applied to last 12-month sales revenue of the
business (LTM sales) to estimate enterprise value.
Once the enterprise value is estimated, the following steps are taken:
– Net financial debt appearing in the most recent financial statements is subtracted from the enterprise value. If net debt exceeds enterprise
value, the value of shareholders’ equity remains at zero if the debt is without recourse to Georgia Capital.
– The resulting fair value of equity is apportioned between Georgia Capital and other shareholders of the Company being valued, if applicable.
Valuation based on enterprise value using peer multiples is used for profitable businesses within non-financial industries.
b. Equity fair value valuation
Fair value of equity investment in companies can determined as using price to earnings (P/E) multiple of similar listed companies.
The measure of earnings used in the calculation is recurring adjusted net income (net income adjusted for non-recurring items and forex gains/
losses) for the last 12 months (LTM net income). The resulting fair value of equity is apportioned between Georgia Capital and other
shareholders of the company being valued.
Fair valuation of equity using peer multiples can be used for businesses within financial sector (e.g. insurance companies).
Net Asset Value
The net assets methodology (NAV) involves estimating fair value of equity investment in private portfolio company as its book value at reporting
date. This method is appropriate for businesses whose value derives mainly from the underlying value of its assets and the assets are already
carried at their fair value (usually fair valuation of assets is performed by professional third-party valuers) on the balance sheet. Net asset value
method is also appropriate for project-based businesses, for which the use of peer multiples will not provide meaningful information and
businesses under development up to the point when they become profitable.
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VALUATION METHODOLOGY CONTINUED
Validation
Fair value of investment estimated using one of the valuation methods described above is triangulated using several other valuation methods
as follows:
• Listed peer group multiples – peer multiples such as P/E, P/B (price to book) and dividend yield are applied to respective metrics of the
investment being valued. We develop fair value range based on these techniques and analyse whether fair value estimated above falls within
this range.
• Discounted cash flow (DCF) – Discounted cash flow valuation method is used to determine fair value of equity investment. Under discounted
cash flow analysis unobservable inputs are used, such as estimates of probable future cash flows and internally-developed discounting rate of
return. If fair value of investment derived using discounted cash flow technique is higher than fair value estimated using NAV or peer multiples
method, we consider such valuation reasonable for the business with growth prospects; while if fair value derived using DCF is lower, we
adjust fair value estimate derived using NAV or peer multiples method.
Valuation of Equity Investments in Private Portfolio Companies
The table below summarises fair valuation of equity investments in private portfolio companies as at 31 December 2018:
FINANCIAL REVIEW
DOUBLE-DIGIT REVENUE GROWTH COUPLED WITH STRONG OPERATING
CASH FLOW GENERATION
The financial results are presented on two different bases: under International Financial
Reporting Standards (IFRS) as adopted by the European Union and under an adjusted IFRS
methodology.
2018 was the first year for Georgia Capital as an independent premium listed company on the London Stock Exchange, following the completion
of the demerger from BGEO Group PLC on 29 May 2018. The financial results are presented on a basis as if the demerger had occurred at the
beginning of the earliest period presented. The Group operates as a holding company of a diversified group of companies focused on investing
in and developing businesses in Georgia and its strategy is to acquire and develop and then exit portfolio companies – it is not in the business of
managing or owning portfolio companies indefinitely. As such, and in order to provide transparency in our results in the most relevant and useful
way for our investors, we have elected to also provide a set of management accounts that adjust the IFRS results to present Georgia Capital on
an investment holding company basis (management accounts). Our discussion focuses on both the IFRS and the management accounts. At the
Group level we focus more on the management accounts in line with the investment holding company view, whereas at each portfolio investment
level our discussion focuses on IFRS results.
Business
Valuation method
Late stage portfolio
Water Utility
EV/EBITDA (based on LTM EBITDA)
Housing Development
NAV at reporting date
P&C Insurance
P/E (based on LTM Net income)
Early stage portfolio
Renewable Energy
At book value until power plant is operational. EV/
EBITDA (LTM) following the launch
Hospitality and Commercial Real
Estate
NAV at reporting date
Beverages – wine
Beverages – beer
EV/EBITDA (based on LTM EBITDA)
EV/Sales (based on LTM sales) due to negative EBITDA
Multiple
applied
Fair value
GEL
millions.
A reconciliation of our investment holding company basis management accounts to the IFRS statements is provided on pages 85 to 88.
The management accounts are an alternative performance measure (APM); the basis for their preparation is described on pages 82 to 84;
they have not been audited or reviewed.
8.8
N/A
7.4
431.0
66.8
130.5
N/A
61.2
N/A
149.1
9.1
2.2
56.8
4.3
Performance Highlights (IFRS)
(GEL’000)
Group consolidated
Revenue
Gross profit
Private, late stage, portfolio performance
Revenue, Water Utility
EBITDA1, Water Utility
Gross real estate profit, Housing Development
EBITDA1, Housing Development
Earned premiums, net, P&C Insurance
Adjusted net income, P&C Insurance2
Private, early stage, portfolio performance
EBITDA1, Renewable Energy
NOI, Hospitality and Commercial Real Estate
EBITDA1, Beverages
Listed portfolio performance
EBITDA1, GHG
Adjusted net income, BoG2
FY18
FY17
Change
1,282,866
486,675
1,127,170
431,461
149,127
83,359
14,935
8,877
67,490
17,734
(770)
31,541
(6,441)
135,000
72,573
8,313
21,970
62,770
16,300
(1,733)
3,369
856
132,274
458,270
108,148
373,822
13.8%
12.8%
10.5%
14.9%
79.7%
-59.6%
7.5%
8.8%
55.6%
NMF
NMF
22.3%
22.6%
1 EBITDA is an alternative performance measure (APM) and is defined on page 243 in the Glossary.
2
IFRS net incomes for P&C Insurance and BoG are adjusted to exclude the impact of non-recurring items and non-recurring deferred tax remeasurement charges.
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FINANCIAL REVIEW CONTINUED
Consolidated IFRS Income Statement
GEL thousands, unless otherwise noted
Revenue
Cost of sales
Gross profit
Operating expenses
EBITDA
Share in profit of associates
Dividend income
Depreciation and amortisation
Net foreign currency loss
Interest income
Interest expense
Net operating income before non-recurring items
Net non-recurring items
Profit before income tax expense
Income tax expense
Profit for the year
Total (loss)/profit attributable to:
– shareholders of Georgia Capital PLC
– non-controlling interests
(Loss)/Earnings per share:
– basic and diluted
FY18
FY17
1,282,866
(796,191)
486,675
(268,984)
217,691
247
23,875
(74,155)
(37,546)
23,275
(91,619)
61,768
(41,251)
20,517
(3,606)
16,911
1,127,170
(695,709)
431,461
(213,340)
218,121
376
–
(54,031)
(6,737)
8,909
(60,903)
105,735
(5,330)
100,405
(6,136)
94,269
Change
13.8%
14.4%
12.8%
26.1%
-0.2%
-34.3%
NMF
37.2%
NMF
NMF
50.4%
-41.6%
NMF
-79.6%
-41.2%
-82.1%
(9,496)
26,407
70,125
24,144
NMF
9.4%
(0.26)
2.34
NMF
As a result of strong operating performance across the businesses, Georgia Capital generated consolidated gross profit of GEL 486.7 million
in 2018 (up 12.8% y-o-y). Increase was mainly driven by double-digit growth in the healthcare and pharmacy business gross profit, as GHG has
started to capture benefits from major investments in 2016 and 2017. The y-o-y healthcare revenue growth was largely driven by a successful
ramp-up of the newly-launched hospitals, while gross profit margin in the pharmacy and distribution business continued to improve mainly as
a result of successful ongoing negotiations with manufacturers for price discounts. Consolidated gross profit was also positively affected by
increased water supply revenue coupled with significant cost efficiencies in the water utility business. The gross profit of beverages business
was up 27% y-o-y to GEL 29.5 million on the back of increased export wine sales and revenues generated from the beer and lemonade business
lines. Additionally, Beverages recorded GEL 2.9 million revaluation gain on grapes on its increased vineyard base through the Kindzmarauli
acquisition. Gross profit from Housing Development was negatively affected by the absence of GEL 21 million commercial property revaluation
gains, which were recognised in 2017. However, gross profit margin excluding revaluation gains in Housing Development still was up from 9%
in 2017 to 11% in 2018 on the back of strong project execution.
Consolidated EBITDA remained flat y-o-y due to increased operating expenses. Operating expenses were up as a result of the organic growth of
the businesses, where the most material y-o-y impact was driven by the beverages business’s launch of beer operations. Also, prior to demerger
from the BGEO Group, holding company costs were borne by the former Parent Company.
The Group recorded net operating income before non-recurring items of GEL 61.8 million (down 41.6% y-o-y). Dividend income of GEL 23.9
million from BOG was offset by increased depreciation and amortisation expenses, net interest expenses and unfavourable impact from foreign
exchange movements:
• Net Interest expense amounted to GEL 68.3 million (up 31.4% y-o-y), mainly increasing due to the issuance of the inaugural US$300 million
bonds by GCAP.
• Foreign exchange loss amounted to 37.5 million, out of which GEL 24.9 was recorded on GCAP level and was mostly related to USD to GEL
exchange rate volatility, since GCAP has accounting short foreign currency position in US dollars amounting to c.US$97.5 million (GEL 261
million) at 31 December 2018.
• Depreciation and amortisation increased to GEL 74.2 million (up 37.2% y-o-y) as a result of sizeable development projects carried out in
healthcare, water utility and beverages businesses, including launch of new healthcare facilities, development works on Water Utility
infrastructure and the beverages business’s launch of beer operations.
2018 net non-recurring expenses of GEL 41.3 million were largely related to the demerger from BGEO Group, which triggered recognition of fees
for services received in connection with the demerger and acceleration of share-based compensation expenses for accounting purposes.
As a result of the movements described above, consolidated IFRS net profit was GEL 16.9 million in 2018 (down 82.1% y-o-y) and both diluted
and basic EPS was GEL (0.26) in 2018 down from GEL 2.34 in 2017.
Consolidated IFRS Balance Sheet
GEL thousands, unless otherwise noted
Cash and cash equivalents
Amounts due from credit institutions
Debt securities owned
Equity investments at fair value
Accounts receivable
Insurance premiums receivable
Inventories
Investment properties
Prepayments
Income tax assets
Property and equipment
Goodwill
Intangible assets
Other assets
Assets of disposal group held for sale
Total assets
Accounts payable
Insurance contracts liabilities
Income tax liabilities
Deferred income
Borrowings
Debt securities issued
Other liabilities
Liabilities of disposal group held for sale
Total liabilities
Total equity attributable to shareholders of Georgia Capital PLC
Non-controlling interests
Total equity
Total liabilities and equity
31-Dec-18
31-Dec-17
256,930
40,299
71,824
457,495
170,228
57,801
278,615
151,232
117,909
2,405
1,671,917
142,095
51,634
251,462
–
346,241
38,141
31,907
1,153
35,337
30,855
80,110
159,989
87,760
1,374
657,635
21,935
5,457
69,870
1,148,584
3,721,846
2,716,348
143,114
68,207
1,119
62,059
764,355
916,401
235,771
–
42,987
46,403
860
73,066
650,734
77,835
63,206
619,029
2,191,026
1,574,120
1,201,815
329,005
844,663
297,565
1,530,820
1,142,228
3,721,846
2,716,348
Change
-25.8%
5.7%
NMF
NMF
NMF
87.3%
NMF
-5.5%
34.4%
75.0%
NMF
NMF
NMF
NMF
NMF
37.0%
NMF
47.0%
30.1%
-15.1%
17.5%
NMF
NMF
NMF
39.2%
42.3%
10.6%
34.0%
37.0%
On 23 August 2018 Georgia Capital announced that it no longer expects to own less than 50% stake in GHG at the end of 2018. As the sell down
of GHG shares to below 50% within one year from classification as held for sale, is no longer probable (i.e. the Board withdrew the plan to sell at
current share price), investment in GHG stopped meeting IFRS 5 criteria for classification, therefore Georgia Capital ceases to classify GHG as a
disposal group held for sale in 2018 annual Consolidated Financial Statements.
Total assets increased to GEL 3,722 million (up 37.0%), which is mainly driven by the following:
• Equity investments at fair value increased due to the contribution of 19.9% BoG equity stake, valued at GEL 457 million at 31 December 2018,
•
into the Group’s equity as part of the demerger from BGEO Group.
Increase in property and equipment balance reflects: (i) launch of new healthcare facilities; (ii) development works on Water Utility infrastructure
carried out during the year in order to upgrade the network; (iii) rehabilitation works at the Gardabani wastewater treatment plant, which went
through a major rehabilitation after c.30 years of operation, and since July 2018 has been fully functional, servicing the whole population in
Tbilisi and surrounding area; and (iv) intensive construction works continued on Mestiachala HPPs during 2018.
Total liabilities increased mainly due to US$300 million Eurobonds issuance by Georgia Capital in March 2018.
Increase in total equity is mainly attributable to the addition of 19.9% BoG equity stake, offset by share buybacks. On 14 June 2018 the
Group commenced a share buyback programme of up to US$45 million. During 2018 Georgia Capital had share buybacks of GEL 108.3 million,
of which management trust purchases were GEL 63.6 million and GEL 44.7 million was bought back as part of the US$45 million share
buyback programme.
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FINANCIAL REVIEW CONTINUED
Management accounts
Georgia Capital Highlights
Georgia Capital performance
(GEL thousands)
GCAP net operating income
Total attributable income of portfolio companies
of which, income from listed investments
of which, income from private investments
Net income
Georgia Capital NAV overview
Total portfolio value
Net Asset Value (NAV)
Listed investments
Private investments
Liquid assets and loans issued
Net debt
NAV per share, GEL
NAV per share, GBP
FY18
FY17
Change
48,690
187,865
112,569
75,296
164,407
13,603
93,909
20,889
73,020
70,473
NMF
NMF
NMF
3.1%
NMF
FY18
FY17
Change
1,883,374
1,688,221
977,827
905,547
605,130
(196,915)
47.13
13.88
1,850,861
1,840,447
933,481
917,380
264,546
(7,733)
46.73
13.35
1.8%
-8.3%
4.8%
-1.3%
NMF
NMF
0.9%
4.0%
In line with the European Securities and Markets Authority (ESMA) guidelines about the use of APMs in the Annual Report, we discuss below the
reconciliation of net income under management accounts with IFRS consolidated results.
FY18 net income under IFRS Consolidated Income Statement was GEL 16.9 million as compared to net income under management accounts of
GEL 164.4 million. The following items explain the drivers of differences between the two metrics:
a. BOG attributable income – IFRS Consolidated Financial Statements include dividends declared and paid by BOG of GEL 23.9 million, while
net income under management accounts include consolidation of attributable 19.9% of BOG’s net profit of GEL 91.2 million, adjusted to
exclude the impact of non-recurring items.
b. Revaluation of Hotels – revaluation gain of GEL 25.8 million is recorded within Hospitality and Commercial Real Estate business net income
within management accounts, while under IFRS Consolidated Income Statement hotels are carried at cost and no revaluation gains or losses
are recognised.
c. Non-recurring items and FX gains and losses – GEL 31 million loss from foreign currency movements and GEL 56 million non-recurring
expenses are reflected under IFRS Consolidated Income Statement before arriving to net income, while under management accounts they are
included below net income line and within other comprehensive income.
Apart from the items notes above, the Income Statement under management accounts mirrors IFRS Consolidated Income Statement and the
performance of the underlying businesses are described below. IFRS results of each portfolio business together with management commentary
are discussed on pages 102 to 116. A detailed reconciliation of our Management Income Statement to the IFRS Consolidated Income Statement
is provided on page 88.
Management monitors the Group’s performance on a regular basis based on developments
in a management account income statement and statement of Net Asset Value (NAV)
prepared under the adjusted IFRS methodologies described in APM Policy on pages 82
to 84. The management accounts are an alternative performance measure (APM); they have
not been audited or reviewed. A reconciliation of our management accounts to the IFRS
statements is provided on pages 85 to 88.
NAV Statement
All businesses are supported by strong operating fundamentals, but equity market valuations remain under pressure from stock market
conditions in emerging and frontier economies.
NAV Statement
GEL thousands, unless otherwise noted
Listed portfolio companies
GHG (75,118,503 shares)
BoG (9,784,716 shares)
Private portfolio companies
Late stage
Water Utility
Housing Development
P&C Insurance
Early stage
Renewable Energy
Hospitality and Commercial
Beverages
Pipeline (at cost)
Education
Other
Total portfolio value
Net debt
of which, cash and liquid funds
of which, loans issued
of which, gross debt
Net other assets/ (liabilities)
Net Asset Value
Management fair value
Ownership %
FY18
FY17
Change amount
Change % Total return
return %
Total
57.0%
19.9%
100.0%
100.0%
100.0%
65.0%
100.0%
80.0%
100.0%
100.0%
977,827
520,332
457,495
905,547
628,326
431,017
66,785
130,524
271,288
61,182
149,079
61,027
5,933
7,071
(1,138)
933,481
933,481
–
917,380
715,270
498,181
75,609
141,480
202,110
51,511
78,142
72,457
–
–
–
44,346
(413,149)
457,495
(11,833)
(86,944)
(67,164)
(8,824)
(10,956)
69,178
9,671
70,937
(11,430)
5,933
7,071
(1,138)
NMF
-1.3%
4.8% (637,781)
-44.3% (413,148)
(224,632)
(47,474)
-12.2% (40,792)
(38,324)
-13.5%
(1,512)
-11.7%
(956)
-7.7%
(6,682)
34.2%
4,700
18.8%
40,515
90.8%
(51,897)
-15.8%
(432)
NMF
NMF
NMF
-38.9%
-44.3%
-31.8%
-5.2%
-5.7%
-7.7%
-2.0%
-0.7%
-3.3%
9.1%
51.8%
-71.6%
NMF
1,883,374
1,850,861
32,513
1.8% (685,688)
-26.8%
(196,915)
299,650
305,480
(802,045)
1,762
(7,733)
264,546
–
(272,279)
(2,681)
(189,182)
35,104
305,480
(529,766)
4,443
NMF
13.3%
NMF
NMF
NMF
1,688,221
1,840,447
(152,226)
-8.3%
Shares outstanding
Net Asset Value per share (GEL)
Net Asset Value per share (GBP)
35,816,947
39,384,712
(3,567,765)
-9.1%
47.13
13.88
46.73
13.35
0.40
0.53
0.9%
4.0%
NAV per share in GEL terms was up 0.9%, while total NAV decreased by 8.3% to GEL 1.7 billion at 31 December 2018 as a result of the following
movements:
I. Listed portfolio companies – The value of holdings in listed portfolio companies increased with the contribution of 19.9% BoG equity stake,
valued at GEL 457 million at 31 December 2018, into the Group’s equity as part of the demerger from BGEO Group. At the same time, the
market value of our 57% equity stake in GHG decreased by 44.3% y-o-y as a result of the weak market conditions.
Despite delivering a very strong operating performance in 2018 (y-o-y full-year EBITDA up by 22.3%), GHG’s share price retreated from GBP
3.55 at 31 December 2017 to GBP 2.04 at 31 December 2018 resulting in a GEL 413 million reduction in the market value of the Group’s
holding. We did not sell any GHG shares during 2018 as we believe that the stock price was highly undervalued.
Following the demerger completion, the BoG share price closed at GBP 18.64 on 29 May 2018, its first trading day. The share price retreated
in 2H18 and closed at GBP 13.77 on 31 December 2018 even though the bank delivered a strong 26%+ ROAE. As a result, the market value of
19.9% equity stake in BOG decreased by GEL 249 million during 2018. In July 2018, Georgia Capital received GEL 23.9 million dividend
payment from BoG and as a result, net market value change after dividends amounted to negative GEL 225 million in 2018.
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FINANCIAL REVIEW CONTINUED
II. Private portfolio companies – The private portfolio companies continued to perform strongly in 2018, however, valuations were
unfavourably affected by negative trends in emerging and frontier markets. Late stage businesses delivered negative 5.7% investment return,
despite of the record-high GEL 49 million dividend inflows to GCAP on the back of their strong trading performances.
The early stage portfolio companies continued development to the next levels of their greenfield lifecycles, delivering negative 3.3% return
mainly as a result of the underperformance of the beer business, which incurred a GEL 14 million EBITDA loss in 2018 and resulted in GEL
48.4 million mark down in its fair value in 2018. The hospitality and commercial real estate business demonstrated outstanding performance
by earning 51.8% investment return driven by GEL 27.6 million revaluation gains from hotels and commercial properties.
The table below summarises total returns across our listed and private portfolio companies:
Business
31-Dec-17
Fair value
Fair value
change
31-Dec-18
Fair value
Capital
allocations
Listed portfolio companies
1,639,483
(661,656)
977,827
GHG
BoG1
933,481
706,002
(413,149)
(248,507)
520,332
457,495
–
–
–
Private portfolio companies
917,380
(17,766)
899,614
(78,338)
Inter-business
capital
reallocation2
Dividend
inflows
Total return
Comment on
Fair value
–
–
–
–
23,875
(637,781)
–
23,875
(413,149)
(224,632)
48,629
(47,475)
Late stage
Water Utility
Housing Development2
P&C Insurance
Early stage
Renewable Energy
Hospitality and Commercial2
Beverages
of which, wine
of which, beer
Pipeline
Total
715,270
498,181
75,609
141,480
202,110
51,511
78,142
72,457
34,520
37,937
–
(86,944)
(67,164)
(8,824)
(10,956)
69,178
9,671
70,937
(11,430)
22,251
(33,681)
5,933
628,326
431,017
66,785
130,524
271,288
61,182
149,079
61,027
56,771
4,256
5,933
–
–
–
–
(2,477)
–
(2,477)
–
48,629
28,840
9,789
10,000
(78,338)
(4,971)
(32,899)
(40,468)
(25,754)
(14,714)
(6,365)
2,477
–
2,477
–
–
–
–
–
–
–
–
–
–
–
(40,792)
(38,324)
(1,512)
(956)
(6,683)
4,700
40,515
(51,898)
(3,503)
(48,395)
(432)
2,556,863
(673,489)
1,883,374
(84,703)
–
72,504
(685,688)
Note a
Note b
Note c
Note d
Note e
Note f
a. The 15% increase in Water Utility’s EBITDA created approximately GEL 102 million value, however, this was more than offset by multiple
contraction from 9.4 to 8.8 (GEL 48 million decrease) and net debt widening of GEL 121 million. As a result, fair value decreased by
GEL 67 million in 2018.
b. Housing Development’s fair value was down by GEL 8.8 million mainly on the back of net capital distribution of GEL 7.3 million. FY18 net
profit was at break-even level, amounting to GEL 0.4 million, due to slowdown in sales momentum driven by low levels of inventory.
c. For P&C Insurance the 8.8% increase in net income adjusted for demerger related non-recurring items created a GEL 12 million value,
however, it was offset by multiple contraction from 8.7 to 7.4 (GEL 23 million decrease), leading to an overall fair value decrease by
GEL 11 million.
d. The GEL 9.7 million increase in the fair value for Renewable Energy was mainly driven by GEL 5 million capital allocation from
Georgia Capital and by positive impact from exchange rate movements, as the Company assets are denominated in US dollars.
c. The increase of GEL 35 million in cash and liquid funds, amounting to GEL 299.7 million at 31 December 2018, is primarily driven by the
proceeds from the milestone US$300 million six-year bond issuance. In line with its risk management practices, the Group actively
monitors the allocation of its liquid resources and its commitment to maintain at least US$50 million liquid funds. At 31 December 2018,
cash and liquid funds were allocated as follows:
Cash and liquid funds
Cash at bank
Internationally listed debt securities
Locally listed debt securities
Total cash and liquid funds
31-Dec-18
142,284
129,295
28,071
299,650
31-Dec-17
219,400
24,136
21,010
264,546
Change
-35.1%
NMF
33.6%
13.3%
Internationally listed debt securities include Eurobonds issued by Georgian corporates (GEL 102 million) and sovereign Georgian
Eurobonds (GEL 27 million). Locally listed debt securities are local bonds issued by Georgian corporates, which are listed and traded on
the Georgian Stock Exchange. Interest income from cash and liquid funds amounted to GEL 15.0 million in 2018, up from GEL 1.2 million
in 2017.
d. During 2018 Georgia Capital deployed cash for share buybacks of GEL 87.4 million, of which management trust purchases were GEL 42.6
million and GEL 44.8 million was bought back as part of the US$45 million share buyback programme.
Income Statement (Management Accounts)
Management views Georgia Capital’s income statement as a two-fold document that reflects performance of the stand-alone GCAP as well as
the performance of each portfolio company. The management Profit and Loss Statement is an aggregation of the bottom lines of the attributable
stand-alone IFRS Profit and Loss Statements of listed and private portfolio companies together with GCAP’s stand-alone Profit and Loss
Statement. For details on the methodology underling the preparation of Management Account Income Statement, please refer to APM policy
on pages 82 to 84.
Income Statement
GEL thousands, unless otherwise noted
Dividend income
Interest income
Interest expense
GCAP gross operating income
Operating expenses
GCAP net operating income (1)
Attributable income of listed portfolio companies
of which, GHG PLC
of which, BoG PLC1
Attributable income of private portfolio companies
Late stage
of which, Water Utility
of which, Housing Development
of which, P&C Insurance
FY18
72,504
39,586
(44,711)
67,379
(18,689)
48,690
112,569
21,373
91,196
75,296
68,161
43,635
6,929
17,597
8,573
(645)
28,808
(19,590)
(1,438)
187,865
FY17
Change y-o-y
35,000
1,380
(16,266)
20,114
(6,511)
13,603
20,889
20,889
–
73,020
77,387
39,156
22,140
16,091
(4,367)
(838)
3,090
(6,619)
–
93,909
(35,000)
(2,039)
–
70,473
1,362
(3,745)
90,275
NMF
NMF
NMF
NMF
NMF
NMF
NMF
2.3%
NMF
3.1%
-11.9%
11.4%
-68.7%
9.4%
NMF
-23.0%
NMF
NMF
NMF
NMF
NMF
NMF
NMF
NMF
NMF
NMF
NMF
NMF
158,365
-51.0%
e. Fair value of Hospitality and Commercial increased by GEL 70.9 million on the back of GEL 27.6 million revaluation gains recorded on hotels
Early stage
and commercial properties and GEL 32.9 million capital allocation from Georgia Capital in 2018.
f. Fair value decrease of GEL 11.4 million of Beverages was largely driven by beer business underperformance, where GEL 14 million EBITDA
loss in 2018 triggered a mark down of the beverage business value by GEL 48.4 million. The decrease in value was partially offset by the
wine business, where the GEL 25.8 million increase in fair value was related to the capital allocations from Georgia Capital for the
acquisition of Kindzmarauli.
of which, Renewable Energy
of which, Hospitality and Commercial
of which, Beverages
Pipeline
Total portfolio company attributable income (2)
III. Net debt – The GEL 189.2 million increase in net debt resulted from:
Income before tax, provision and adjustment (1)+(2)
236,555
107,512
a. Increase of GEL 529.8 million in gross debt (debt securities issued and borrowings). Georgia Capital issued US$300 million 6.125% six-year
Eurobonds due 2024 in March 2018 and raised US$291 million (GEL 716 million) net proceeds, of which GEL 270 million was used to repay
borrowing from the Group’s previous Parent Company, BGEO Group. The outstanding balance of debt securities issued at 31 December
2018 was GEL 802 million.
b. Loans issued in the amount of GEL 305 million during 2018, primarily relate to three facilities: (i) a GEL 104.6 million (US$39.1 million) loan
to the hospitality and commercial real estate business for ongoing development, construction and growth of the hotel pipeline; (ii) a GEL
46.1 million (US$7.2 million) to the housing development business to refinance some of the existing borrowings; and (iii) a GEL 133.8 million
(US$50 million) loan issued to the BoG holding company as part of the demerger, maturing in March 2020. The loans are issued at market
terms and interest income from loans issued amounted to GEL 24.6 million in 2018, significantly up from GEL 0.2 million in 2017.
Adjustment for dividend income accrual
Provision
Income tax
Net Income
Net foreign currency (loss) gain
Non-recurring expense
Realised gain from sale of portfolio company shares
Total comprehensive income
(72,504)
356
–
164,407
(30,936)
(55,920)
–
77,551
1 Pro-forma beginning balance of BoG represents the contribution of BoG’s 19.9% equity stake, valued at GEL 706 million at the date of the contribution, into Georgia Capital’s equity by its
former parent company BGEO as part of the demerger. BGEO Group PLC is the predecessor of BoG.
2 GEL 2.5 million capital reallocation from the hospitality and commercial real estate business to the housing development business.
1 Attributable income from BoG was restated for the change in IFRS 9 write-off policy in accordance with BoG 4Q18 and FY18 results release.
For details please refer to: https://bankofgeorgiagroup.com/results/earnings
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99
FINANCIAL REVIEW CONTINUED
Georgia Capital generated gross operating income of GEL 67.4 million in 2018 (up by GEL 47.3 million). Gross operating income was up on the
back of strong dividend inflows. The housing development business paid the first-ever dividend of GEL 9.8 million to GCAP. The increase in gross
operating income in 2018 also reflects the addition of the 19.9% BoG equity stake to the listed portfolio companies, which paid GEL 23.9 million
dividend in July 2018. Excluding the positive impact of dividends received from BoG, 2018 dividend income was up by 38.9% y-o-y. Dividend
income is accrued based on paid, declared or expected dividend stream from portfolio companies during the calendar year. The following table
summarises the dividend income breakdown:
Water Utility
BoG
P&C Insurance
Housing Development
Total dividend income
FY18
28,840
23,875
10,000
9,789
72,504
FY17
28,000
–
7,000
–
35,000
Change
3.0%
NMF
42.9%
NMF
NMF
Early stage businesses continued development to the next levels of their greenfield lifecycle and related attributable income was GEL 8.6 million
in 2018, which was driven by GEL 27.6 million revaluation gain booked in 2H18 on two under construction and one operational hotel and on
rent-generating assets within the hospitality and commercial real estate business. The revaluation gain was partially offset by the beverages
business, which recorded GEL 29.2 million loss on stand-alone basis in 2018 due to the delays in introduction of branded beers from the
Heineken portfolio.
The performance of each private portfolio company is discussed on pages 102 to 114.
Net income of GEL 164.4 million in 2018 reflects the elimination of the dividend accrual from the GCAP attributable income of portfolio companies
to avoid double-counting and a provision on our mezzanine loans to portfolio companies.
The Group’s total comprehensive income is then driven by net foreign currency loss/(gain), non-recurring expense and realised gains from the
sale of portfolio company shares. Other comprehensive income decreased from GEL 87.9 million in 2017 to GEL 86.9 million loss in 2018. The
following table summarises the breakdown of other comprehensive income components:
The significant increase in both Interest income and Interest expense in 2018 was driven by the issuance of the inaugural US$300 million bonds
and investment of related proceeds into investment securities and loans issued. Georgia Capital earned an average yield of 7.7% on the liquid
assets and issued loans, of which 9.8% was earned on the loans issued and 5.1% on the liquid funds. The coupon on the US$300 million bond is
6.125%.
The components of GCAP’s Operating expenses for 2018, are presented in the table below:
Net foreign currency (loss) gain
Non-recurring expense
Realised gain from sale portfolio company shares
Other comprehensive income
FY18
FY17
Change
(30,936)
(55,920)
–
(86,856)
1,362
(3,745)
90,275
87,892
NMF
NMF
NMF
NMF
The Group incurred net foreign currency loss of GEL 30.9 million in 2018 from USD to GEL and EUR to GEL exchange rate volatility at GCAP level
and across its water utility and beverages businesses. GCAP’s GEL 24.8 million net foreign currency loss in 2018 was mostly related to USD to
GEL exchange rate volatility, since GCAP has accounting short foreign currency position in US dollars amounting to c.US$97.5 million (GEL 261
million) at 31 December 2018.
Non-recurring expenses in 2018 of GEL 55.9 million are not comparable to the GEL 3.7 million figure in 2017. 2018 non-recurring expenses largely
relate to the demerger from BGEO Group, which triggered recognition of fees for services received in connection with the demerger and
acceleration of share-based compensation expenses for accounting purposes. GCAP’s GEL 23.4 million non-recurring expense was entirely
related to the demerger. The following table summarises the breakdown of non-recurring expenses:
GCAP
Listed portfolio companies
Private portfolio companies
Total non-recurring expenses
FY18
(23,449)
(17,122)
(15,349)
(55,920)
FY17
Change
–
(2,995)
(750)
(3,745)
NMF
NMF
NMF
NMF
The realised gain from sale of portfolio company shares of GEL 90 million in 2017 resulted from the sale of 9.5 million shares of GHG (7.2%) by
Georgia Capital in May 2017 for US$40 million cash proceeds, which decreased its stake in GHG to 57%. Georgia Capital did not sell any shares
of its portfolio companies during 2018.
Administrative expenses1
Management expenses – cash-based2
Management expenses – share-based3
Total operating expenses
FY18
(5,717)
(5,331)
(7,641)
(18,689)
FY17
Change
(1,056)
(76)
(5,379)
(6,511)
NMF
NMF
42.1%
NMF
Following the demerger from the BGEO Group, administrative and management expenses are now fully borne by the Group, while prior to the
demerger (before 29 May 2018) only a portion of the expenses were allocated to the Group. As a result, operating expenses are not directly
comparable. GCAP operating expenses have a targeted cap of 2% of Georgia Capital’s market capitalisation. 2018 operating expenses were only
1.4% of market capitalisation at 31 December 2018 given the start-up year effect.
Total portfolio company attributable income doubled y-o-y from GEL 93.9 million to GEL 187.9 million in 2018. However, 2017 and 2018 are not
directly comparable since BoG’s attributable income is not reflected in 2017, while it added GEL 91.2 million in 2018. Excluding BoG attributable
profit, portfolio company attributable income was up 2.9% y-o-y in 2018. The increase was mainly driven by GEL 27.6 million revaluation gains
from hospitality and commercial real estate business, which were partly offset by different developments in the other private portfolio businesses
discussed below.
GHG’s attributable income was up 2.3% y-o-y in 2018. The 2.3% y-o-y growth in 2018 reflects the impact of the sell down of a 7% equity stake by
Georgia Capital in May 2017, which reduced the portion of attributable net income on y-o-y basis. Had we not reduced our stake in GHG, related
attributable income would have increased by 8.3%. GHG continued to deliver on its strategic priorities leading to 22.2% y-o-y growth in EBITDA
and achieved a record full-year EBITDA of GEL 132.3 million, as GHG has started to capture benefits from major investments in 2016 and 2017.
GHG’s strong performance also resulted in 13.9% adjusted ROIC for roll-outs in 2018 (up 110 bps y-o-y). The performance of GHG, in which we
continue to hold a 57% stake, is discussed in more details on pages 115 to 116.
Attributable income of BoG was GEL 91.2 million on a full-year basis driven by its strong performance across corporate and retail businesses
as business momentum continues to accelerate in Georgia, while cost of risk remained well-contained at 1.6% in 2018 down from 2.2% in 2017.
BoG successfully delivered on its strategy, with adjusted ROAE of 26.1% in 2018, well above the targeted through-the-cycle ROAE of 20%+. On
9 July 2018, BoG declared a dividend in respect of 2017 year of GEL 2.44 per ordinary share (c.30% payout ratio), which was paid to its ordinary
shareholders on 31 July 2018. The Group received a GBP 7.4 million (GEL 23.9 million) dividend payment from BoG. In 4Q18 and FY18 earnings
release BoG recommended an annual dividend for 2018 of GEL 2.55 per share subject to shareholders approval. This represents a payout ratio of
30% and a 4.5% increase over last year’s dividend. GCAP is expected to receive a GEL 25 million dividend inflow from BoG in 2019. Please refer
to Bank of Georgia Group’s 4Q18 and FY18 earnings release for further details at: http://bankofgeorgiagroup.com/.
Attributable income from private portfolio companies increased by a more modest 3.1% y-o-y to GEL 75.3 million in 2018.
Late stage portfolio companies demonstrated positive performance in their recurring businesses in 2018. In the housing development business,
excluding the GEL 21 million commercial property revaluation gains in 1H17 attributable income was up in 2018, even though the overall sales
momentum in 2018 was hurt by low inventory levels due to the delay in the process of receiving new construction permits. Attributable income
from the water utility business was up by double digits despite extraordinarily lower precipitation related water inflows to Zhinvali HPP. P&C
insurance made steady progress. The 11.9% y-o-y decline in the attributable income from private late stage businesses in 2018 is entirely
attributable to the absence of the revaluation gains in Housing Development.
Includes expenses such as external audit fees, legal counsel, corporate secretary and other similar administrative costs.
1
2 Cash-based management expenses are cash salary and cash bonuses paid/accrued for staff and management compensation.
3 Share-based management expenses are share salary and share bonus expenses of management.
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FINANCIAL REVIEW CONTINUED
Capital Allocation Highlights
We continue to follow the capital allocation projections announced in our 1H18 earnings release. During 2018, actual net capital deployed was
GEL 12.1 million, lower by GEL 52 million than our estimate at 30 June 2018. This was mainly driven by additional GEL 10 million dividend inflows
from Housing Development and GEL 40 million less capital allocation needs at early stage and pipeline businesses, which we expect to be
instead deployed in 2019, i.e. increase previously projected 2019 capital allocations. The table below, which represents capital allocation
projections for the existing portfolio businesses and the pipeline businesses, summarises capital allocation outlook as of 31 December 2018.
The table does not forecast potential capital deployments in acquisitions or potential capital inflows from exits from current portfolio businesses.
Capital Allocation
(GEL, million)
Listed
Late stage
Early stage
Pipeline
BoG
GHG
Water Utility
Housing Development
P&C insurance
Renewable Energy
Hospitality and Commercial
Beverages
Education
Total
2018A
(23.9)
–
(28.8)
(9.8)
(10.0)
5.0
32.9
40.6
6.1
12.1
2019E
2020E
2021E
2022E
2019-2022
Total in
(25)
(4)
(30)
(10)
(12)
74
30
27
70
120
(27)
(6)
(32)
(15)
(15)
53
9
10
42
19
(29)
(8)
(34)
(20)
(18)
70
–
–
28
(11)
(31)
(11)
(35)
(25)
(22)
(20)
–
–
–
(144)
(112)
(29)
(131)
(70)
(67)
177
39
37
140
(16)
Capital Allocation Overview in 2018
In 2018 Georgia Capital received GEL 72.5 million in dividends, of which GEL 23.9 million was from BoG in 3Q18 and GEL 48.6 million from
private late stage portfolio businesses: P&C Insurance – GEL 10 million in 1H18, Water Utility – GEL 28.8 million in 4Q18 and Housing
Development – GEL 9.8 million in 4Q18. During 2018 Georgia Capital invested GEL 84.6 million across its early stage businesses and new
business lines, of which GEL 78.5 was capital for early stage portfolio companies. The capital was used primarily for bolt-on acquisitions to
increase scale and accelerate progress to value creation goals. The following capital allocation decisions were made during 2018:
• GEL 5.0 million was allocated to Renewable Energy, of which GEL 4 million was used for the development of hydro power plants (Zoti HPP
and Bakhvi HPP) and the remaining amount was used for the development of wind power plants.
• GEL 32.9 million was allocated to the hospitality business for the development of existing hotels and the acquisition of a land plot for hotel
and office space development.
• GEL 40.6 million was allocated to Beverages, of which, GEL 25.2 million and GEL 7.8 million were used for the acquisitions of Kindzmarauli
and Black Lion, respectively. Additionally, GEL 6.8 million was used to finance the operating deficit of the beer business.
• GEL 6.1 million was allocated to the Education business to acquire land for a high school development.
Capital Allocation Outlook Through 2019-2022
Listed Portfolio Companies
BoG is a stable dividend payer with outstanding track record and significant growth momentum and strong profitability. We expect that BoG will
maintain its dividend payout ratio within targeted 25-40% range. Over the last seven years, BoG has consistently paid out dividends at compound
annual growth rate (CAGR) of 39% over the same period. Therefore, we estimate that dividend receipts from BoG will increase approximately by
7% annually and will deliver approximately GEL 112 million dividends in total to Georgia Capital through the end of 2022.
GHG, as the largest integrated healthcare provider, is well-placed to benefit from significant new growth opportunities ahead in areas such as
medical tourism, outpatient business where there is high growth in domestic demand, and related services like the provision of dental services,
aesthetics, lab diagnostic, etc. GHG management and the Board have reviewed the appropriate framework for capital allocation for the Group
and decided to recommend to shareholders at the 2019 Annual General Meeting, a dividend of GEL 0.053 per share, to be paid in respect of
2018 earnings. GHG plans to implement a dividend policy that reflects an annual dividend payout in the range of 20-30% of earnings; Based
on the company guidance, we conservatively estimate that GHG’s payout ratio will remain at 20% and in total GHG will deliver GEL 29 million
dividends to Georgia Capital through the end of 2022 at current ownership stake. This reflects analysts consensus EPS estimate through
2019-2021 years.
Private Portfolio Companies: Late Stage
Water Utility is a stable dividend paying business with no additional equity capital or material debt capital needs. The water utility business paid
GEL 29 million dividend in 2018 and we forecast approximately 5% CAGR in the water utility business dividend growth through the end of 2022
driven by higher energy efficiency, a key driver of future dividend growth potential, and overall growth in water consumption as the economy
continues to grow. We estimate GEL 131 million dividend cash flow from Water Utility through the end of 2022.
Housing Development paid its first dividend of GEL 10 million in 2018 on the back of previously accumulated cash flows from successfully
executed residential projects and confirmed outlook as a result of construction permits received at year-end. We had not estimated dividend
inflows from Housing Development in 2018. As the business matures and continues transition into a real estate asset manager business model,
we expect it to continue returning money through a combination of dividends and capital returns. Given the strong platform and brand name,
Housing Development is well-placed to benefit from the continued growth in demand for private housing as the country’s wealth grows. The
housing development business does not have any additional equity capital needs through the end of 2022 as it has developed a leading real
estate developer platform in Georgia. Housing Development mostly finances its projects through pre-sales. Debt capital needs are specific to
individual projects and could appear for short-term periods only. Given the Housing Development’s strong project pipeline and outstanding
project execution skills, we estimate dividend inflow to remain at the same level of GEL 10 million in 2019, followed by an annual payout increase
of GEL 5 million going forward, or GEL 70 million through the end of 2022.
Property and Casualty Insurance is yet another business with strong dividend payout track record and potential for growth as the insurance
market remains highly underpenetrated in Georgia. Aldagi paid a GEL 7 million dividend in 2017, which grew by 43% to GEL 10 million in 2018
on the back of a strong growth in the bottom line. Given the business’ strong track record and high growth potential we have estimated GEL 12
million dividend payout in 2019, which is expected to grow to GEL 22 million in 2022. Property and Casualty Insurance does not have needs for
any additional equity capital or debt capital.
Private Portfolio Companies: Early Stage
Renewable Energy (65% ownership) has a medium-term target of 500MW operating power generation capacity, including the existing 152MW
HPP of the water utility business. Energy consumption is forecasted to increase at least by 5% CAGR over the next 15 years, driven by economic
growth. The business currently has a 410MW pipeline in place, where it estimates GEL 177 million equity capital needs from Georgia Capital (i.e.
65% of the total equity capital needs) and GEL 968 million debt capital needs through 2022 based on the targeted average 70%:30% debt to
equity leverage ratio.
Hospitality and Commercial Real Estate capital needs are estimated based on the 1,000 hotel room target on the back of projected
double-digit growth in tourist inflows over the coming years. The business currently has 152 operational hotel rooms and 969 hotel rooms in its
pipeline. In order to reach 1,000 fully operational hotel rooms within three years, the hospitality business needs a further GEL 39 million equity
capital injection and GEL 186 million in debt capital. We target a 70%:30% debt to equity leverage ratio at hotels.
Beverages. The wine business is targeting 1,000 hectares of vineyards from the current 436 hectares to support the growing demand from
export markets for Georgian wine. The beer business has launched the beer factory and is in process of launching additional beer brands to
increase the product offering to tap the expected growth in low beer consumption levels of 27.5 litres per capita. As a result, the beverages
business requires approximately GEL 37 million equity capital and GEL 67 million debt capital to finance its planned growth through 2020 and
beyond.
Private Portfolio Companies: Pipeline Stage
Education. We have identified education as an attractive fragmented service industry with high-growth potential driven by increased demand for
quality education and low Government spending. We expect to deploy GEL 140 million in equity capital, while the business will raise GEL 120
million in debt capital. Capital deployment will happen gradually over the next four to five years and by 2025 we expect the business to reach
30,000 pupils and to become the largest chain of affordable schools in Georgia.
Overall, based on the estimated dividend inflows, we continue to expect to collect sufficient cash inflows through the end of 2022 to
accommodate the equity capital needs of early stage and pipeline stage portfolio companies during the same period. 2019 is a net equity capital
investment year for Georgia Capital, followed by relatively neutral 2020 and 2021, while in 2022 we expect net equity capital returns from portfolio
companies. Based on this outlook, and together with the available GEL 605 million funds at GCAP (liquid funds and issued loans) at 31 December
2018, we remain well-positioned to support the value creation across our private portfolio businesses and take advantage of new opportunities
meeting our stringent acquisition criteria as and when they arise.
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103
DISCUSSION OF INVESTMENT PORTFOLIO IFRS RESULTS
Water Utility
Positive operating leverage supports EBITDA margin expansion in 2018
GEL thousands, unless otherwise noted
INCOME STATEMENT HIGHLIGHTS
Revenue
Water supply
Energy
Other
Operating expenses
Provision for doubtful trade receivables
EBITDA
EBITDA margin
Depreciation and amortisation
Net interest expense
Net non-recurring expenses
Net profit4
CASH FLOW HIGHLIGHTS
Cash flow from operating activities before maintenance capex
Maintenance capex
Cash flow from operating activities
Cash flow used in investing activities
Development capex
Cash flow from financing activities
Net proceeds from borrowings
Dividends paid out
Cash ending balance
BALANCE SHEET HIGHLIGHTS
Total assets
Property, plant and equipment
Trades and other receivables
Cash balance
Total liabilities
Total equity
GEL millions, unless otherwise noted
KEY HIGHLIGHTS
Revenue
EBITDA
Development capex1
Maintenance capex1
FCF
Cash from operations
Net debt
FY18
149.1
83.4
148.5
22.5
-66
81.6
306.5
FY18
FY17
149,127
131,814
9,052
8,261
(60,735)
(5,033)
83,359
55.9%
(25,393)
(14,330)
(6,121)
135,000
118,904
9,755
6,341
(60,752)
(1,675)
72,573
53.8%
(20,213)
(12,408)
(1,135)
Change
10.5%
10.9%
-7.2%
30.3%
-0.03%
NMF
14.9%
25.6%
15.5%
NMF
32,545
37,401
-13.0%
FY18
FY17
81,590
(22,540)
59,050
(125,092)
(148,453)
19,300
70,888
(28,840)
70,150
(23,203)
46,947
(105,024)
(113,605)
88,163
134,179
(28,244)
13,713
61,963
Dec-18
Dec-17
639,267
586,207
19,657
13,713
368,781
567,936
441,556
23,738
61,963
300,150
270,486
267,786
Change
16.3%
-2.9%
25.8%
19.1%
30.7%
-78.1%
-47.2%
2.1%
-77.9%
Change
12.6%
32.8%
-17.2%
-77.9%
22.9%
1.0%
70.8
–
70.8
FY17
change
Key performance metrics
Capital outlook through 2022
Net investment
2018 dividend
ROIC2
157.4
28.8
10.3%
Capital needs3
of which, equity
of which, debt
135
72.6
113.6
23.2
-58.1
70.2
185.4
10.5%
14.9%
30.7%
-2.9%
-13.7%
16.3%
65.3%
1 Capex figures are stated including VAT.
2 Please see definition on page 243.
3 Gross capital needs, excluding dividend distribution.
4 Please refer to page 88 for the reconciliation of FY18 stand-alone Water Utility net income to the attributable income from Water Utility as reported under the Management Account Income
Statement on page 97.
Income Statement Highlights
The Water Utility’s FY18 revenues were up 10.5% over 2017 on the back of the strong performance of the water supply business.
Revenue from water supply to legal entities and individuals (FY18 up 10.9% over 2017) benefitted from increases for both legal entities and
individuals. Revenue from water supply to legal entities increased 7.3% y-o-y to GEL 92.2 million in 2018 reflecting strong business activity across
various industries. Revenue from water supply to individuals increased 20.2% y-o-y to GEL 39.6 million in 2018. Most of the increase is
attributable to the increased residential tariff effective from 1 January 2018. New connections, which more than doubled from 2,347 in 2017 to
5,015 in 2018, also contributed to the increase in water supply revenues.
FY18 energy revenue was down 7.2% over 2017. The decrease in revenues from electricity power sales is attributable to extraordinarily lower than
average precipitation-related water inflows to Zhinvali HPP, partly offset by significant savings in the Water Utility’s self-consumption of electricity,
which decreased by 18.4% to 237,145 thousand kwh in 2018. FY18 other income was up 30.3% over 2017. The increase mainly reflects higher
number of fines charged on illegal connections amounting to GEL 1.7 million in 2018.
Operating expenses remained almost flat y-o-y, amounting to GEL 60.7 million in 2018. This reflects the efficient cost management and continued
rehabilitation works, resulting in significant cost savings in infrastructure assets maintenance expenses and raw materials. Overall, in 2018
operating leverage was positive at 10.5 percentage points.
The increase in the provision for doubtful trade receivables to GEL 5.0 million in 2018 was primarily driven by the adoption of IFRS 9. IFRS 9
introduced a forward-looking expected credit loss (ECL) approach effective from 1 January 2018, which is intended to result in an earlier
recognition of credit losses based on an ECL impairment approach, compared with the previous incurred-loss impairment approach for financial
instruments under IAS 39.
The strong increase in water supply revenues coupled with the efficient cost management led to 14.9% y-o-y increase in EBITDA to GEL 83.4
million in 2018.
Net interest expense was up 15.5% y-o-y in 2018 due to increased leverage obtained through international financial institutions and local banks
to finance capital expenditures and refinance more expensive and short-term funding. Net non-recurring expenses increased in 2018 due to
the acceleration of share-based payment expense recognition following Georgia Capital’s demerger from BGEO Group in May 2018. Foreign
exchange losses in 2018 reflect the accounting impact from Georgian Lari’s depreciation against the Euro as part of GGU’s outstanding
borrowings are denominated in Euros and GGU recorded losses in 2018 on its unhedged short position of GEL 131 million in Euros at
31 December 2018.
As a result, Water Utility profit was GEL 32.5 million in 2018, down 13.0% y-o-y.
Balance Sheet Highlights
The 32.8% increase in property, plant and equipment in 2018, was primarily due to development works on Water Utility infrastructure carried out
during the year in order to upgrade the network. Additionally, GEL 45.6 million of the increase in FY18 is driven by rehabilitation works at the
Gardabani wastewater treatment plant, which went through a major rehabilitation after c.30 years of operation, and since July 2018 has been fully
functional, servicing the whole population in Tbilisi and surrounding area. Total capex for Gardabani wastewater treatment plant rehabilitation was
in line with the estimated GEL 60 million.
2017 and 2018 were capital-intensive years for the water utility business. Efficiency programmes, such as upgrade of water and wastewater
network, purchase of heavy machinery and metering of residential and commercial customers, will have a dual effect of reducing own electricity
consumption and increasing third-party electricity sales. Additionally, regulated capex is included in Regulated Asset Base, used by the regulator
to calculate fair return on investment. For the regulatory period 2018-2020, such return on investment (referred to as WACC in the tariff-setting
methodology) is set at 15.99% (up from 13.54% in 2017). Capital expenditure level is expected to decrease in 2019 and gradually reach long-term
run-rate level of c.GEL 52-70 million by 2022. The table below summarises capex forecast through 2022:
GEL millions
Maintenance capex
Development capex
Total capital expenditures, including VAT
2018A
23
148
171
2019F
23
65-75
88-98
2020F
23
45-58
68-81
2021F
23
35-50
58-73
2022F
22
30-48
52-70
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DISCUSSION OF INVESTMENT PORTFOLIO IFRS RESULTS CONTINUED
The increase in total liabilities is due to increased borrowings obtained from international financial institutions (IFIs) and local banks at the end of
2017 to support capital expenditures for development of water supply network. During 2017, GGU secured long-term financing of EUR 81.5
million from IFIs for efficiency-related capital expenditure purposes, namely from European Investment Bank (EIB), The Netherlands Development
Finance Company (FMO) and German Investment Corporation (DEG) at the GWP level (GGU’s principal utility subsidiary). The borrowings were
largely utilised in 2017 and the remaining undrawn balance of EUR 8.6 million was drawn down during 1H18 from the IFI financing. Additionally,
c.GEL 48 million was obtained from local banks during 2018 to support intensive capital expenditures.
Cash Flow Highlights
GGU has an outstanding water supply receivable collection rate within the 95-99% range. During FY18, the collection rates for legal entities and
households was 94%. Although the Georgian water utility sector historically had low receivables collection rates, as a result of GGU’s
arrangement with electricity suppliers since 2011, GGU’s collection rates remain very strong at approximately 96%. As part of the arrangement
non-paying water customers are disconnected from the electricity network and in return, electricity suppliers receive flat monetary compensation
from GGU. Operating cash flow was up 16.3% y-o-y in 2018 as a result of the growth in revenues and positive operating leverage.
In 2018, the water utility business distributed dividends in amount of GEL 28.8 million (up 3.0% y-o-y) to Georgia Capital.
2019 Outlook
The water utility business’s outlook for 2019 is positive as management expects further continued growth in revenues from water supply with
limited increase in operating expenses, while continuing to reduce self-consumption of electricity and increasing third-party electricity sales.
Electricity market deregulation, currently expected to be fully enacted from 1 May 2019, is anticipated to positively impact revenue stream from
electricity sales. The business plans to gradually decrease volume of capital expenditures after completing two years of an accelerated capex
programme and maintain the increasing trend of dividend distribution.
Housing Development
Solid GEL 10 million first-ever dividend payout following successful project execution
GEL thousands, unless otherwise noted
INCOME STATEMENT HIGHLIGHTS
Gross profit from apartments sales
Gross profit from construction services
Gross real estate profit
Revaluation of commercial property1
Operating expenses
EBITDA
Profit2
CASH FLOW HIGHLIGHTS
Net cash flows from operating activities
Net cash flows used in investing activities
Net cash flows from financing activities
Net proceeds from borrowings
Cash, ending balance
BALANCE SHEET HIGHLIGHTS
Total assets
Land bank
Inventories
Total liabilities
Total equity
FY18
FY17
9,445
5,334
14,935
5,524
(11,582)
8,877
8,036
–
8,313
21,586
(7,929)
21,970
399
20,527
Change
17.5%
NMF
79.7%
-74.4%
46.1%
-59.6%
-98.1%
FY18
FY17
Change
(10,154)
(13,691)
16,595
(850)
10,467
18,657
(9,292)
(77,899)
2,513
20,059
Dec-18
Dec-17
250,992
8,722
105,307
182,950
68,042
245,652
58,373
59,199
168,977
76,675
NMF
47.3%
NMF
NMF
-47.8%
Change
2.2%
-85.1%
77.9%
8.3%
-11.3%
31.3
–
31.3
GEL millions, unless otherwise noted
KEY HIGHLIGHTS
Revenue
Gross real estate profit
EBITDA
Development capex
Maintenance capex
FCF
Cash from operations
Net debt
FY18
137.8
14.9
8.9
13.7
–
-23.8
-10.2
107.2
FY17
change
Key performance metrics
Capital outlook through 2022
Net investment
2018 dividend
ROIC4
18.7
10.0
4.1%
Capital needs3
of which, equity
of which, debt
115.1
8.3
22.0
9.3
–
9.4
18.7
65.1
19.7%
79.7%
-59.6%
47.3%
NMF
NMF
NMF
64.7%
1 Value created on commercial property.
2 Please refer to page 88 for the reconciliation of FY18 stand-alone Housing Development net income to the attributable income from Housing Development as reported under the
Management Account Income Statement on page 97.
3 Gross capital needs, excluding dividend distribution.
4 Please see definition on page 243.
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DISCUSSION OF INVESTMENT PORTFOLIO IFRS RESULTS CONTINUED
The Housing Development gross profit from apartment sales fluctuates with the cycle of projects and strength of demand in the market for
affordable housing. FY18 gross profit was up 17.5% y-o-y. Market conditions remain strong and the FY18 y-o-y increase was driven by strong
project execution. In 2018 Housing Development has successfully completed two affordable residential projects located in the centre of Tbilisi.
It reached total sales progress of 87% in ongoing projects and managed to sell down large part of its inventory at higher per ticket prices due to
the sales closer to full completion stage. Average price per square metre was up 24% in 2018 over 2017. The development of apartment sales in
the relevant periods are shown in the table below:
Square metres sold
Number of apartments sold
Total sales value (US$)
Sales value of apartments (US$)
Average price per square metre
FY18
FY17
15,872
146
22,341,912
20,652,166
45,621
629
49,118,065
47,965,669
1,301
1,051
While in the process of receiving the new permits, Housing Development has not started new projects in 2018 and sales momentum was
negatively affected by low levels of inventory. Inventory levels will increase by approximately 3,000 apartments over the next few years, since in
November Tbilisi City Municipality Council approved the masterplan brief on Housing Development’s largest ever in-house affordable housing
project. The Digomi project will be developed in three stages and the construction and development of 168,000 square metres residential and
84,000 square metres commercial spaces will continue for approximately four years. Housing Development started pre-sales for stage one from
February 2019, where the total sellable area is approximately 22,000 square metres. As of 19 February 2019, 3,176 square metres with US$3.3
million sales value has already been pre-sold and 3,437 square metres has been booked.
During 2018, housing gain from revaluation of commercial property in the amount of GEL 5.5 million was recorded on the apartments intended for
lease out and on commercial spaces under development in our three major projects as compared to GEL 21.6 million in 2017. In 2017 revaluation
was performed for commercial spaces under development in the above mentioned three major projects after reaching a construction progress
threshold.
Gross profit from construction services was GEL 5.3 million in 2018, which was 79% driven by third-party projects. Construction fees were mainly
generated from two third-party construction agreements in addition to in-house development projects: (i) the shell and core construction of a new
shopping mall located in Tbilisi’s Saburtalo district; and (ii) fit-out works for Radisson Tsinandali in Kakheti region. In 2017, m2 acquired BK
Construction LLC, a local real estate construction company, with the aim to bring the construction works in-house and achieve cost and project
development efficiencies.
Operating expenses were GEL 11.6 million in 2018 (up 46.1% y-o-y). The y-o-y increase reflects increased administrative expenses within the
construction arm in line with the business ramp up, while bringing construction works in-house will result in cost and project development
efficiencies.
Housing Development recorded profit of GEL 0.4 million for FY18 reflects mainly the impact of non-recurring expenses. Non-recurring expenses
amounted GEL 6.2 million in 2018 and were mainly driven by acceleration of share-based expense recognition as a result of the Group’s
demerger from BGEO Group in May and by expenses related to the construction of a college for vocational education in Western Georgia, which
was officially opened in 2H18. The college, with a total project cost of GEL 3 million, offers 11 short-term vocational courses to more than 600
construction specialist/workers annually and most of the graduates are expected to be employed within the construction arm. Before net
non-recurring items, 2018 Housing Development profit was GEL 6.6 million for the full year.
Housing Development currently has a land bank with a value of GEL 8.7 million, which decreased significantly y-o-y as a result of masterplan brief
approval for Digomi land (respective land was transferred from investment property to inventory). Land bank is expected to decrease further over
the coming years, in line with its asset light strategy, as Housing Development plans to develop third-party land plots under franchise agreements.
Cash Flow Highlights
The Housing Development business continued to deploy cash for ongoing project developments, while low levels of inventory negatively affected
sales, which decreased from US$49.1 million sales value in 2017 to US$22.3 million in 2018 as noted above. Operating cash flow was, therefore,
negative GEL 10.2 million in 2018, down from GEL 18.7 million in 2017.
In December 2018, Housing Development distributed GEL 10.0 million dividends. The first ever dividend payment was made on the back of
accumulated cash inflows from successfully executed projects.
2019 Outlook
During 2019, Housing Development expects to complete the construction of two ongoing residential projects and kick off the development of
its largest housing project in Digomi, which will drive revenue growth and gross margin expansion on the back of expected scale efficiencies.
Further, the business aims to complete the design stage and in 4Q19 start pre-sales of its largest-ever franchise project on a third-party land
plot located in Tbilisi airport highway in a densely populated suburban area.
P&C Insurance
Double-digit growth in net underwriting profit driven by efficient risk management
GEL thousands, unless otherwise noted
INCOME STATEMENT HIGHLIGHTS
Earned premiums, net
Insurance claims expenses, net
Acquisition costs, net
Net underwriting profit
Net investment profit
Operating profit
Net non-recurring items
Pre-tax profit
Income tax expense
Net profit3
CASH FLOW HIGHLIGHTS
Net cash flows from operating activities
Net cash flows used in investing activities
Net cash flows from financing activities
Cash, ending balance
BALANCE SHEET HIGHLIGHTS
Cash and liquid funds
Insurance premiums receivable, net
Pension fund assets
Total assets
Gross technical provision
Pension benefit obligations
Total liabilities
Total equity
GEL millions, unless otherwise noted
KEY HIGHLIGHTS
FY18
Earned premiums, net
Net income*
Development capex
Maintenance capex
FCF
Cash from operations
Net debt
* Net income is adjusted for non-recurring
67.5
17.7
–
–
17
20.9
–
items.
FY17
62.7
16.3
–
–
7.1
12.7
–
FY18
FY17
67,490
(25,748)
(9,520)
32,222
3,988
20,587
(652)
20,072
(2,990)
17,082
62,770
(25,098)
(9,100)
28,572
3,490
19,067
–
19,275
(2,975)
16,300
FY18
FY17
20,943
(3,910)
(10,000)
11,103
12,684
(5,600)
(7,000)
4,185
Change
7.5%
2.6%
4.6%
12.8%
14.3%
8.0%
NMF
4.1%
0.5%
4.8%
Change
65.1%
-30.2%
42.9%
NMF
Dec-18
Dec-17
Change
38,967
31,442
18,931
145,710
45,664
18,932
89,572
34,335
28,491
18,536
135,157
50,271
18,536
86,410
13.5%
10.4%
2.1%
7.8%
-9.2%
2.1%
3.7%
56,138
48,747
15.2%
change
Key performance metrics
Capital outlook through 2022
Net investment
2018 dividend
ROAE1
-13.9
10
34.4%
Capital needs2
of which, equity
of which, debt
–
–
–
7.5%
8.8%
N/A
N/A
NMF
65.1%
NMF
1 Adjusted for non-recurring items.
2 Gross capital needs, excluding dividend distribution.
3 Please refer to page 88 for the reconciliation of FY18 stand-alone P&C Insurance net income to the attributable income from P&C Insurance as reported under the Management Account
Income Statement on page 97.
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109
DISCUSSION OF INVESTMENT PORTFOLIO IFRS RESULTS CONTINUED
P&C Insurance recorded solid double-digit increase in net underwriting profit for the full year in 2018 driven by strong increases in net premiums
earned.
Renewable Energy
On track to launch first hydro power plant in 1H19
Intensive construction works continued on Mestiachala HPPs during 2018 with GEL 63.9 million capital expenditures spent on development.
The major part of the construction works is already completed, including concrete works, pipe fitting, substation construction and electrical
equipment installation. The annual net generation capacity is projected at approximately 171GWh, with peak generation in August, when the
market prices are higher compared to May-June period, when most of the HPPs in Georgia have peak generation. The project has a 15-year
Government PPA in place with the price of US$55 per MWh during Sep-Apr period. The project cost is anticipated at c.US$1.2 million per MW.
Net premiums earned were up 7.5% y-o-y in FY18. This was driven by multiple factors: (a) the termination of relationships with loss-making clients
to improve the loss ratio and overall bottom line; (b) the introduction of insurance supervision fees from 1 January 2018; (c) restrictions applied by
government to our Agro Insurance project (effective from 1 April 2018), limiting client eligibility; (d) net premiums earned from the new compulsory
border third-party liability (TPL) insurance of GEL 5.2 million in 2018; and e) substantial increase in net premiums earned from credit
unemployment insurance line which kicked in at the end of 2017, with net revenue seven times higher to GEL 1.6 million in 2018. Additionally, as
part of the risk management exercise, Aldagi revisited its reinsurance policies and terminated a reinsurance treaty for credit life insurance
products as of 1 January 2018 leading to net premiums earned from credit life insurance growing by 29.6% y-o-y in 2018.
Net insurance claims increased in 2018 only by 2.6% y-o-y, where the increase was primarily limited by profitability of compulsory border TPL
portfolio, reducing the loss ratio in motor business line from 62.2% to 55.0% y-o-y. Overall, the loss ratio decreased by 1.8 percentage points,
reaching 38.2% during 2018.
Net acquisition costs were GEL 9.5 million in 2018 (up 4.6% y-o-y), due to on average higher commission rate on property insurance mainly driven
by increased commission rate with a local financial institution. Furthermore, introduction of compulsory border TPL insurance starting from March
2018 increased acquisition costs by GEL 1.2 million y-o-y. Nevertheless, commission ratio decreased from 14.5% to 14.1% in FY18, mainly on the
back of decrease in Agro insurance portfolio, which on average has a higher commission rate.
P&C Insurance’s key performance ratios remained healthy during FY18 as noted below:
Key ratios
Combined ratio
Expense ratio
Loss ratio
FY18
75.5%
37.3%
38.2%
FY17
75.2%
35.2%
40.0%
The expense ratio increased by 2.1 percentage points reaching 37.3% in 2018. This is due to higher personnel training costs incurred by the end
of 2018, impairment charges due to termination of performance bond insurance contract and mandatory costs of participation in compulsory
border TPL project.
Net investment profit increased to GEL 4.0 million in 2018 (up 14.3% y-o-y). Investment yield remained high at 10.0% in FY18 compared to 9.9% in
FY17. The liquid assets portfolio increased by 13.5% y-o-y in 2018.
P&C Insurance’s operating profit and net income reached GEL 20.6 million (up 8.0% y-o-y in 2018) and GEL 17.1 million (up 4.8% y-o-y in 2018),
respectively, in 2018.
Balance Sheet Remains Solid and Well-Capitalised
At 31 December 2018, total assets stood at GEL 145.9 million up 7.9% from 31 December 2017 driven by 13.5% increase in cash and liquid funds
during the same period. Insurance receivables increased due to prolongation of commercial property contract with significant client in property
insurance near pension regulation effective from 1 January 2019, pension assets and related liabilities are expected to substantially decrease
starting from 2019. P&C Insurance’s strong position is also evidenced by solvency ratio, which stood at 131% at 31 December 2018, well above
than the required minimum of 100%. P&C insurance business expects to maintain its solvency ratio at minimum level of 130% over the coming
years.
Cash Flow Highlights
Operating cash flow was up 65.1% y-o-y in FY18 on the back of efficient risk management, decreasing payments for claims, while insurance
premiums received increased by 5%. Profitability of compulsory border TPL, having overall lower loss ratio, also drove operating cash flow up.
Increased Interest inflows in line with liquid assets growth also positively contributed to the increase in operating cash flow.
P&C insurance business paid a GEL 10 million dividend in 2018, which grew by 43% from GEL 7 million in 2017.
2019 Outlook
P&C Insurance expects insurance activity to increase during 2019 across retail and SME segments and has actively started to develop its
marketing strategy towards entering these underpenetrated segments, expected to significantly increase revenue generation. Revenue growth
may significantly accelerate subject to parliament approval of the mandatory third-party liability (TPL) insurance legislation, which has been
submitted with a target launch date of 1 July 2019. The business also will continue to keep its focus on maintaining healthy combined ratio, below
75%, and benefit from border TPL growth.
GEL thousands, unless otherwise noted
INCOME STATEMENT HIGHLIGHTS
Revenue
Operating expenses
EBITDA
Net loss3
Attributable to:
– shareholders of the Group
– non-controlling interests
CASH FLOW HIGHLIGHTS
Cash flow from operating activities
Cash flow used in investing activities
Development capex
Cash flow from financing activities
Proceeds from borrowings
Cash ending balance
BALANCE SHEET HIGHLIGHTS
Total assets
Property, plant and equipment
Cash balance
Total liabilities
Total debt4
Total equity
Total equity attributable to the shareholders of the Group
GEL millions, unless otherwise noted
KEY HIGHLIGHTS
Revenue
EBITDA
Capex
FCF
Cash from operations
Net debt
FY18
n/a
-0.8
68.3
n/a
-0.7
62.3
FY17
n/a
-1.7
76.6
n/a
-1.5
56.6
change
Key performance metrics
Capital outlook through 2022
Net investment
2018 dividend
ROIC1
n/a
55.6%
-10.9%
n/a
52.5%
10.2%
56.6
–
-0.9%
Capital needs2
of which, our equity
(65% stake)
of which, equity from
minority
of which, debt
FY18
–
(770)
(770)
(816)
(530)
(286)
FY17
–
(1,733)
(1,733)
(2,177)
(2,093)
(84)
Change
NMF
55.6%
55.6%
62.5%
74.7%
NMF
FY18
FY17
Change
(696)
(62,295)
(68,258)
63,228
55,494
8,388
(1,466)
(69,776)
(76,565)
74,069
57,268
8,298
Dec-18
Dec-17
169,304
114,645
8,388
75,145
70,711
94,159
61,203
96,551
47,953
8,298
69,920
64,848
26,631
16,505
52.5%
10.7%
10.8%
-14.6%
-3.1%
1.1%
Change
75.4%
NMF
1.1%
7.5%
9.0%
NMF
NMF
1,240
177
95
968
1 Please see definition on page 243.
2 Gross capital needs, excluding dividend distribution.
3 Please refer to page 88 for the reconciliation of FY18 stand-alone Renewable Energy net loss to the attributable loss from Renewable Energy as reported under the Management Account
Income Statement on page 97.
4 Mezzanine ban from GCAP is classified as borrowing in stand-alone IFRS Financial Statements of renewable energy business, which in 2018 was converted to equity.
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DISCUSSION OF INVESTMENT PORTFOLIO IFRS RESULTS CONTINUED
Renewable Energy financials reflect Mestiachala HPP being in its construction stage and other Renewable Energy projects being under
development. The increase in property, plant and equipment compared to 31 December 2017 is primarily attributable to the construction of
Mestiachala HPPs. The increase in total equity is primarily attributable to capital injections from the shareholders for development and
construction of renewable projects. Overall the renewable energy business is financing the projects with up to 30% equity contribution.
Renewable Energy continues to build ground for its 500MW operating capacity medium-term target. It searches for opportunities to develop new
hydro projects and seeks acquisition possibilities among existing projects, which are either commissioned or under feasibility stage. Currently,
preparation works are underway to commence construction works on 46MW Zoti HPPs in 2H19, located in Western part of Georgia, expected to
have net generation of 164MWhs, with c.53% of generation covered by 15-year Government PPA (average US$51 per MWh during September-
April period). In 2Q18 the Company applied for an MoU for yet another new project – 38MW Racha HPPs. Cost per MW is anticipated to be at
c.US$1.5 million with the capacity factor estimated to be as high as c.49%. Additionally, preliminary SPA has been signed for Bakhvi 2 HPP in
August 2018 and the management is working on prolongation of MoU formed with the Government. Subject to successful MoU prolongation,
the project construction works are anticipated to start in the first half of 2020 with the planned commissioning in the first half of 2022. Based on
the current feasibility study results, installed capacity of Bakhvi 2 HPP is anticipated to be 36MWs, with annual net generation of c.127GWhs.
Total cost per MW is projected to be c.US$1.3 million.
Renewable Energy also continues on the development of wind projects, and wind farms near Tbilisi and Kaspi are at an advanced stage with
the planned construction commencement in second half of 2019 and commissioning in second half of 2020. The management is currently
negotiating with the Government regarding MoU and PPA terms and conditions, expecting to finalise the documentation in 1H19.
The table below summarises the indicative pipeline of upcoming energy projects:
Renewable Energy Projects Pipeline as of 31 December 2018
Project
Mestiachala HPPs
Zoti HPPs
Bakhvi 2 HPP
Racha HPPs
Wind Tbilisi
Wind Kaspi
Wind (Kutaisi, Plevi, Tkibuli)
Solar
Total
Target MWs
Construction
commencement
date
Target
commissioning date1
Target ROIC2
Net annual
generation capacity
(GWh)
50
46
36
38
57
54
99
30
410
1H17
2H19
1H20
1H21
2H19
2H19
1H21
TBD
1H19
1H21
1H22
1H23
2H20
2H20
1H22
TBD
13.2%
12.9%
13.5%
14.7%
13.3%
14.1%
12.5%
10.1%
171
164
127
165
179
215
306
64
1,391
2019 Outlook
Renewable Energy is on track to commission Mestiachala HPP in 1H19 and start construction works on 46MW Zoti HPPs and 111MW wind projects
in 2H19. The business will continue to develop Renewable Energy projects to reach its target of 500MWs installed capacity in the medium term.
We foresee a growing electricity deficit, and considering steps taken towards full market deregulation, favourable regulatory conditions. Accordingly,
in addition to continuing the development of its current pipeline, the Company plans to continue looking into new projects.
Hospitality and Commercial Real Estate
A year of growth in revenue, earnings, portfolio and pipeline
GEL thousands, unless otherwise noted
INCOME STATEMENT HIGHLIGHTS
Gross profit from operating leases
Gross profit from hospitality services
Gross real estate profit
Revaluation of commercial property3
Operating expenses
Net operating income (NOI)
Profit (loss)4
CASH FLOW HIGHLIGHTS
Net cash flows from operating activities
Net cash flows used in investing activities
Net cash flows from financing activities
Net proceeds from borrowings
Cash, ending balance
BALANCE SHEET HIGHLIGHTS
Cash and cash equivalents
Investment property
Land bank
Commercial real estate
Total assets
Borrowings
Total equity
GEL millions, unless otherwise noted
KEY HIGHLIGHTS
Revenue
NOI
Development capex
Maintenance capex
FCF
Cash from operations
Net debt
FY18
38.5
31.5
81.0
–
(66.8)
5.7
91.7
FY18
4,588
1,945
6,761
27,621
(2,841)
31,541
26,396
FY17
3,042
–
3,042
977
(650)
3,369
3,135
Change
50.8%
NMF
NMF
NMF
NMF
NMF
NMF
FY18
FY17
Change
5,670
(79,444)
87,735
76,397
28,616
2,689
(32,483)
40,372
12,696
14,806
Dec-18
Dec-17
28,615
225,343
37,459
187,884
294,833
104,557
159,839
14,805
56,770
14,529
42,241
130,022
14,749
87,955
NMF
NMF
NMF
NMF
93.3%
Change
93.3%
NMF
NMF
NMF
NMF
NMF
81.7%
FY17
change
Key performance metrics
Capital outlook through 2022
Net investment
2018 Dividend
ROIC1
107
–
16.4%
Capital needs2
of which, GCAP equity
of which, debt
225.1
39.6
185.5
4.6
3.4
32.5
–
(29.8)
2.7
24.2
NMF
NMF
NMF
NMF
NMF
NMF
NMF
1 Target commissioning dates are indicative and subject to regulatory procedures.
2 Target return on invested capital is calculated based on average stabilised EBITDA divided by total invested capital.
1 Please see definition on page 243.
2 Gross capital needs, excluding dividend distribution.
3 Value created on commercial property.
4 Please refer to page 88 for the reconciliation of FY18 stand-alone Hospitality and Commercial Real Estate net income to the attributable income from Hospitality and Commercial Real
Estate as reported under the Management Account Income Statement on page 97.
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DISCUSSION OF INVESTMENT PORTFOLIO IFRS RESULTS CONTINUED
INCOME STATEMENT HIGHLIGHTS
Gross profit from operating leases was up 50.8% y-o-y in FY18 primarily due to the expansion of the commercial real estate portfolio, supported
by high-occupancy levels. The portfolio available for lease continues to be successfully leased with an occupancy rate and an average yield of
90.1% and 9.9%, respectively, in 2018, compared to 88.3% and 9.1% in 2017. The commercial real estate business obtains commercial space
(ground floor) at residential developments from the housing development business and also acquires it opportunistically from third parties. Nearly
80% of the total commercial assets portfolio represents office and retail areas and another 20% residential and industrial spaces.
Our first hotel, Ramada Encore on Kazbegi ave. has completed its ninth full month of operations, generating GEL 1.9 million of gross profit with
US$74.6 ADR and 44.4% occupancy rate and earning net operating profit margin of 37.8% since its launch in March 2018. The hotel has a
capacity of 152 rooms and is catering to the needs of the rapidly-growing market for budget travellers in Georgia.
In 2018 hospitality business booked revaluation gain of GEL 25.8 million on two under construction and one operational hotel, while a revaluation
gain of GEL 1.9 million was recorded on rent-generating assets. Management hires an independent, internationally recognised valuation company
to determine the fair values of hotels after a predetermined construction progress threshold is reached.
Balance Sheet Highlights
At 31 December 2018, total assets of Hospitality and Commercial Real Estate were GEL 294.8 million (more than doubled from GEL 130.0 million
at 31 December 2017) and was largely concentrated in investment property. In 2018 Commercial Real Estate increased more than four times
compared to 31 December 2017 due to the commencement of construction of Ramada Melikishvili hotel, acquisition of under construction
Gudauri hotel, completion of Ramada Encore Kazbegi Hotel and commercial portfolio expansion. Borrowings increased due to the funding of the
ongoing hotel developments and acquisition of a single commercial real estate asset, all of which was fully financed by Georgia Capital. In
December 2018 Hospitality and Commercial Real Estate has initiated the process of placing US$30 million bonds into the local market backed by
rental income stream from commercial properties. The bonds are being issued at par with a three-year tenor and an annual coupon rate of 7.5%,
payable quarterly. The Proceeds will be used to finance upcoming hotel developments.
The hospitality business continued to build ground for its targeted 1,000 hotel rooms portfolio, by investing GEL 19 million in an under-
construction hotel in Gudauri and a land plot in Telavi for hotel development. The business has three hotel projects under construction – a luxury
hotel on Gergeti street in Tbilisi with an expected 100 rooms, the Melikishvili Avenue hotel in Tbilisi with expected 125 rooms and a hotel in the
leading ski resort of the Caucasus region, Gudauri with an expected 121 rooms. Additionally, there are six hotels in a design stage: (a) a hotel in
Telavi with expected 130 rooms; (b) a hotel in Kutaisi with expected 121 rooms; (c) a hotel in Akhasheni village, Kakheti, in Eastern Georgia
well-known tourist wine destination with expected 60 rooms; (d) a business style 4-star hotel in old Tbilisi with expected 120 rooms; and e) two
hotels in mountainous Svaneti region with expected 192 rooms in total. The total capital needs to complete the construction and development
of the hotels in the current pipeline is estimated at GEL 247.5 million, summarised in the table below:
Beverages
Outstanding growth in revenues driven by strong performance in the wine business
GEL thousands, unless otherwise noted
INCOME STATEMENT HIGHLIGHTS
FY18
FY17
Change
Consolidated
Revenue
Gross profit
EBITDA
Net loss4
Wine business
Revenue
Gross profit
Gross profit margin
Operating expenses
EBITDA
Net profit
Beer business
Revenue
Gross profit
Gross profit margin
Operating expenses
EBITDA
Net loss
Distribution business3
Revenue
Gross profit
Gross profit margin
Operating expenses
EBITDA
Net loss
76,214
29,254
(6,441)
(29,173)
29,352
14,042
47.8%
(6,891)
7,151
(91)
29,308
10,087
34.4%
(23,841)
(13,754)
(28,475)
24,896
5,252
21.1%
(4,627)
625
(197)
55,730
22,378
856
(14,393)
20,427
10,063
49.3%
(4,636)
5,427
4,137
17,927
6,956
38.8%
(12,489)
(5,533)
(19,507)
24,413
5,166
21.2%
(4,438)
728
308
36.8%
30.7%
NMF
NMF
43.7%
39.5%
48.6%
31.8%
NMF
63.5%
45.0%
90.9%
NMF
46.0%
2.0%
1.7%
4.3%
-14.1%
NMF
104
37
67
Hotel
Ramada Encore Kazbegi, Tbilisi
Gudauri
Seti Square in Mestia, Svaneti
Ramada Melikishvili, Tbilisi
Gergeti, Tbilisi
Ramada Kutaisi
Mestia, Svaneti
Telavi
Javakhishvili, Tbilisi
Kakheti Wine and Spa
Total
Rooms
Current stage
Target opening
date1
Total cost excl.
VAT US$ ‘000
Target ROIC2
GEL millions, unless otherwise noted
Operational
Construction
Design
Construction
Construction
Design
Design
Design
Design
Design
152
121
72
125
100
121
120
130
120
60
1,121
Q1-2018
Q2-2019
Q4-2019
Q1-2020
Q3-2020
Q4-2020
Q1-2021
Q2-2021
Q2-2021
Q3-2021
12,066
10,809
5,915
12,352
23,473
9,535
10,096
12,735
14,144
7,500
18.0%
12.8%
16.2%
15.7%
13.7%
17.5%
15.8%
13.4%
13.8%
17.3%
KEY HIGHLIGHTS
Revenue
EBITDA
Development capex
Maintenance capex
FCF
Cash from operations
Net debt
FY18
76.2
(6.4)
32.4
0.4
(42.1)
(13.8)
107.1
FY17
change
Key performance metrics
Capital outlook through 2022
Net investment
2018 dividend
ROIC1
116
–
-11.4%
Capital needs2
of which, equity
of which, debt
55.7
0.9
30.6
–
(40.0)
(9.8)
49.6
36.8%
NMF
5.6%
NMF
-5.3%
39.7%
115.9%
Cash Flow Highlights
The first operational Ramada Encore hotel added GEL 2.3 million to operating cash flow, which more than doubled from GEL 2.7 million in 2017
to GEL 5.7 million in 2018. As the hospitality and commercial real estate business progressed towards its targeted 1,000 hotel room portfolio in
2018, it continued to acquire under construction hotels and land plots for further development. Hospitality and Commercial Real Estate targets
70%:30% debt to equity leverage ratio at hotels and during 2018 m2 received a loan from Georgia Capital with an outstanding balance of GEL
104.6 million (US$39.1 million) at 31 December 2018. The loan proceeds will be used primarily for ongoing development, construction and growth
of the hotel pipeline.
2019 Outlook
The hospitality business plans to commence the construction of a Ramada hotel in Kutaisi in 1Q19, currently in the design stage, complete the
design stage of Telavi and Kakheti, Wine and Spa hotels and commission hotels in Gudauri and Seti Square Svaneti in 2019.
1 Target opening dates for hotels under design stage are subject to outcomes of design process and may be changed.
2 Target return on invested capital per each hotel equals stabilised adjusted net operating income divided by total investment.
1 Please see definition on page 243.
2 Gross capital needs, excluding dividend distribution.
3 Starting from 4Q18 distribution business represents separate business line after reorganisation within the Company, therefore results of distribution business line for comparative periods
differ from the one presented in the previous announcements.
4 Please refer to page 88 for the reconciliation of FY18 stand-alone Beverages net loss to the attributable loss from Beverages as reported under the Management Account Income
Statement on page 97.
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115
DISCUSSION OF INVESTMENT PORTFOLIO IFRS RESULTS CONTINUED
In 2018 Georgia Capital continued to invest in the beverages business, successfully acquiring 100% equity stakes in the leading Georgian craft
beer producer, Black Lion LLC (total consideration of US$3.2 million) in February 2018 and in the prominent winery Kindzmarauli Marani LLC (total
consideration of US$9.5 million). Through the acquisition of Kindzmarauli, which added 350 hectares of vineyards, bringing the total vineyard base
to 436 hectares, our wine business is now a top three winery in Georgia in terms of the vineyard base. Therefore, management expects to
minimise reliance on purchased grapes in the coming years and as a result, manage gross profit margin levels.
Beverages revenue in 2018 was up 36.8%. The increase was driven by revenues generated from the beer and lemonade business line and by
mostly organic growth in the wine business supported by the country’s strong export markets growing at 13% y-o-y in 2018 reaching record-high
86.2 million wine bottle export sales. In line with the market growth, our wine bottle sales also increased significantly by 22% from c.3.5 million
bottles in 2017 to 4.3 million in 2018.
Top-line growth was also supported by the GEL 2.9 million revaluation gain on grapes recorded in December 2018, driven by our increased
vineyard base through the Kindzmarauli acquisition. Beverages achieved a well-diversified revenue mix in 2018: wine (41%), distribution (21%), and
beer and lemonade (38%).
The wine business maintained a solid gross profit margin of 48% in 2018, compared to 49% in 2017, despite discontinuation of the Government
subsidy on grapes, which adversely affected grape purchase prices for the business and therefore, the cost of goods sold. Wine EBITDA
increased by 31.8% y-o-y.
Beer EBITDA was negative GEL 13.8 million in 2018, compared to negative GEL 5.4 million in 2017. During 2017, the beer business actively
invested in beer facilities to accommodate the launch of its beer and lemonade businesses, however, the launch of key Heineken brands was
delayed, thereby negatively impacting the 2018 performance. Based on the updated timeline, Heineken and Amstel production are expected to
commence in 1H19. Starting from 2H18 Beverages has strengthened its beer business with a new CEO and COO and new management
decreased the negative EBITDA contribution by 18.6% h-o-h in 2H18 on the back of efficient cost management. Our beer business is actively
working on export markets and first batch of lemonade was exported in Russia in December 2018.
2019 Outlook
The wine business expects to maintain high double-digit revenue growth on strategic export markets, while diversifying the export revenue
streams. At the same time the wine business plans to invest in improving the quality processes, renewing production facilities and acquiring
additional vineyards to further increase production capacity and reduce cost of goods sold. On the back of improvement in the quality processes,
the business is expected to enter the premium wine segment, thereby diversifying its current product mix.
The beer business plans to achieve 20% volume market share in beer by the end of 2019, by launching the Heineken brands in 1H19, improving
product mix, launching new brands, enhancing the distribution platform and targeted marketing.
GHG
The completion of significant investment programme now beginning to be reflected in business performance, delivering
GEL 132 million FY18 EBITDA
GEL thousands, unless otherwise noted
INCOME STATEMENT HIGHLIGHTS
Consolidated
Revenue
EBITDA
Net profit3
Healthcare services business
Revenue
EBITDA
EBITDA margin (%)
Net profit
Pharmacy and distribution business
Revenue
EBITDA
EBITDA margin (%)
Net profit
Medical insurance business
Net insurance premiums earned
EBITDA
Net profit/(loss)
CASH FLOW HIGHLIGHTS
Net cash flow from operating activities
EBITDA to cash conversion
Net cash used in investing activities
Net cash flow from financing activities
Cash and cash equivalents, beginning
Cash and cash equivalents, ending
FY18
FY17
Change
849,917
132,274
53,239
305,598
76,008
24.9%
16,133
518,578
52,215
10.1%
34,157
55,112
4,051
2,949
FY18
99,580
75%
-85,347
-26,917
48,840
36,154
747,750
108,148
45,940
265,396
70,071
26.4%
27,360
450,315
38,854
8.6%
21,182
53,710
(436)
(2,602)
13.7%
22.3%
15.9%
15.1%
8.5%
-41.0%
15.2%
34.4%
61.3%
2.6%
NMF
NMF
FY17
Change
58,239
54%
-128,748
96,647
23,239
48,840
71.00%
+21ppts
-33.70%
NMF
110.20%
-26.00%
GEL millions, unless otherwise noted
KEY HIGHLIGHTS
Revenue
EBITDA
Development capex
Maintenance capex
FCF
Cash from operations
Net debt
FY18
849.9
132.3
52.6
11.1
-12.7
99.6
342.4
FY17
change
Key performance metrics
Net investment
2018 dividend
ROIC1
ROIC adjusted2
128,9
–
11.00%
13.90%
747.8
108.1
79.7
9.6
25.6
58.2
296.9
13.70%
22.30%
-34.10%
15.50%
NMF
71.00%
15.30%
1 Please see definition on page 243.
2 Return on invested capital is adjusted to exclude newly launched hospitals and polyclinics that are in roll-out phase.
3 Please refer to page 88 for the reconciliation of FY18 stand-alone GHG net income to the attributable income from GHG as reported under the Management Account Income Statement on
page 97.
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117
Strategic Review Discussion of Results
DISCUSSION OF INVESTMENT PORTFOLIO IFRS RESULTS CONTINUED
GHG delivered double-digit y-o-y growth in consolidated revenues for 2018, driven by double-digit growth in healthcare services and pharmacy
and distribution businesses revenues. The y-o-y healthcare revenue growth was largely driven by a successful ramp-up of the newly-launched
hospitals. Tbilisi Referral Hospital contributed GEL 17.7 million to 2018 revenues, reaching 46.5% occupancy rate in 4Q18 and Regional Hospital’s
occupancy rate was 32.7% in 4Q18, adding GEL 21.0 million to 2018 revenues. By the end of 2018 GHG entered into the Georgian dental market
by launching dental clinics within the Group’s polyclinics, aiming to consolidate this highly-fragmented market, with an estimated annual market
size of GEL 100 million, where no single player in Georgia has previously been able to establish a scalable business.
During 2018, GHG continued to focus on improving operating performance and developing synergies across the business lines. The gross
margin in the pharmacy and distribution business continued to improve 100 bps y-o-y in 2018, mainly as a result of ongoing negotiations with
manufacturers for price discounts. GHG is the largest purchaser of pharmaceuticals in Georgia. The healthcare services business gross margin
remained strong at around 41.9% in 2018, despite the flagship hospitals roll-out phase and the impact of the Government’s changes to Universal
Healthcare Programme (UHC) effective from May 2017. As a result of new initiatives that the medical insurance business implemented since 2Q18,
its loss ratio improved significantly 690 bps y-o-y in 2018. Insurance business has significantly improved claims retention rates within the Group,
total claims retained within the Group was up 690 bps y-o-y and total claims retained on outpatient services was also up 1,120 bps y-o-y in 2018.
Healthcare services EBITDA margin was 24.9% in 2018, compared to 26.4% in 2017, reflecting the planned significant investment and roll-out
phase of newly-launched hospitals and polyclinics. The EBITDA margin for referral hospitals and community clinics was 25.7% in FY18 (27.2%
in FY17). Excluding the dilutive effect of roll-outs, the EBITDA margin was towards targeted level, 28.7% in FY18. The pharmacy and distribution
business delivered outstanding performance and, on the back of extracted procurement synergies, posted record-high EBITDA margin above
10% in 2018 (10.1%), substantially exceeding its “more than 8%” medium-term target. The medical insurance business made a solid contribution
of GEL 4.1 million in 2018 to GHG’s EBITDA, after improved operational efficiency over the last 18 months.
Cash Flow Highlights
Net cash flows from operating activities was up 71.0% y-o-y in 2018 to GEL 99.6 million on the back of strong EBITDA performance and a
substantially improved EBITDA to cash conversion ratio. After a number of hospital openings in 2018, benefits of the major investment programme
started to materialise and was reflected in the reduced working capital needs. As a result, EBITDA to cash conversion ratio improved
considerably, reaching 75.3%, which is expected to further improve going forward.
In FY18 GHG spent a total of GEL 63.7 million on capital expenditures (capex), of which maintenance capex was GEL 11.1 million. With the
opening of the Mega Laboratory (“Mega Lab”), GHG has now completed its three-year intensive capital expenditure phase. 2018 was the final
year of the major investment programme and investment volume slowed (development capex outflow down 34.1% y-o-y) as the projects
completed. With the improved operational cash flow and declining investment volume, the Group has stabilised the needs for new borrowings.
Net outflow from financing activities amounted to GEL 26.9 million, which reflects only marginal excess of new funding over the repaid borrowings
during the year and interest payments.
Please refer to GHG’s announcement for more details at: http://ghg.com.ge/financial-results
Strong cash flow generation during 2018 enabled GHG board to announce the proposed dividend policy. Please refer to GHG’s announcement
for more details at http://ghg.com.ge/news-announcements
Photo Old Tbilisi, home to
the diverse cultural heritage
of the city. The panoramic
view of Tbilisi at sunset is
truly breathtaking.
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119
DIRECTORS’ GOVERNANCE STATEMENT
Combined CEO and Chairman Role
We acknowledge that our decision to combine the roles of Chairman
and CEO in a single person (Irakli Gilauri) is not compliant with provision
A.2.1 of the 2016 UK Corporate Governance Code (and provision 9 of
the 2018 UK Corporate Governance Code). This matter is regularly
reviewed (including with our shareholders as discussed below) by the
Nomination Committee and the Board. After careful consideration, the
Board continues to believe that the current structure better serves our
Company and recommend that it should continue. The basis for this
conclusion is summarised below.
As a matter of procedure, the combination of the roles was expressly
discussed with the shareholders of the Company’s predecessor prior
to the demerger, and described in the demerger circular and
prospectus that created the Company. The demerger including this
structure was approved by 100% of shareholders who voted. There
has also been engagement in early 2019 by Non-Executive Directors
with shareholders by letters, calls and also face-to-face meetings in the
United Kingdom, Europe and the USA, in which shareholders again
confirmed their support for the structure. We would not want to change
our structure against the wishes of our shareholders.
More importantly, we believe that combining the two roles also
continues to make sense in our case as a matter of substance:
Georgia Capital is unusual as a listed company because we manage it
first and foremost as a holding company focused on investing in and
developing businesses, with the result that we hold and operate a
highly diversified group of companies.
• Our central group management structure is quite small (head office
has around 30 employees). It is principally at the level of the central
management team at which the board provides challenge, most
importantly on investment/divestment decisions through the
Investment Committee as discussed below.
• The highly diverse portfolio of businesses, except for the very
early stage ones, have an unusually strong measure of operational
independence. Two of them are independently listed: we are a
19.9% investor in Bank of Georgia Group PLC which has its own
board and is independent of us; and we own 57% of Georgia
Healthcare Group PLC, which also has a separate board composed
mainly of Independent Non-Executive Directors, although Irakli
Gilauri sits on this board as the sole Non-Executive Director who is
not independent. Each of the private portfolio companies also has
its own strong CEO who operate their businesses with a significant
degree of operational independence, with principal oversight and
strategic guidance exercised by Mr Gilauri or another member of
the central group management team.
• We believe that the role of a Non-Executive Chairman on top of
a CEO in this environment could interfere with the lean group
structure. It would also add extra cost.
The Board is almost entirely independent and is highly experienced.
• Other than the CEO, our Board is composed solely of independent
Non-Executive Directors (six in total). As there is only one Executive
Director, and each Non-Executive Director approaches the
Company with true independence, the Executive Director cannot
form a block to try and convince enough independent directors to
support him. Our decisions at the Board and the decisions of the
Investment and Nomination Committees (on which the CEO sits) are
typically reached through consensus, but ultimately it is a majority
decision: the CEO does not have a veto and is heavily outnumbered.
• The Non-Executive Directors are experienced business people of
particular high quality for a FTSE Small/MidCap company and we
would invite shareholders to consider their biographies and note
the degree of real expertise and experience they bring to the Board.
They have a diverse range of backgrounds and nationalities and
each brings a fresh view and particular expertise to board
discussions. The Senior Independent Director, a former partner
at a top US law firm, is highly experienced in the region and is the
governance lead for the Board and the Non-Executive Directors.
He also chairs the Audit Committee. Previous roles for the other
Non-Executive Directors include:
– career at Goldman Sachs specialising in real estate;
– investment officer at a major investment fund;
– career at McKinsey with particular focus on healthcare
and valuation;
– career in banking, investment funds and investor relations; and
– membership and experience on a number of UK boards and
qualified accountant.
The role of the Investment Committee in our company context is
outsized. The Investment Committee plays the key role for Group in
making decisions on portfolio investments and exits, managing all
aspects of investment policy and strategy. It scrutinises, challenges
and ultimately either approves or disapproves of investment and
divestment proposals and initiatives, including significant add-on
investment for the existing portfolio companies. It also considers the
commercial terms of major transactions (i.e. over £2.5 million). All Board
members sit on the Investment Committee, but it is chaired by a
Non-Executive Director, not the Chairman/CEO.
The Group’s NAV is set by the Audit Committee. The Group’s key
financial and investor communications metric is its net asset value as
approved by the Audit Committee, a committee of all Independent
Directors on which the CEO does not sit.
The Non-Executive Directors exercise key secondary oversight of the
private portfolio businesses.
• Although we think of ourselves as a holding company and delegate
day to day management to our portfolio companies and ongoing
strategic advice to the Group CEO/Chairman and his central team,
the private portfolio companies’ CEOs also present directly to the
Board to update them and to seek approvals on the most important
capital allocation and strategic matters. In that sense, the most
important decisions of our private portfolio companies are reserved
for the Board.
• The Directors also engage directly with senior management and the
workforce in Georgia so that there are further unfiltered channels of
access. A number of Non-Executive Directors (including the Chair of
the Investment Committee) regularly tour facilities and projects of
the portfolio companies and meet with one or more of the portfolio
company CEO/ executive management once a quarter which
facilitates direct and open access.
Given the structure of the Group explained in the foregoing, the Board
continues to believe the current combined Chairman/CEO structure
best suits the Group and notes that the recent shareholder
engagement exercise shows that its shareholders understand and
support this approach.
Irakli Gilauri
Chairman and Chief
Executive
David Morrison
Senior Independent
Non-Executive Director
The Board is responsible for ensuring sound management and long-term success of the
Group which can only be achieved with an appropriate governance framework.
Dear shareholders
We are pleased to present the first Governance Statement since the
Group was admitted to listing and commenced business following the
successful demerger of BGEO Group PLC in May 2018. All Directors
were appointed prior to listing to allow them time to understand the
business. In addition, Directors received detailed training in respect
of the responsibilities and obligations of directors of premium listed
companies on the London Stock Exchange. This training included their
duties and responsibilities under the UK Corporate Governance Code,
Listing Rules, the Disclosure Guidance and Transparency Rules, the
Companies Act 2006 and the Market Abuse Regulation.
We remain committed to working with our management to ensure
that our high standards extend beyond the boardroom and are
continually implemented in the successful delivery of the
Company’s strategic priorities.
Irakli Gilauri
Chairman and
Chief Executive
3 April 2019
David Morrison
Senior Independent
Non-Executive Director
3 April 2019
The Board is responsible for ensuring sound management and
long-term success of the Company which can only be achieved with
an appropriate governance framework. The Board has applied the UK
Corporate Governance Code published in 2016 (the “Code”) and it is
against that version of the Code that we are reporting.
Compliance Statement
Since our listing in May, we applied the main principles and
complied with the Provisions of the 2016 UK Corporate
Governance Code, with the below exceptions.
We are pleased to report on some key features of the robust
governance structure we have established since May 2018:
• a complete Committee structure with terms of reference that are
compliant with the UK Corporate Governance Code, with each
Committee composed to ensure that we have the correct skill
sets for them to operate effectively;
• a Board with a proven track record in business with both sector
and country-specific knowledge consisting of seven Directors: our
Chairman and CEO and six Independent Non-Executive Directors; and
• comprehensive governance policies.
The Board has been fully briefed on the revisions made to the Code during
2018, which applied to the Group from 1 January 2019. A gap analysis was
undertaken against the revised Code and the Company has been taking
appropriate steps to ensure it complies with the new Code. For example,
Kim Bradley was appointed as the designated Non-Executive Director to
engage with the workforce. Revised Committee Terms of References and
Group Policies, compliant with the revised Code, were adopted towards
the end of 2018. We look forward to providing an update in next year’s
report on the further steps we have taken to comply with the additional
requirements of the updated Code.
Section A.2.1 of the Corporate Governance Code recommends
that the roles of Chairman and Chief Executive should not be
exercised by the same individual. Section A.3.1 recommends
that the Chairman on appointment should be independent. The
Company’s Chairman, Irakli Gilauri, also serves as the Company’s
Chief Executive Officer and is not considered by the Board to be
independent. Our explanation is set out on the next page.
The Board did not undertake a formal effectiveness evaluation
due to the comparatively short period between the Company’s
listing and year end 2018 and the significant proportion of Board
time devoted to the Group’s demerger from BGEO Group PLC
(B.6.1 and B.7.2), but shall undertake such a review in 2019.
The Code and associated guidance are published by the Financial
Reporting Council and are available at: www.frc.org.uk.
Set out on our website at: https://georgiacapital.ge/
governance/cgf is the Board’s assessment of its application of
the Main Principles of the Code as required by LR 9.8.6.
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Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
121
BOARD OF DIRECTORS
Irakli Gilauri
David Morrison
Kim Bradley
Massimo Gesua’ sive
Salvadori
William Huyett
Caroline Brown
Jyrki Talvitie
Chairman and Chief Executive
Senior Independent Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
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Irakli Gilauri was appointed as
Chairman and Chief Executive of
the Company on 24 February 2018.
Irakli Gilauri also serves as a
member of the Company’s
Nomination and Investment
Committees.
Mr Gilauri is a Non-Executive
Director of Georgia Healthcare
Group PLC and a member of the
Supervisory Board of JSC Georgia
Healthcare Group. He also sits on
the Supervisory Board of JSC
Georgia Capital. Mr Gilauri formerly
served as the CEO of BGEO Group
from 2011 to May 2018. He joined
as CFO of Bank of Georgia in 2004
and was appointed as Chairman of
the Bank in September 2015,
having previously served as CEO of
the Bank since May 2006.
Mr Gilauri has up to 20 years of
experience in banking, investment
and finance. Prior, he was an EBRD
(European Bank for Reconstruction
and Development) banker. Over the
last decade, Mr Gilauri’s leadership
has been instrumental in creating
major players in a number of
Georgian industries, including
banking, healthcare, utilities and
energy, real estate, insurance
and beverages.
Mr Gilauri received his
undergraduate degree in Business
Studies, Economics and Finance
from the University of Limerick,
Ireland, in 1998. He was later
awarded the Chevening Scholarship,
granted by the British Council, to
study at Cass Business School of
City University, London, where he
obtained his MSc in Banking and
International Finance.
Dr Massimo Gesua’ sive Salvadori
was appointed as Independent
Non-Executive Director of the
Company on 24 February 2018.
He also serves as a member of the
Company’s Investment, Nomination
and Audit Committees.
Dr Gesua’ sive Salvadori is a bank
analyst covering banking and other
financial stocks globally. He works
for Odey Asset Management, a
London-based hedge fund, which
he joined in 2011. He is responsible
for generating investment ideas
and understanding broad trends.
Dr Gesua’ sive Salvadori worked
as a management consultant at
the London office of McKinsey &
Co. between 2002 and 2011,
specialising in financial services
and served clients across different
geographies in developed and
emerging markets as part of the
banking strategy practice. He is a
member of the Supervisory Board
of JSC Georgia Capital.
Dr Gesua’ sive Salvadori, a native
of Venice, obtained an MPhil and
a PhD from Oxford University,
where he attended St. Antony’s
College. He graduated with a
BSc in Economics from Warwick
University. He attended the United
World College of the Adriatic in
Duino. His postgraduate studies
were funded through scholarships
by the Foreign and Commonwealth
Office, the Economic Research
Council, the Fondazione Einaudi
and the Ente Einaudi.
David Morrison was appointed
as Senior Independent
Non-Executive Director of the
Company on 24 February 2018.
Mr David Morrison also serves as
Chairman of the Company’s Audit
Committee and as a member of
the Company’s Investment and
Nomination Committees.
Mr Morrison is a Non-Executive
Director of Georgia Healthcare
Group PLC and a member of the
Supervisory Board of JSC Georgia
Healthcare Group. He sits on the
Supervisory Board of JSC Georgia
Capital. Mr Morrison previously
served as the Senior Independent
Non-Executive Director of BGEO
Group PLC from October 2011 until
May 2018, which included positions
as Chairman of Audit Committee
and a member of Remuneration
and Nomination Committees.
Mr Morrison spent most of his
career (28 years) at Sullivan &
Cromwell LLP where he served as
Managing Partner of the firm’s
Continental European offices. His
practice focused on advising public
companies in a transactional
context, including capital raisings,
IPOs and mergers and acquisitions.
Mr Morrison is the author of several
publications on securities
law-related topics, and was
recognised as a leading lawyer in
Germany and France. In 2008,
Mr Morrison turned his attention to
conservation finance as the
Founding CEO of the Caucasus
Nature Fund (CNF), a charitable
trust dedicated to wilderness
protection in Georgia, Armenia and
Azerbaijan. He now acts as Chair of
CNF’s supervisory board, and
serves on the boards of two other
conservation trusts he helped to
create in 2015 and 2016.
Mr Morrison received his
undergraduate degree from Yale
College and his law degree from the
University of California, Los
Angeles. He was also a Fulbright
scholar at the University of
Frankfurt.
Kim Bradley was appointed as an
Independent Non-Executive Director
of the Company on 24 February
2018. He also serves on the
Remuneration and Nomination
Committees, and as Chairman of
the Investment Committee.
Mr Bradley previously served as
Independent Non-Executive Director
of BGEO Group PLC from December
2013 until May 2018. Mr Bradley
served as Chairman of BGEO Group
PLC’s Risk Committee and as a
member of BGEO Group PLC’s
Audit and Nomination Committees.
Mr Bradley retired from Goldman
Sachs in early 2013, following 15
years as a professional in the Real
Estate Principal Investments and
Realty Management divisions, where
he focused on investment in both
European real estate and distressed
debt. In addition to his investment
activities, Mr Bradley led Goldman
Sachs’ asset management affiliates
in France, Italy and Germany, where
he was involved in financial and tax
audits as well as the management of
internal audit activities. He has also
served as President of Societa
Gestione Crediti and a member of
the Board of Directors of Capitalia
Service Joint Venture in Italy and
Chairman of the Shareholders Board
at Archon Capital Bank Deutschland
in Germany. Prior to Goldman Sachs,
he served as a Senior Executive at
GE Capital for seven years in both
the United States and Europe, where
his activities included real estate
workouts and restructuring, as well
as acquisitions. Prior to GE Capital,
Mr Bradley held senior executive
positions at Manufacturers Hanover
Trust (now part of JP Morgan) and
Dollar Dry Dock Bank. He has also
served as a Peace Corps volunteer
and as a consultant with the US
Agency for International
Development in Cameroon.
Mr. Bradley is also Managing Partner
at Sabino Capital Partners LLC, an
entity through which he provides real
estate advisory. He is a member of
the Supervisory Board of JSC
Georgia Capital.
Mr Bradley holds an MA in
International Affairs from the
Columbia University School of
International and Public Affairs and
an undergraduate degree in English
Literature from the University of
Arizona.
William Huyett was appointed as
Independent Non-Executive
Director of the Company on
24 February 2018. He also serves
as a member of the Company’s
Remuneration, Investment and
Nomination Committees.
Mr Huyett was appointed as
Non-Executive Chairman of
Georgia Healthcare Group PLC on
20 September 2018, having served
as an Independent Non-Executive
Director since 18 June 2017. He
serves as a member of the Clinical
Quality and Safety Committee and
the Nomination Committee of
Georgia Healthcare Group PLC. He
is also Chairman of the Supervisory
Board of JSC Georgia Healthcare
and a member of the Supervisory
Board of JSC Georgia Capital.
Mr Huyett is Chief Financial Officer
of Cyclerion Therapeutics, recently
spun out from Ironwood
Pharmaceuticals, a NASDAQ-listed
biopharmaceutical innovator in
Cambridge MA where he was
Chief Operating Officer. Prior to
that, during a 30-year career at
McKinsey & Company in the US
and Europe, he served clients in
healthcare and other technology-
intensive industries. He advised
those clients on value creation
strategies and their implications
for organisation effectiveness
and board governance. His areas
of expertise include corporate
portfolios, growth, mergers and
acquisitions, and divestitures.
He is co-author of a text on
corporate finance: Value: Four
Cornerstones of Value Creation.
He currently serves on the boards
of two not-for-profit institutions,
Rockefeller University in New York
and Marine Biological Laboratory
Woods Hole.
Mr Huyett earned a BSc in Electrical
Engineering and an MBA from the
University of Virginia.
Dr Caroline Brown was appointed
as Independent Non-Executive
Director of the Company on
24 February 2018. She also serves
as a member of the Investment,
Nomination and Audit Committees.
Dr Brown has managed divisions
of FTSE100 groups and AIM
businesses with international
industrial and technology
operations and has worked as
a corporate finance adviser to
governments and corporations
with Merrill Lynch, UBS and HSBC.
Dr Brown has chaired audit
committees of listed companies
for the past 15 years and is a
Fellow of the Chartered Institute of
Management Accountants.
Dr Brown was an advisor to the
Board of Georgia Healthcare Group
PLC from 24 February 2018 to
31 December 2018. Dr Brown
currently serves as the Chair of
NAHL Group PLC, and as an
independent Non-Executive
Director on the boards of
London-quoted companies,
Luceco plc and Earthport plc.
Dr Brown also serves as a Trustee
of the Raspberry Pi Foundation.
She is a member of the Supervisory
Board of JSC Georgia Capital.
Dr Brown holds a first-class degree
and PhD in Natural Sciences from
the University of Cambridge and a
Masters of Business Administration
from the Cass Business School,
University of London.
Jyrki Talvitie was appointed as
Independent Non-Executive
Director of the Company on
24 February 2018. He also serves
as Chairman of the Company’s
Nomination and Remuneration
Committees and as a member
of the Company’s Investment
Committee.
Mr Talvitie has worked in the
financial industry for 28 years in
banks as well as on both the buy
and sell side of markets. Prior to
joining the Board, Mr Talvitie
worked in Moscow for 14 years,
his latest position being in charge
of Strategic Partners and Investors
at Sberbank, the largest bank in
Russia and one of the top 15 in the
world. He is also a member of the
Management Board of Magnit,
a Russian publicly quoted retailer.
Before Sberbank Mr Talvitie was a
Management Board Member at
Russian Direct Investment Fund,
Head of Investor Relations at VTB
Bank and established and ran the
Russian operations of East Capital,
a Swedish Private Equity and Asset
Management company, while also
managing a Financials Fund. Prior
to moving to Russia in 2003,
Mr Talvitie worked for BNP Paribas
in Paris, Bank of New York in
London and Moscow, as well as
several Nordic banks, both in
Helsinki and Moscow. Mr Talvitie
has extensive board experience,
having served on over ten boards of
both public and private companies
in Georgia, Finland, Russia,
Kazakhstan and Ukraine. He is a
member of the Supervisory Board
of JSC Georgia Capital.
Mr Talvitie holds an Executive MBA
from London Business School as
well as a Masters of Law from
Helsinki University. Mr Talvitie also
holds a Diploma in Company
Direction from the Institute of
Directors in London.
Link Company Matters Limited
Link Company Matters Limited acts as Company Secretary to Georgia Capital PLC and reports to the General Counsel.
Link Company Matters Limited is one of the UK’s largest professional services secretarial teams and was voted Service
Provider of the Year at the 2018 ICSA Awards. With offices in the UK and mainland Europe, Link Company Matters Limited
supports both domestic and international clients, including a wide range of AIM-quoted and Main Market companies,
with all aspects of their company secretarial and governance needs.
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Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
123
EXECUTIVE MANAGEMENT TEAM
EXECUTIVE MANAGEMENT
Georgia Capital Management
Georgia Capital Management
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Irakli Gilauri, Chairman and Chief Executive
See page 120 for his biography.
Avto Namicheishvili, Deputy CEO
From 28 January 2019, Mr Namicheishvili assumed the role of interim CEO of the Group’s water utility
and renewable energy businesses, in addition to his Deputy CEO role at Georgia Capital. Formerly he
was BGEO Group General Counsel. He was General Counsel of the Bank of Georgia from 2007 to
2018 and has played a key role in all of the Group’s equity and debt raises on the capital markets, and
over 25 mergers and acquisitions. Prior, he was a Partner at a leading Georgian law firm. Holds LLM.
in international business law from Central European University, Hungary.
Ekaterina Shavgulidze, Chief Investment Officer
Formerly served as the Head of Funding and Investor Relations of BGEO Group. Ms Shavgulidze
joined BGEO as a CEO of BGEO’s healthcare services business in 2011. She played a key role in the
Georgia Healthcare Group’s IPO as a Group Head of IR. Prior to that, she was an Associate Finance
Director at AstraZeneca, UK. Holds an MBA from Wharton Business School.
Giorgi Alpaidze, Chief Financial Officer
Formerly BGEO Group CFO. Joined BGEO as Head of Group’s Finance, Funding and Investor
Relations in 2016. He has extensive international experience in banking, accounting and finance.
Previously he was a senior manager in Ernst & Young LLP’s Greater New York City’s assurance
practice. BBA from the European School of Management in Georgia. US Certified Public Accountant
Eka Duchidze, Executive Director
Formerly served as corporate secretary and investor relations coordinator at BGEO Group. Joined
Bank of Georgia as Corporate Secretary in 2005. During the past years she has carried out a number
of crucial roles, including Executive Assistant to CEO and Head of Internal Branding. Recently, Eka
oversaw the development of SOLO Banking and SOLO Lifestyle at Bank of Georgia. Prior, she served
for eight years at the World Bank Group of which for two years she was at the World Bank HQ in
Washington DC as a Programme Assistant at OPIC Department.
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Nikoloz Gamkrelidze, CEO, Georgia Healthcare Group
Previously deputy CEO (Finance) of BGEO Group. Our healthcare business story starts with
Mr Gamkrelidze, who started it in 2006, and has successfully led it through outstanding growth and
most recently the IPO on the London Stock Exchange. Holds an MA in international healthcare
management from the Tanaka Business School of Imperial College London.
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Archil Gachechiladze, CEO, Bank of Georgia
Previously CEO at GGU, the Group’s water utility and renewable businesses. Prior to that
Mr Gachechiladze was a Deputy CEO in charge of corporate banking in Bank of Georgia. He
launched the Bank’s industry and macro research, brokerage and advisory businesses, as well as he
was leading investments in GGU and launched Hydro Investments. Previously, he was an Associate
at Lehman Brothers Private Equity in London, and worked at Salford Equity Partners, EBRD, KPMG,
Barents and the World Bank. Holds MBA with distinction from Cornell University and is CFA
charterholder.
Avto Namicheishvili, Interim CEO, GGU
From 28 January 2019, Mr Namicheishvili assumed the role of interim CEO of the Group’s water utility and
renewable energy businesses, in addition to his Deputy CEO role at Georgia Capital. Formerly he was BGEO
Group General Counsel. Joined as a General Counsel to the Bank of Georgia in 2007, and has since played a
key role in all of the Group’s equity and debt raises on the capital markets, and over 25 mergers and
acquisitions. Prior, he was a Partner at a leading Georgian law firm. Holds LL.M. in international business law
from Central European University, Hungary.
Irakli Burdiladze, CEO, m2 Real Estate
Joined as a CFO at the Bank of Georgia in 2006. Before taking leadership of real estate business in 2010,
he served as the COO of the Bank. Prior he was a CFO at a leading real estate developer and operator in
Georgia. Holds a graduate degree in International Economics and International Relations from the Johns
Hopkins University School of Advanced International Studies.
Giorgi Baratashvili, CEO, Aldagi
Joined as the Head of Corporate Clients division of Aldagi in 2004. Before taking the leadership of our P&C
insurance business in 2014, he served as Deputy CEO of Aldagi in charge of strategic management for
corporate sales and corporate account management. Holds the Master Diploma in International Law.
Giorgi Tskhadadze, CEO, Wine Business
CEO of wine business since November 2018. He was previously Head of Water Utility within GGU, having
joined the Group in December 2014. Prior to that, he held executive positions at several leading local
companies, including as CFO at IDS Borjomi and Poti Sea Port. Prior to joining GGU, Mr Tskhadadze was
acting as a partner at Proxima Prime Partners. Holds BSc degree in Economics and Engineering from Tbilisi
State University.
Tornike Nikolaishvili, CEO, Beer Business
CEO of beer business since September 2018, having previously been Chief Marketing Officer at Bank of
Georgia from March 2018. Previously he was a Commercial Director at EFES Georgia – Natakhtari Brewery.
Before joining EFES, he was an Advertising Manager of Cartu-Universal. Overall, he has 15 years` experience
in FMCG sector. Holds BBA degree of European School of Management.
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124
Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
125
CORPORATE GOVERNANCE FRAMEWORK
Our Governance Structure
BOARD
CEO
Executive
Management
Audit
Committee
Investment
Committee
Nomination
Committee
Remuneration
Committee
Read more
on page 130
Read more
on page 135
Read more
on page 128
Read more
on page 138
The Board is comprised of seven Directors, six of whom are
Independent Non-Executive Directors. The biographies of all our
Directors can be found on pages 120 to 121 and at: https://
georgiacapital.ge/governance/board. More information on the
composition of the Board can be found later in this report on page 125.
The Georgia Capital Board is assisted in fulfilling its responsibilities
by four principal Committees: Investment, Audit, Nomination and
Remuneration. The terms of reference are approved by each
Committee and the Board and reviewed annually and can be found at:
https://georgiacapital.ge/governance/cgf/terms.
For further information about the Committees see the Nomination
Committee Report on page 128, the Audit Committee Report on page
130, the Remuneration Committee Report on page 138 and the
Investment Committee Report on page 135.
The Board is responsible to shareholders for creating and delivering
shareholder value over the long term through the management of the
Group’s business. Among our responsibilities are setting and
overseeing the execution of the Group’s strategy within a framework of
effective risk management and internal controls, demonstrating ethical
leadership and upholding best practice corporate governance.
Each Director also recognises their statutory duty to take into account
the Company’s various stakeholders in its deliberations and decision-
making. You can read more about our main stakeholders, and the ways
in which we have engaged with them over the year, in the Resources
and Responsibilities section of this Annual Report on pages 73 to 81.
By setting the tone at the top, establishing the core values of the
Company and demonstrating our leadership, we are creating a culture
that clearly sets an expectation that every employee acts ethically and
transparently in all of their dealings. This, in turn, fosters an environment
where business and compliance are interlinked. One of the CEO’s
priorities over the next 12 months, which will be closely monitored by
the Board, is to develop and foster the Group’s culture across the
Company, JSC Georgia Capital and each of the portfolio companies.
We also monitor management’s execution of strategy and financial
performance. While our ultimate focus is long-term growth, the
Company also needs to deliver on short-term objectives and we seek
to ensure that management strikes the right balance between the two.
In order to ensure that we meet our responsibilities, specific
key decisions have been reserved for approval by the Board. A full
formal schedule of matters specifically reserved for the Board can be
found on our website at: https://georgiacapital.ge/governance/
cgf/schedule.
Outside of these matters, the Board delegates authority for the
day-to-day management of the business to the CEO. The CEO
delegates aspects of his own authority, as permitted under the
corporate governance framework, to the Management Board.
Operation of the Board
The Board meets at least four times a year in Georgia. We also hold
meetings at our London offices, with Directors either attending in
person or via teleconference. Each quarter the following topics are
usually discussed in the Board meeting:
•
financial update (with formal financial results announcements
typically being approved in separate phone conferences);
• macroeconomic developments, including a focus on both the
Georgian and regional markets;
• an assessment of current and potential future risks to the Company;
regulatory and legislative updates, including corporate governance
•
as appropriate;
• updates from the Committee meetings, typically including at least
an Audit Committee Report on accounting issues and internal
audit; and
• business updates from selected portfolio companies.
The entire Board sits on the Investment and Nomination Committees,
and every meeting reviews the investment pipeline and takes action as
necessary on new investments or disinvestments.
In addition, amongst the Board’s responsibilities are:
• oversight of the Company;
• strategy and assessment of the principal risks;
•
• setting the corporate culture and values: and
• accountability to shareholders and other stakeholders for the
the governance structures;
Company’s long-term success.
There is an annual schedule of rolling agenda items to ensure that
all matters are given due consideration and are reviewed at the
appropriate point in the financial and regulatory cycle. These include
the budget, quarterly trading updates, half-year and full-year results,
the Annual Report and Accounts, and the Notice of AGM.
The Chairman and CEO seeks input from the Non-Executive Directors
ahead of each Board meeting in order to ensure that any matters raised
by Non-Executive Directors are on the agenda to be discussed at the
meeting. The Senior Independent Director supports the Chairman in his
role, acts as an intermediary for other Non-Executive Directors when
necessary and liaises with the Non-Executive Directors outside of the
Board and Committee meetings. The Senior Independent Director met
with the Non-Executive Directors without the Chair present at least once
during the year to appraise the Chairman’s performance.
Board and Committee Meeting Attendance
Details of Board and Committee meeting attendance in 2018 are as follows:
Members
Irakli Gilauri
David Morrison*
Kim Bradley*
Massimo Gesua’ Sive Salvadori*
William Huyett*
Caroline Brown*
Jyrki Talvitie*
Notes: * Denotes independent Director.
Board
Audit
Committee
Nomination
Committee
Remuneration
Committee
Investment
Committee
6/6
6/6
6/6
6/6
6/6
6/6
6/6
n/a
5/5
n/a
5/5
n/a
5/5
n/a
1/1
1/1
1/1
1/1
1/1
1/1
1/1
n/a
n/a
3/3
n/a
3/3
n/a
3/3
2/2
2/2
2/2
2/2
2/2
2/2
2/2
The Board’s Objectives for 2019 are:
• Continuous review of overall strategy for the Group.
• Monitor the Group’s implementation of its strategy and financial performance.
• Oversee improvements to risk management and internal controls, as needed.
• Continue succession planning at the Board and senior management level.
• Continuing to develop the future talent pipeline at the levels below the Board.
• Active and disciplined pursuit of new investment opportunities.
We consider that a diversity of gender, social and ethnic backgrounds,
cognitive and personal strengths, and balance in terms of skills,
experience, independence and knowledge are important to effectively
govern the business. The Board and its Nomination Committee will
work to ensure that the Board continues to have the right balance of
skills, experience, independence and knowledge necessary to
discharge its responsibilities in accordance with the highest standards
of governance.
We believe our overall size and composition to be appropriate, having
regard in particular to the independence of character and integrity of all
of the Directors. Each of our Non-Executive Directors occupies, and/or
has previously occupied, senior positions in a broad range of relevant
associated industries. They bring valuable external perspective to the
Board’s deliberations through their experience and insight from other
sectors enabling them to contribute significantly to decision-making.
No individual, or group of individuals, is able to dominate the decision-
making process and no undue reliance is placed on any individual.
All our Directors were appointed in February 2018, ahead of our
admission to listing on the London Stock Exchange in May 2018. We
have assessed the independence of each of the six Non-Executive
Directors and are of the opinion that each acts in an independent and
objective manner. We consider that, under the UK Corporate
Governance Code, all of our Non-Executive Directors are independent
and free from any relationship that could affect their judgement.
Evaluation of Board Performance
The Board continuously strives to improve its effectiveness and
recognises that its annual evaluation process is an important tool in
reaching that goal. For 2018, it was agreed not to undertake a formal
effectiveness evaluation due to comparatively short period between the
Company’s listing and year end and the significant proportion of Board
time devoted to the Group’s demerger from BGEO Group PLC. In 2019
we will conduct a comprehensive review of the Board’s composition,
expertise, dynamics, management and focus on meetings, support,
risk management, oversight, controls and priorities.
Succession Planning and Board Appointments
We believe that effective succession planning mitigates the risks
associated with the departure or absence of well-qualified and
experienced individuals. We recognise this, and our aim is to ensure
that the Board and management are always well resourced with the
right people in terms of skills and experience, in order to effectively and
successfully deliver our strategy. We also recognise that continued
tenure brings a depth of Company-specific knowledge that is important
to retain.
The Board’s Nomination Committee is responsible for both Director
and senior management succession planning. There will be a formal,
rigorous and transparent procedure for the appointment of new
Directors to the Board, including a review of other significant
commitments Directors may have.
More details on the role and performance of the
Nomination Committee are on pages 128 to 129.
Non-Executive Directors’ Terms of Appointment
On appointment, our Non-Executive Directors are provided with
a letter of appointment that sets out the terms and conditions of
their directorship, including the fees payable and the expected time
commitment. Each Non-Executive Director is expected to commit
approximately 25-35 days per year to the role. An additional time
commitment is required to fulfil their roles as Board Committee
members and/or Board Committee Chairmen, as applicable. Having
reviewed all Directors’ current time commitments, we are confident that
all Non-Executive Directors have sufficient time to dedicate the amount
of time necessary to contribute to the effectiveness of the Board.
The Letters of Appointment for our Non-Executive Directors are
available for inspection at our Company’s registered office during
normal business hours.
Diversity Policy
We value diversity in all forms in accordance with our Diversity Policy.
More information on the Company’s Diversity Policy, its objectives,
implementation and results can be found on page 77.
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Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
127
CORPORATE GOVERNANCE FRAMEWORK CONTINUED
External Appointments
Prior to accepting any external appointments, Directors are required
to seek the Board’s approval. The Board believe that the other external
directorships/positions held provide the Directors with valuable
expertise which enhances their ability to act as a Non-Executive
Director of the Company. Our Non-Executive Directors hold external
directorships or other external positions but the Board believes they
still have sufficient time to devote to their duties as a Director of the
Company.
Board Induction, Ongoing Training, Professional
Development and Independent Advice
On appointment, each Director takes part in an induction programme,
during which they meet members of senior management and receive
information about the role of the Board and individual Directors, each
Board Committee and the powers delegated to those Committees.
They are also advised by the Company Secretary and the UK General
Counsel of the legal and regulatory obligations of a Director of a
company listed on the London Stock Exchange. Induction sessions
are designed to be interactive and are tailored to suit the needs of the
individual, taking into account previous experience and knowledge.
Prior to demerger, all Directors received detailed training in respect
of the responsibilities of companies that have a premium listing on
the London Stock Exchange.
We are committed to the continuing development of our Directors in
order that they may build on their expertise and develop an ever more
detailed understanding of the business and the markets in which the
Group companies operate. All of our Directors participated in ongoing
training and professional development throughout 2018, which
included briefings, site visits, development sessions and presentations
by our Company Secretary and the UK General Counsel, members of
management, external speakers and our professional advisors. During
the year our Company Secretary and UK General Counsel provided
updates on legislative changes including the Non-Financial Reporting
Directive and diversity initiatives, as well as refresher training session
on directors’ duties under the Companies Act, in particular section 172.
In addition, amendments to the Disclosure Guidance and Transparency
Rules and the FRC’s guidance on reporting were presented. The UK
General Counsel also provided training to the Board on the new UK
Corporate Governance Code and the new FRC Guidance on Board
Effectiveness.
All Directors have access to the advice of the Company Secretary and
the UK General Counsel, as well as independent professional advice,
at the Company’s expense, on any matter relating to their
responsibilities.
Company Secretary
The Board appointed Link Company Matters Limited to act as
Company Secretary to Georgia Capital PLC in June 2018. Link
Company Matters Limited is one of the UK’s largest professional
services secretarial teams. Previously in the year this position was
held by Rebecca Wooldridge, an experienced lawyer specialising
in corporate governance, who was subsequently appointed as UK
General Counsel to the Group.
Directors
All Directors are required by the Company’s Articles of Association
and the UK Corporate Governance Code to be elected by shareholders
at the first Annual General Meeting in May 2019 following their
appointment. Going forward, in line with the Code’s recommendation,
all Directors will seek re-election on an annual basis. The Board has set
out in its Notice of Annual General Meeting the qualifications of each
Director and support for election as applicable.
Workforce Engagement
In December 2018, Kim Bradley was appointed as the designated Non-
Executive Director for employee engagement. The Board is considering
various mechanisms for engagement in 2019. The Board is also
encouraged to engage with employees outside of formal channels and
workforce engagement since our listing in May 2018 has included visits
to construction sites and portfolio company offices. The Board will also
offer advice on ongoing developments and feasibility studies of the
Company’s subsidiaries, and will provide strategic insights where
useful. The matter of workforce engagement will be something that
the Board will focus on in 2019.
Annual General Meeting
The Notice of Annual General Meeting is circulated to all shareholders
at least 20 working days prior to such meeting. All shareholders are
invited to attend the Annual General Meeting, where there is an
opportunity for individual shareholders to question the Chairman
and, through him, the Chairs of the principal Board Committees.
After the Annual General Meeting, shareholders can meet informally
with the Directors.
As recommended by the UK Corporate Governance Code, all
resolutions proposed at the 2019 Annual General Meeting will be voted
on separately and the voting results will be announced to the London
Stock Exchange and made available on the Company’s website as
soon as practicable after the meeting. These will include all votes cast
for and against and those withheld, together with all proxies lodged
prior to the meeting. In the event that 20% or more of votes have been
cast against a resolution, an explanation will be provided in the
announcement to the London Stock Exchange of the actions the
Company will be taking to address shareholders’ concerns. A follow up
announcement would then be made within six months of the Annual
General Meeting regarding feedback received from shareholders and
the subsequent actions taken by the Company.
See page 244 for further Shareholder Information and page 137
for further information on shareholder engagement.
UK Bribery Act 2010 (the “Bribery Act”)
The Board stands firmly against bribery and corruption and is
committed to the Group acting in an ethical manner. To support this,
and in response to the legislation, the Group has implemented and
enforces its Anti-Bribery and Anti-Corruption Policy. The Board
attaches the utmost importance to the Policy and its systems. The
Company has also introduced a whistleblowing system, including
an anonymous helpline, under its Whistleblowing Policy.
Directors’ Responsibilities
Statements explaining the responsibilities of the Directors
for preparing the Annual Report and consolidated and
separate Financial Statements can be found on page 154
of this Annual Report.
A further statement is provided confirming that the Board considers the
Annual Report, taken as a whole, is fair, balanced and understandable
and provides the information necessary for shareholders to assess the
Company’s position and performance, business model and strategy.
Internal Controls and Risk Management
The Company has a comprehensive system of internal controls in
place, designed to ensure that risks are mitigated and that the
Company’s objectives are attained. It is accountable for reviewing and
approving the effectiveness of internal controls operated by the
Company, including financial, operational and compliance controls,
and risk management. The Board recognises its responsibility in
respect of the Company’s risk management process and system of
internal control and oversees the activities of the Company’s external
auditors and the Group’s risk management function (supported by the
Audit Committee).
A review of the Company’s risk management approach is
further discussed in the Strategic Review on pages 66 to 68.
For detail on the management and mitigation of each principal risk
see pages 70 to 72.
The Group’s Viability Statement is detailed on page 69.
Please refer to pages 130 to 134 for further detail in relation
to the role of the Audit Committee.
The Group’s governance structure for risk management
is illustrated on page 67.
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Georgia Capital PLC Annual Report 2018
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NOMINATION COMMITTEE REPORT
Developing and
recruiting the
talent pipeline for
a unique Group
Dear shareholders
I am pleased to present the first Nomination Committee Report
for the Group.
Following the listing of the Company, the Nomination Committee has
primarily focused on ensuring the Board and its Committees are
suitably resourced to facilitate the successful delivery of our strategic
and financial objectives. We have also provided input into the
significant processes undertaken to separate the functions of the
investment business and banking business and to reposition the
management team. We are pleased to report that the Nomination
Committee is satisfied that the overall size, composition of the Board
and its Committees is appropriate for the Group and that each contains
the right combination of skills, experience and knowledge. In addition,
we have in place strong leaders across our portfolio companies.
However, we acknowledge that improvements can always be made
and see 2019 as an opportunity to continue to build on our progress.
In particular, the following areas will be prioritised during 2019:
• succession planning at the Board and senior management level;
• continuing to develop the future talent pipeline at the levels below
the Board; and
increasing diversity and inclusion across all levels of the business.
•
I invite you to read more on the activities we have undertaken during
2018 in the following report.
Jyrki Talvitie
Chairman of the Nomination Committee
3 April 2019
Composition and Members’ Meeting Attendance
The composition of the Nomination Committee and the members’
meeting attendance for the year 2018 are set out in the Board and
Committee meeting attendance table on page 125, and the skills and
experience each member contributes can be found on pages 120
to 121, The majority of the members of the Nomination Committee
are Independent Non-Executive Directors. From time to time, when
appropriate, other members of management may be invited to provide
a fuller picture and deeper level of insight into key issues and developments.
Training and Director Induction
We are committed to the continuing development of our Directors in
order that they may build on their expertise and develop an ever more
detailed understanding of the business and the markets in which
Group companies operate. All of our Directors participated in ongoing
training and professional development throughout 2018, which
included briefings, site visits, development sessions and presentations
by our UK General Counsel and Group Company Secretary, members
of management, external speakers and our professional advisors.
Each Director, upon appointment, receives a tailored induction to the
Company and its various businesses over the first six months of
appointment, with the purpose of:
• building an understanding of the nature of the Company, its
business and its markets;
• building a link with the Company’s people;
• building an understanding of the Company’s main relationships; and
• understanding the obligations and responsibilities of a Director of a
UK premium listed company.
Board and Committee Evaluation
Following the completion of the demerger process in late May 2018,
the Nomination Committee decided that holding an effectiveness
review during the remainder of the year would not provide sufficient
value for the Board and the Company. An evaluation will be undertaken
in 2019 once Directors have had an appropriate amount of time to work
together and fully assess the effectiveness of the Board and its
Committees. The Senior Independent Director met the Non-Executives
without the Chairman/CEO present.
JYRKI TALVITIE
Chairman of the
Nomination Committee
The Role of the Nomination Committee
The role of the Nomination Committee is to assist in ensuring that the
Board comprises individuals who are best able to discharge the
responsibilities of Directors, having regard to the highest standards of
governance, the strategic direction of the Company and the diversity
aspirations of the Board. We also help to ensure that the Company
appoints excellent executive managers within our portfolio of
companies, capable of successfully executing our strategic objectives.
In summary, the key responsibilities of the Nomination Committee
include:
•
•
regular review of the composition of the Board and its Committees
to ensure they are appropriately constituted and balanced in terms
of diversity of gender, social and ethnic backgrounds, cognitive and
personal strengths, and balance in terms of skills, experience,
independence and knowledge;
responsibility for identifying and nominating for the approval of the
Board, candidates to fill Board vacancies as and when they arise;
• giving full consideration to succession planning for Directors,
including the Chairman and CEO and other senior executives,
taking into account the challenges and opportunities facing the
Company, and the skills and expertise needed on the Board in the
future;
• keeping under review the Group’s leadership needs, both executive
and non-executive, with a view to ensuring the continued ability of
the Company to compete effectively in the marketplace; and
• making recommendations to Board concerning the re-election by
shareholders of Directors under the annual re-election provisions
of the UK Corporate Governance Code or the retirement by rotation
provisions in the Company’s Articles of Association, having due
regard to their performance and ability to continue to contribute
to the Board in the light of the knowledge, skills and experience
required and their independence, bearing in mind the need for
progressive refreshing of the Board (particularly in relation to
Directors being re-elected for a term beyond six years).
The Nomination Committee undertook its annual review of its
Terms of Reference in December and agreed upon the necessary
revisions to ensure the responsibilities of the Committee were aligned
with those detailed in the 2018 UK Corporate Governance Code.
The full terms of reference of the Nomination Committee can be found on
our website here: https://georgiacapital.ge/governance/cgf/terms.
During the year the Nomination Committee also reviewed the time
commitment of the Non-Executive Directors, taking into account any
external directorships, length of service as well as independence of
character and integrity. When considering this alongside the
Company’s strategic direction and the required skills and
competencies required of the Board, the Nomination Committee
recommends that each Non-Executive Director and the Executive
Director be elected at the 2019 AGM.
Role of the Chairman of the Board
We acknowledge that our decision to combine the roles of Chairman and
CEO is not compliant with provision A.2.1 of the 2016 UK Corporate
Governance Code (and Provision 9 of the 2018 UK Corporate Governance
Code). This matter is regularly reviewed (including with our shareholders)
by the Nomination Committee. After careful consideration, the Nomination
Committee and the Board continue to believe that the current structure
better serves our Company and recommend that it should continue.
The basis for this conclusion, and our shareholder engagement on this
matter, is set out in the Directors’ Governance Statement on page 119.
Diversity Policy
Our Board embraces diversity in all its forms. Diversity of skills,
background, experience, knowledge, outlook, approach, gender,
nationality and ethnicity, amongst other factors, will be taken into
consideration when seeking to appoint a new Director to the Board.
Similarly, we are clear that diversity of outlook and approach, while
inevitably being difficult to measure, may be equally important.
We are supportive of the ambition shown in recent reviews on diversity,
including the Davies Review and the Hampton-Alexander Review, and
will continue to examine ways in which we can increase female
representation at Board and senior management level. While we do not
currently employ any formal diversity targets at Board level, the Board
will continue to keep this approach under review.
The Nomination Committee is responsible for maintaining and
assessing the effectiveness of the Company’s Diversity Policy and
will be undertaking a review of this as part of its activities for 2019.
Succession Planning and Talent Development
As identified in the Chairman’s letter above, succession planning at
the Board and senior management level will be a primary focus of the
Nomination Committee throughout 2019.
A large part of this focus will be to ensure that appropriate
opportunities are in place to develop high-performing individuals and to
build diversity in senior roles across the business. We have a fantastic
talent pool of employees within Georgia Capital PLC and firmly believe
that focusing on their development is the best way to ensure a healthy
and diverse pipeline of future leaders of the Company. We increase the
skills of our existing executive managers and develop a pipeline of new
executive, senior and middle managers through coaching, mentoring
and leadership programmes.
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Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
131
AUDIT COMMITTEE REPORT
Commitment to
comprehensive
and transparent
reporting
DAVID MORRISON
Chairman of the Audit
Committee
Dear shareholders
This is the first Audit Committee Report for Georgia Capital PLC.
Following the demerger the opportunity presented to introduce new
members to the Company’s Board and to this Committee, and I take
this opportunity to thank my fellow Audit Committee members,
Dr Caroline Brown and Massimo Gesua’ sive Salvadori.
During the year our focus has been on ensuring that solid foundations
are in place for the audit processes in the new company. With this in
mind, we undertook a full tender exercise for the appointment of an
external auditor during the autumn of 2018. Full details of the process,
which culminated with the Board accepting our recommendation that
Ernst & Young LLP (EY) be reappointed, are set out in this report.
Alongside this we have considered a range of financial reporting matters,
including: the consolidation of Georgia Healthcare Group PLC; the use of
alternative performance measures (APMs); and the introduction of IFRS
16. On APMs, we are satisfied that the information presented, adjusting
the IFRS results to present Georgia Capital as a stand-alone parent
Company of a diversified group of businesses, is very relevant to and
useful for our investors.
We launched Georgia Capital PLC with a commitment to transparency
to our shareholders and potential investors. We hope you find our
comprehensive first Annual Report and Accounts to be consistent
with that commitment.
We invite your suggestions on how we can make future editions of the
report most useful to you.
Further details are in the following report.
David Morrison
Chairman of the Audit Committee
3 April 2019
Introduction
This report provides insight into the functioning of the Audit Committee
(the “Committee”) and its activities during the reporting period including
an overview of the key areas of activity and principal topics covered at
each meeting of the Committee.
For the financial year 2018, these activities included a review of the
performance and effectiveness of the Company’s external auditor
and the Company’s internal controls, including Internal Audit, risk
management and combined assurance systems. The Audit Committee
also exercised its responsibilities for ensuring the integrity of the
Company’s published financial information and reviewing the
judgements made by management, and the assumptions and
estimates on which they are based.
Composition and Operations of the Audit Committee
The composition of the Audit Committee complies with the UK
Corporate Governance Code (the “Code”), which provides that the
Audit Committee should comprise of at least three Independent
Non-Executive Directors. The Audit Committee members are David
Morrison (Chairman), Dr Caroline Brown and Massimo Gesua’ sive
Salvadori, all of whom are considered independent. The Board is
satisfied that two members of the Audit Committee have recent and
relevant financial experience and that the Audit Committee as a whole
has competence relevant to the sector in which the Company
operates. Dr Caroline Brown has deep experience of accountancy
and audit and is a Fellow of the Chartered Institute of Management
Accountants. Mr Morrison has both chaired and sat on audit
committees of publicly-traded companies for the last ten years.
Attendance at meetings by Audit Committee members during the year
can be found on page 125. The Company Secretary is Secretary to
the Audit Committee and attends all meetings. The meetings are also
attended by: the Chief Financial Officer and the Head of Internal Audit;
and representatives of the Company’s external auditor, EY. Other
Matter considered
Action taken
members of the Board, and members of the executive team, also
attend where necessary to provide a deeper level of insight into key
issues and developments.
The Audit Committee reports to the Board on how it discharges its
responsibilities and makes recommendations to the Board, all of which have
been accepted during the year. The Audit Committee’s Terms of Reference
outline its primary roles and responsibilities. These were updated in
December 2018 to reflect the requirements of the 2018 UK Corporate
Governance Code (the “Code”) and are available on the Company’s website
at: https://georgiacapital.ge/governance/cgf/terms.
The Audit Committee works to a planned programme of activities
focused on key events in the annual financial reporting cycle and
standing items that it considers regularly under its Terms of Reference.
It also reacts to business developments as they arise. The Audit
Committee also holds separate meetings, not attended by management,
to allow us to discuss any issues of concern in more detail and directly
with the external auditor and the Head of Internal Audit.
Mr Morrison will attend the AGM to respond to any shareholder
questions that may be raised on the Audit Committee’s activities.
Accounting for
demerger
Use of alternative
performance
measures (APMs)
Introduction of
IFRS 16
Key Purpose and Responsibilities
On behalf of the Board, the Audit Committee safeguards high standards
of integrity and oversees conduct in financial reporting, internal control
and risk management, and Internal Audit. It also supervises the work of
our external auditor. A full description of the Audit Committee’s roles and
responsibilities is set out in the Terms of Reference.
Revenue
recognition
The Chairman of the Audit Committee reports to the Board on how it
has discharged its responsibilities at Board meetings. As the Company
only commenced operating in May 2018, the Board considered that
there would not be value in it carrying out a formal effectiveness
evaluation of itself during 2018. Consequently, an effectiveness
evaluation will be conducted in 2019.
Impairment review
of goodwill and of
fixed assets
Agreed the treatment of the transfer of BGEO
Group plc’s investment business to the
Company. In addition, agreed the treatment of
demerger costs and demerger implications on
management share remuneration.
Following the introduction of APMs, the Audit
Committee confirmed that the requirements
of the Disclosure, Guidance and Transparency
Rules and the mandatory guidelines issued by
ESMA on APMs were met and the reconciliation
between the APMs and the IFRS results
was clear, balanced and understandable.
The presentation of the results continued to
be fair and balanced. Further information on
the Company’s use of APM’s during the year
can be found on pages 82 to 84.
The Audit Committee received regular updates
from management about the implementation
of IFRS 16 and reviewed work on the impact
assessment of IFRS 16 adoption, which was
reviewed by EY.
The Audit Committee considered appropriate
application of IFRS 15 and monitored
effectiveness and adequacy of controls over
revenue recognition across different businesses
within the Group through the reports from
management, internal and external auditors.
The Audit Committee considered
management’s assessment of the recoverability
of goodwill relating to cash generating units
and the carrying value of fixed assets held
within the beer business. The Audit Committee
reviewed the assumptions applied by
management and is satisfied that the carrying
value of fixed assets and goodwill is not impaired.
Due to regulatory restrictions on foreign
ownership of agricultural land, the Company’s
interest in Kindzmarauli Marani LLC is held by a
special purpose vehicle. The Audit Committee
was satisfied that the Company had control as
defined by IFRS and the interest is consolidated
into the Company’s accounts.
Business Developments
The Audit Committee considered the financial implications of a number
of business developments during the course of the year, including the
postponement of our previously announced decision to reduce our
holding of Georgia Healthcare Group plc (GHG) to less than 50% by the
end of 2018 in the light of the Board’s view that the current share price
significantly undervalues the performance and value creation prospects
of GHG. The Audit Committee also considered the implications of new
pipeline projects.
Financial Reporting
A principal responsibility of the Audit Committee is to consider the
significant areas of complexity, management judgement and estimation
that have been applied in the preparation of the Financial Statements.
The Audit Committee received detailed reporting from the external
auditor in respect of key areas of audit focus during the year. The Audit
Committee and the external auditor, without management present,
discussed the key areas of audit focus, the suitability of the accounting
policies which have been adopted and whether management’s key
reporting estimates and judgements were appropriate. Taking into
account the external auditor’s assessment of risk, but also using
our own independent knowledge of the Group, we reviewed and
challenged where necessary, the actions, estimates and judgements of
management in relation to the preparation of the Financial Statements.
The significant accounting matters and financial judgements
considered by the Audit Committee in relation to the Financial
Statements are set out below.
Accounting for
interest in
company holding
agricultural land
Accounting for
listed portfolio
investment in
GHG
The Audit Committee was satisfied that the
Company’s listed portfolio investment in GHG
no longer meets the criteria for classification as
held for sale and thus is reclassified as
continuing operations in 2018 Financial
Statements.
Valuation of
investment
property
Considered the reports of management,
prepared based on the third-party valuation
and the view of the external auditors.
Internal Audit
The Audit Committee is responsible, on behalf of the Board, for overseeing
the Internal Audit function, which serves as one of the Group’s sources
of assurance over the adequacy and effectiveness of the systems and
processes of risk management and control across the Group. The Audit
Committee monitors the scope, extent and effectiveness of the Group’s
Internal Audit function. We review and approve the Internal Audit Policy
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AUDIT COMMITTEE REPORT CONTINUED
and oversee the Internal Audit Plan, which is designed using a risk-based
approach aligned with the overall strategy of the Group.
In 2018, the Internal Audit assignments focused on financial reporting,
operational controls and risk management processes. Results of each
assignment were discussed and presented to the Audit Committee.
Throughout the year, we received regular reports from Internal Audit
on its audit activities and significant findings as well as the corrective
measures recommended to management. We also reviewed and
monitored management’s responsiveness to the corrective measures
and found that, on the whole, management accepted recommendations
and used them as a basis to improve processes.
The Head of Internal Audit has direct access to the Audit Committee
and the opportunity to discuss matters with the Audit Committee
without other members of management present. We also monitor
the resources dedicated to Internal Audit as well as the relevant
qualifications and experience of the team.
Following the demerger and our listing in May 2018, the Audit
Committee decided to conduct a full tender amongst appropriate firms
for the statutory audit and related services of the Group. The tender
was for the provision of external audit and audit-related services for
the three years (2019, 2020 and 2021) beginning with the review of
Financial Statements for six months ending 30 June 2019 and audit
of Financial Statements for the year ending 31 December 2019. The
Audit Committee led the process as described below.
Request for Proposal
Requests for Proposals/Invitations to Tender (RFPs) were sent in the
third quarter of 2018, including to firms outside of the “Big Four” audit
companies. These were selected as those most likely to fulfil the
criteria in particular for capability, competence and audit quality across
their UK and Georgian teams. The RFP explained that the tender was
for the periods stated above and that the auditor would also be subject
to re-appointment at the Company’s Annual General Meetings.
The RFP outlined that Georgia Capital’s objectives for the tender
process were to:
We reviewed the Internal Audit plan for 2019 and approved the Internal
Audit Charter. We also reviewed the effectiveness of the Internal Audit
department by considering progress against the agreed plan, taking into
account the need to respond to changes in the Group’s business and the
external environment. We also considered the quality of the reporting by
Internal Audit to the Audit Committee and the ability of Internal Audit to
address unsatisfactory results. On this basis, we concluded that the
Internal Audit function is effective and respected by management, and
that it conforms to the standards set by the Institute of Internal Auditors.
External Audit
With respect to our responsibilities for the external audit process on
behalf of the Board, we:
• approved the annual audit plan, which included setting the areas
of responsibility, scope of the audit and key risks identified;
• oversaw the audit engagement, including the degree to which the
•
external auditor was able to assess key accounting and audit judgement;
reviewed the findings of the external audit with the external auditor,
including the level of errors identified during the audit;
• monitored management’s responsiveness to the external auditor’s
•
findings and recommendations;
reviewed the qualifications, expertise and resources of the external
auditor;
• monitored the external auditor’s independence, objectivity and
compliance with ethical, professional and regulatory requirement;
reviewed audit fees;
•
• monitored the rotation of key partners in accordance with applicable
•
legislation; and
recommended the appointment, re-appointment or removal, as
applicable, of the external auditor.
Audit Tender
For the audit of the Financial Statements in this Annual Report, the
Company complied with the mandatory audit processes and the Audit
Committee complied with the responsibility provisions set out in terms
of the Competition and Markets Authority Statutory Audit Services
Order 2014 (“CMA Order”) relating to: (a) putting the audit services
engagement on tender every ten years; and (b) strengthening the
accountability of the external auditors to the Audit Committee,
including: requiring that only the Audit Committee is permitted to agree
to the external auditors’ fees and scope of services; influence the
appointment of the audit engagement partner; make recommendations
regarding the appointment of auditors; and authorise the auditors to
carry out non-audit services.
• secure high-quality external audit services;
• appoint a firm who will provide high standards of professional
service; and
• appoint a firm who will provide excellent value for money.
To ensure all participating firms had equal and sufficient information
to understand the Group’s business, the RFP provided general
information about the business, timeline and description of tender
process, outline of evaluation criteria, scope of work and tender
response format. The RFP contained detailed information on the
required contents of the proposals from the firms. We received
responses from a number of companies who confirmed their
willingness to participate in the tender process, confirmed their
independence and signed non-disclosure agreements.
Tender Process
All firms who confirmed participation had access to equal and sufficient
information to understand the Group’s business through data room,
including historical financial information, Group structure, Group
accounting policies, and risk management and internal audit processes
outlines. The firms also had access to publicly available information
including the first and second quarter results releases and the
comprehensive listing prospectus of the Group, and to the
management of Georgia Capital.
All firms provided a proposal and were invited to present to the Audit
Committee in October 2018. All Audit Committee members attended
all face to face presentations alongside the CFO and IFRS Advisory
Manager. Attendees from the firms were a combination of their UK and
Georgian based teams, and each were given adequate time to present,
including time for Q&As with the Audit Committee.
The RFP had set out the criteria that the Audit Committee used in
making a recommendation to the Board on auditor appointment. These
were broken down as follows, with each section given equal weighting:
• capability and competence;
• audit quality and service quality;
• behaviour and deliverables; and
• pricing.
A summary of proposal was prepared for each firm and circulated to
the Audit Committee members along with the full proposals. The Audit
Committee discussed the strengths and weaknesses for each firm.
Based on this process, the Audit Committee determined that EY had the
highest capability, competence and quality for the role. The Committee
recommended two firms to the Board for it to consider for the provision
of external audit and audit-related services for the three years (2019,
2020 and 2021) indicating a preference for EY. This recommendation
was accepted by the Board and separate resolutions proposing EY’s
re-appointment and determination of EY’s remuneration by the Audit
Committee will be proposed at the 2019 AGM.
In making this recommendation, the Audit Committee confirmed in
accordance with clause 489(5) of the Companies Act that: (i) they were
free from the influence of a third party; and (ii) there was no contractual
term of the kind mentioned in Article 16(6) of the Audit Regulation
(Regulation (EU) No 537/2014) restricting the choice by the general
meeting of shareholders as regards the appointment of a particular
statutory auditor or audit firm. The results of the audit tender were
communicated to shareholders via an RNS announcement on
12 November 2018.
EY appointed Richard Addison as our lead partner in 2018. The
external auditor is required to rotate the audit partner responsible for
the Group at least every five years. Following the successfully
completed tender for the provision of external audit services this year,
set out below, the Group will be required to put the external audit
contract out to tender no later than 2028.
Auditor Effectiveness
We have an established framework for assessing the effectiveness
of the external audit process. This includes:
•
• a review of the audit plan, including the materiality level set by the
auditor and the process they have adopted to identify Financial
Statements risks and key areas of audit focus;
regular communications between the external auditor and both the
Audit Committee and management, including discussion of regular
papers prepared by management and EY;
regular discussions with EY (without management present) and
management (without EY present) in order to discuss the external
audit process;
•
• a review of the final audit report, noting key areas of auditor
judgement and the reasoning behind the conclusions reached; and
• a review of EY’s 2018 Transparency Report and the annual FRC
Audit Quality Inspection Report of EY.
In previous years, BGEO Group plc Audit Committee assessed
effectiveness using a formal questionnaire issued to all Audit Committee
members and also to the executive management of the Group leading
the audit which covers, among other items, the quality of the audit and
audit team, the audit planning approach and execution, the presence
and capabilities of the lead audit partner, the audit team’s
communication with the Audit Committee and management and the
auditor’s independence and objectivity. This year, once the Audit
Committee had determined to undertake a tender exercise, it was
decided to postpone the questionnaire element of the review of the
auditor’s effectiveness until the result of that exercise was known.
Following EY’s success in the tender exercise, the Audit Committee
agreed that they had sufficient information to make an assessment
of the external auditor’s work during the 2018 financial year without
completing the questionnaire. Following our assessment of the external
auditor, we formed our own judgement (which was consistent with
management’s view) and reported to the Board that:
•
the audit team was sound and reliable, providing high-quality
execution and service;
the quality of the audit work was of a high standard;
•
• EY’s independence and objectivity were affirmed;
• EY was in a position to challenge management on its approach
to key judgements; and
• appropriate discussions were held with the Audit Committee during
the audit planning process.
Auditor Independence
The Audit Committee is responsible for the development, implementation
and monitoring of the policies and procedures on the use of the external
auditor for non-audit services, which help to ensure that the external
auditor maintains the necessary degree of independence and objectivity.
Further to its work on this in 2016, the Audit Committee continues to take
account of the European Union Audit Directive and Regulation in
conjunction with the FRC’s Ethical Standard for Auditors, effective for the
Company from 1 January 2017, in respect of prohibitions, as well as the
provisions set out in the 2016 version of the Code in relation to non-audit
services, and updates the Group’s non-audit services policy accordingly.
Any non-trivial work other than for audit or interim statements to be
undertaken by the external auditor now requires authorisation by the
Audit Committee except in very narrow circumstances. The Group’s
Policy on Non-Audit Services is available on our website at: https://
georgiacapital.ge/governance/cgf/policies.
The ratio of non-audit fees to audit fees exceeds 1:1. However, nearly
all of the non-audit fees relate to reporting accountant services
provided in relation to the demerger. The Audit Committee is of the
view that separation of teams within EY to undertake these services
was the most efficient method of achieving them. The Audit Committee
(and EY) do not consider that this work compromises the
independence of the external auditor. As indicated in Note 26 of the
audited IFRS Financial Statements for 2018, the total fees paid to EY
for the year ended 31 December 2018 was GEL 5.4 million, of which
GEL 2.1 million related to work other than the audit or review of the
interim accounts.
The Audit Committee has formally assessed the independence of EY,
which included review of: (i) a report from EY describing their
arrangements to identify, report and manage any conflicts of interest,
and their policies and procedures for maintaining independence and
monitoring compliance with relevant requirements; and (ii) the value of
non-audit services provided by EY. EY has also confirmed its
independence throughout the year, within the meaning of the
regulations on this matter and in accordance with their professional
standards.
Whistleblowing, Conflicts of Interest, Anti-Bribery and
Anti-Corruption and Data Protection
The Audit Committee ensured that there are effective procedures
relating to whistleblowing and reviewed and updated the
Whistleblowing Policy. Responsibility for the Policy passed to the Board
in 2019 in line with the requirements of the 2018 UK Corporate
Governance Code.
The Audit Committee is responsible for the Conflicts Authorisation
Policy through which we assess actual and potential conflicts of
interest and assist the Board in its review of the permissibility of
such conflicts.
The Audit Committee keeps under review the Group’s Anti-Bribery
and Anti-Corruption Policy and procedures and receives reports from
management on a regular basis in relation to any actual or potential
wrongdoing. There were no significant findings in 2018. The Policy was
updated during the year.
Risk Management and Internal Controls
In relation to risk management and internal financial control, the Audit
Committee assists the Board in fulfilling its responsibility to review the
adequacy and effectiveness of the controls over financial reporting and
certain types of operational risk: IT and information security (including
cybersecurity), corporate security and similar areas of operational risk
and internal and external fraud or misconduct. Further information
on risk management and internal controls can be found on pages
66 to 68.
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AUDIT COMMITTEE REPORT CONTINUED
INVESTMENT COMMITTEE REPORT
For detail on the management and mitigation of each principal risk
see pages 70 to 72.
For Independent Auditor’s Report see pages 159 to 167.
For Financial Statements see pages 168 to 240.
The Audit Committee is supported by a number of sources of internal
assurance within the Group in order to discharge its responsibilities.
This includes reports from, and regular discussions with, the Group
executives with whom it regularly meets. We receive reports from the
Internal Audit team on the control environment and, as mentioned
earlier in this report, we approve the Internal Audit plan which is
risk-based and aligned with the Group’s strategy.
During 2018 and up to the date of this Annual Report and Accounts,
the Internal Audit team did not find any significant weaknesses in risk
management or internal controls. With respect to external assurance,
the Audit Committee reviews the external auditor’s reports to the Audit
Committee, which include the external auditor’s observations on risk
management and internal financial controls identified as part of its
audit. Without management present, the Audit Committee and EY
discussed the key areas of audit focus, the suitability of the accounting
policies which have been adopted and whether management’s key
reporting estimates and judgements were appropriate.
Fair, Balanced and Understandable Reporting
The Audit Committee reviewed the 2018 Annual Report and Accounts
to consider whether, taken as a whole, it is fair, balanced and
understandable and provides the information necessary for
shareholders to assess the Group’s performance, business model
and strategy.
We did this by satisfying ourselves that there was a robust process
of review and challenge at different levels within the Group to ensure
balance and consistency. We reviewed several drafts of the 2018
Annual Report and Accounts and directly reviewed the overall
messages and tone of the Annual Report with the CEO and CFO. We
also considered other information regarding the Group’s performance
and business presented to the Board during the period, both from
management and the external auditor. After consideration of all of this
information, we are satisfied that, when taken as a whole, the Annual
Report and Accounts is fair, balanced and understandable, and
provides the information necessary for shareholders to assess the
Group’s performance, business model and strategy.
Committee Effectiveness Review
As noted in the Chairman’s introduction to the report, the membership
of the Audit Committee is new following the demerger in the first half
of 2018. The Audit Committee therefore resolved that a review of its
effectiveness during 2018 would be premature and intends instead
to undertake such a review in mid-2019.
Priorities for 2019
For 2019, the Audit Committee’s priorities are:
•
review and approve the planned semi-annual assessments of
portfolio company fair values;
• continue the build-out of the Internal Audit function and its reach
to the different business units;
• ensure that processes put in place to alert the Board to emerging
risks (such as management presentations, Internal Audit and
external audit reporting) are functioning as planned and that the
external auditors deliver on their promised level of service;
review and approve the accounting for one-off and complex
transactions, including acquisitions; and
•
• monitoring the successful implementation of IFRS 16.
Independent and
objective review
and challenge
of the Group’s
investments
Kim Bradley
Chairman of the
Investment Committee
I am delighted to be able to report on the work of the Investment Committee since
the Company was listed following the demerger of BGEO Group PLC in May 2018.
The Investment Committee was established to assist to provide an independent and
objective review of investment opportunities and performance, within the scope of its
term of reference. The terms of reference and Investment Committee membership
was approved by the Board as part of the demerger processes.
The intention is that the Investment Committee will meet not less
than three times a year and otherwise as required. The Investment
Committee met during the year to discuss investment opportunities,
assess risks and rewards and review Major Transactions.
In line with the decision taken by the Nomination Committee in respect
of Committee evaluations, an Investment Committee effectiveness
review will be undertaken during 2019.
I look forward to reporting to you next year on how the Investment
Committee continues to develop and the areas of work within its
remits that it has focused on.
Kim Bradley
Chairman of the Investment Committee
3 April 2019
Composition
The composition of the Investment Committee is a matter for the
Board, on the recommendation of the Nomination Committee and in
consultation with the chairman of the Investment Committee. Presently,
all Directors are members of the Investment Committee.
Key Purpose and Responsibilities
The Investment Committee is responsible for managing all aspects of
investment policy and its strategy for the Group and provides oversight
of the Group’s investments within strategy and risk frameworks. In
addition, the Investment Committee’s responsibilities include:
• selecting investment opportunities based upon recommendations
of the executive management, such recommendations to be based
upon in-depth, rigorous analysis (of business plans, Financial
Statements, projections, risks and rewards, fit with the Group’s
strategy, etc.) as well as the legal structure of the investment;
• considering the material commercial and legal terms of relevant
Major Transactions;
• assessing the risks and rewards and general attractiveness and
suitability of proposed Major Transactions;
• where it deems appropriate, making investment recommendations
and providing ongoing guidance on pricing, contractual negotiations
and other considerations prior to signing;
reviewing each major transaction and its development at least twice
per year, or more often if necessary;
•
• ensuring that management has the appropriate plans and controls
in place, with the necessary resources and capability to manage the
investment risk framework;
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INVESTMENT COMMITTEE REPORT CONTINUED
SHAREHOLDER ENGAGEMENT
•
•
receiving and reviewing (annually) the assurance from management
that the investment risk framework adopted by the Group is
appropriate; and
reviewing investments associated with a major transaction, where
an investment is underperforming or where it is otherwise
appropriate to review the possibilities of exiting an investment.
A “Major Transaction” is an investment opportunity, acquisition or
disposal which is in excess of £2.5 million.
Key Activities
The Investment Committee’s role is to provide oversight of investment
activity and challenge management where appropriate. In 2018, the
Investment Committee undertook a review of the investment risk
framework, and received assurance from executive management that
the framework adopted was appropriate. The Investment Committee
received a number of macro and political updates relevant to the
Georgian economy and reviewed investment opportunities which were
being considered by management. They also reviewed and authorised
capital expenditure requests from the Group’s current portfolio
companies.
Priorities for 2019
•
In-depth review of selected businesses that will complement
the Investment Committee’s oversight of annual business plans
for the portfolio, with specific focus on operational execution
and value creation;
• ensuring consistency of portfolio monitoring and review metrics
and practices with Georgia Capital professionals;
• continued focus on investment monitoring meetings and related
•
internal valuation discussions; and
Investment Committee support and focus on capital allocation to
both new business creation and add on opportunities for existing
businesses in line with strategy.
The Chairman has overall responsibility for ensuring that the Board
understands the views of major stakeholders. The full Board is regularly
kept informed of these views by the Chairman as well as executive
management and the Investor Relations team and, to the extent
deemed appropriate, the Group has taken active steps to adopt
different ways of working in response to feedback received from
shareholders and other stakeholders. Informal feedback from analysts
and the Group’s corporate advisors is also shared with the Board.
Our website, https://georgiacapital.ge/, provides our shareholders
with access to the Group’s results, press releases, investor
presentations, analyst reports, details on our corporate governance
and corporate and social responsibility framework, our leadership, as
well as other information relevant to our shareholders. We also ensure
that shareholders can access details of the Group’s results and other
news releases through the London Stock Exchange’s Regulatory
News Service.
In May 2018, the Company’s shares were admitted to listing on the
London Stock Exchange following the demerger from BGEO Group PLC.
Since then, the Company has established a comprehensive shareholder
engagement programme and encourages an open and transparent
dialogue with existing and potential shareholders.
The Board’s primary contact with institutional shareholders is through
the Chairman and Chief Executive Officer (CEO), Chief Financial Officer,
Advisor to the CEO and Head of Investor Relations, each of whom
provide a standing invitation to shareholders to meet and discuss
any matters they wish to raise. Our Committee Chairmen also make
themselves available to answer questions from investors. The Board
has also appointed David Morrison as the Senior Independent Director
whose role includes acting as an intermediary to the Board for
shareholders.
Ahead of the demerger, a presentation was provided to shareholders
of BGEO Group PLC which laid out the key milestones in the demerger
process and provided a detailed breakdown of the structure of this
Company post demerger. Shareholders were engaged with frequently
throughout the demerger process to address any concerns.
We will engage with shareholders, through the Company’s forthcoming
Annual General Meeting to be held in May 2019 but will also continue
to communicate with shareholders on important developments
throughout the year. Our Half-Year Results and quarterly trading
updates are supported by a combination of presentations and
telephone briefings as was the announcement of our first annual results
in February 2019. Over the course of 2018, members of the Board and
management met with over 100 institutional investors, and participated
in more than 20 investor conferences and roadshows. Throughout the
year, our Directors and management met with shareholders in Georgia,
the United Kingdom, Europe and the US.
In October 2018, Georgia Capital, in conjunction with Galt & Taggart
and others, hosted a Georgia investor day in London, which was open
to all investors and analysts. This Georgia day provided the opportunity
for investors to receive an update from the Chairman and CEO on
strategy and performance as well as meet informally with Board
members and raise matters of interest. We were pleased to have
approximately 100 investors and analysts attend and have ensured that
the views expressed by investors have been fed back to the Board.
Ahead of publication of the Governance Report and the new
Remuneration Policy in this report, the members of the Remuneration
Committee and the Senior Independent Director met with major
shareholders to discuss the combined Chairman and CEO role and
the Policy and to gather feedback.
In addition to our shareholders, we meet with analysts throughout
the year, hold regular meetings with the Group’s existing lenders and
actively engage with potential lenders to discuss our funding strategy.
Our UK General Counsel and our Company Secretary also have
ongoing dialogue with shareholders’ advisory groups and proxy
voting agencies.
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DIRECTORS’ REMUNERATION REPORT
Innovative alignment
of remuneration
with shareholders’
long-term interests
Jyrki Talvitie
Chairman of the
Remuneration Committee
Dear shareholders
On behalf of the Board I am pleased to present our first Directors’ Remuneration Report as an independently listed company. This Remuneration
Report is split into two sections:
• our Directors’ Remuneration Policy (the “Policy”) which will be presented to our shareholders for approval at the 2019 AGM on 22 May 2019;
and
the Annual Remuneration Report providing detail of amounts paid during the reporting year ending 31 December 2018.
•
As we outlined in the 2018 Circular to shareholders that formed the basis for the demerger which created Georgia Capital, the Policy is based on
the share-based model operated by our predecessor and is therefore closely aligned with the Company’s long-term development strategy and
value creation for our shareholders. Compared to the compensation package at our predecessor, BGEO Group PLC, the Georgia Capital package
for Irakli Gilauri, the CEO, provides for:
• a 35% reduction in total salary;
• no cash salary;
•
longer vesting periods (salary shares vest up to the six years from the start of the work year rather than five years and the discretionary
deferred shares have total maximum vesting and holding period of five years);
• a shareholding requirement equivalent to 200% of salary, including post-employment shareholding requirement; and
• new malus and clawback provisions for discretionary deferred shares.
In addition to the above changes set out in the prospectus, in choosing our Policy outlined below, we have taken into account the requirements of
the new UK Corporate Governance Code 2018 (the “Code”). In the first months of 2019, the Remuneration Committee and the Senior Independent
Director engaged extensively with our investors on the new Policy through letters to our shareholders, and, where possible, calls and face-to-face
meetings. Investors were broadly supportive of the Policy including the long-term alignment of the Executive Directors and of the shareholders.
Shareholders’ further feedback has been incorporated in the Policy and Directors’ Remuneration Report as applicable.
Key Policy Principles
•
•
•
to compete effectively in the global market in order to recruit and retain top private-equity talent;
to align management interests with those of shareholders throughout the investment and economic cycles;
to follow the principles and provisions of the Code and good governance – in particular to support strategy and promote long-term sustainable
success and align with the interests of investors and shareholders; and
to fuel the value creation strategy of a diversified group of companies focused on investing and developing businesses in the emerging market
of Georgia.
•
Subject to the changes to the components of base salary, the vesting periods, pension contributions, shareholding guidelines and malus
and clawback provisions as set out below, the new Policy continues with the basics of the approved Remuneration Policy at our predecessor
BGEO Group PLC.
Key Policy Features
1. Compensation is delivered in shares, not cash.
As a Company investing in and developing diverse sectors of the Georgian economy, the Remuneration Committee considers that the best
quantitative performance metric is long-term shareholder return. Our approach to remuneration will continue to use shares for both base and
bonus compensation. For the CEO, there will be no cash salary, with salary being delivered entirely as deferred share salary calculated as a
fixed number of shares (fixed for the duration of the Policy) awarded annually. The deferred salary shares will vest on a phased basis over six
years from the commencement of a work year.
2. Variable pay up to a maximum of 100% of salary.
For the CEO, performance will be rewarded with an award of discretionary deferred shares up to a maximum of 100% of the fixed number of
deferred salary shares. This will be subject to annual performance targets and the discretion of the Remuneration Committee. Discretionary
deferred shares will have phased vesting and will be subject to a total maximum vesting and holding period of five years following grant.
3. Other features of the Policy:
• new shareholding guidelines requiring Executive Directors to build up shareholding equivalent to 200% of salary with a requirement that a
departing Executive Director maintains the required shareholding for two years post-employment;
• the flexibility for the Remuneration Committee to adopt a more typical remuneration structure (in relation to base salary and bonuses) in its
approach to recruiting incoming Executive Directors but within the boundaries (including quantum) of the Policy; and
• a 2% pension contribution fully in line with that available for the wider workforce, together with an executive benefits package that is
reflective of market practice. However Irakli Gilauri, the existing CEO, has agreed for this pension contribution to be waived.
Pay for Performance in 2018
Georgia Capital is proud of the first set of results delivered as a listed company. Mr Gilauri has also exceeded targets in respect of the active
and disciplined pursuit of new investment opportunities and the diversification of the funding base for portfolio activities. Further detail on
the performance targets set in respect of 2018 and the level of performance achieved can be found on page 149. As a consequence of this
performance, the Remuneration Committee approved an award of 85% of maximum opportunity which the Remuneration Committee considers
to be a fair reflection of his performance.
Other Activities of the Remuneration Committee
• Considered the revised Code and the impact on role and remit of the Remuneration Committee.
• Reviewed and recommended updated Terms of Reference of the Remuneration Committee.
• Reviewed the Group companies’ remuneration structures.
• Set the remuneration for senior management.
• Reviewed changes to pension provision following the introduction of Georgian state pension legislation.
Looking Forward
The Directors’ Remuneration Committee has devoted a considerable amount of time to developing the executive remuneration framework. It is
our intention that the new Policy will operate for the next three years as the CEO, the Executive Directors and executive management team work
to deliver long-term value to you, our shareholders. We hope that the new Policy will gain your support at the upcoming 2019 Annual General
Meeting. If you so support it, its implementation will be our priority in 2019.
Jyrki Talvitie
Chairman of the Remuneration Committee
3 April 2019
What’s in this Report
This Directors’ Remuneration Report discloses the amounts earned and other information relating to the year ended 31 December 2018.
The Remuneration Report complies with the provisions of the Companies Act 2006 and Schedule 8 of The Large and Medium-sized
Companies and Groups (Accounts and Reports) Regulations 2008. The Remuneration Report has been prepared in line with the
recommendations of the new Code and the requirements of the UKLA Listing Rules.
This Remuneration Report details the first Remuneration Policy (set out on pages 140 to 147) to be put to shareholders which will be voted
on at the 2019 AGM. Subject to approval by shareholders, the new Policy will apply from the 2019 AGM.
The Annual Report on Remuneration (set out on pages 138 to 153), which includes the Annual Statement by the Chairman of the Remuneration
Committee, will be subject to an advisory vote at the 2019 AGM.
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DIRECTORS’ REMUNERATION REPORT CONTINUED
Directors’ Remuneration Policy
Subject to shareholder approval, this Policy will take effect from the date of the 2019 AGM on 22 May 2019 and will become formally effective
for the three years following that date. As Georgia Capital PLC is a newly-listed company (May 2018) a summary of changes to the previous
Remuneration Policy is not applicable. However, please see the comments from the Chairman of the Remuneration Committee in his statement
on the main changes between this policy and the BGEO Group PLC policy that applied before the demerger.
It is a provision of this Policy that the Group will honour all pre-existing obligations and commitments that were entered into prior to this Policy
taking effect. The terms of those pre-existing obligations and commitments may differ from the terms of the Policy and may include (without
limitation) obligations and commitments under service agreements, deferred share remuneration schemes and pension and benefit plans. After the
Policy becomes effective after the 2019 AGM, Georgia Capital PLC will amend the existing terms of the service contracts of its Executive Director,
Irakli Gilauri, to incorporate the terms of the new Policy.
The Remuneration Committee retains its discretion under the new Policy to make minor amendments to the Policy for regulatory exchange
control, tax or administrative purposes or to take account of a change in legislation without obtaining prior shareholder approval.
Executive Directors Remuneration Policy
The Policy provides for an Executive Director’s remuneration package to be comprised of the elements set forth below. For the avoidance of
doubt, all references to Executive Directors refer to the Executive Directors of Georgia Capital PLC to cover the present Executive Director Irakli
Gilauri and any future Executive Directors of Georgia Capital PLC while this Policy is in force. The compensation structure of executive
management (who serve on the Management Board of JSC Georgia Capital, but who are not Executive Directors of Georgia Capital PLC) is set
by the Remuneration Committee and is modelled on this Policy (except that they may receive a part of their salary in cash) but the Remuneration
Committee is not bound by the Policy when setting their remuneration packages. The Remuneration Committee can set different vesting terms
and conditions for the Executive Management Team as the Remuneration Committee thinks appropriate.
SALARY IN THE FORM OF LONG-TERM DEFERRED SHARES
PURPOSE AND LINK TO STRATEGY
OPERATION
OPPORTUNITY
• The maximum number of deferred share
salary shares is 200,000 per annum for
Irakli Gilauri, of which 20,000 shares per
annum are for his work as the CEO of
Georgia Capital PLC and 180,000 shares
per annum are for his work as a CEO of
JSC Georgia Capital and its subsidiaries.
• The number of deferred share salary is
fixed for the duration of the employment
contracts with Georgia Capital PLC and
JSC Georgia Capital.
• The maximum number of deferred share
salary set for an Executive Director will be
no more than the Remuneration
Committee considers reasonable based
on his/her duties, skills and experience, at
the time when his/her salary is set, which
will normally be at the time at which his/
her service agreement(s) are entered into.
• To reflect the role and required duties,
skills, experience and individual
contribution to the Group whilst promoting
long-term value creation and share price
growth.
• The level of base salary for an Executive
Director is fixed in his or her service
agreement(s). The level of salary is reviewed
by the Remuneration Committee when a
service agreement is up for renewal.
• No cash salary. Salary is comprised entirely
of long-term deferred shares (“deferred share
salary”) in the form of nil-cost options
annually in respect of the work year, and is
usually expected to be awarded within one
month of the end of the work year, although
the Remuneration Committee retains the
discretion to determine the timing of the
award.
• Deferred share salary in respect of a work
year will vest over five years with 20% vesting
in each of the second, third, fourth, fifth and
sixth years following the end of the work
year. At vesting, the Executive Director will
receive (in addition to the deferred share
salary) cash payments equal to the dividends
paid on the underlying shares between the
beginning of the year immediately following
the work year and the vesting date.
• Lapse provisions (natural malus) are built into
the deferred share salary as set out in the
“Service Agreements” and “Policy for Loss of
Office” sections below. Extended malus and
clawback provisions do not apply to base
salary as the Remuneration Committee
considers that the discretionary deferred
shares provide a sufficiently large pool from
which to draw extended malus or clawback
repayments, if necessary in the
circumstances to do so.
PERFORMANCE-BASED REMUNERATION – DISCRETIONARY DEFERRED SHARES
PURPOSE AND LINK TO STRATEGY
OPERATION
OPPORTUNITY
• To motivate and reward an Executive
• Performance-based remuneration is
• For Mr Gilauri, the maximum number of
discretionary deferred shares that may be
awarded is capped at 200,000 shares
(i.e. 100% of deferred share salary).
• For an Executive Director (other than
Mr Gilauri), the maximum opportunity in
respect of the previous work year is 100%
of total salary.
Director that meets or exceeds the KPIs
set for him or her by the Remuneration
Committee for the relevant period.
• Performance-based remuneration solely in
the form of discretionary deferred shares
(no cash bonus) in order to:
– Closely align the interests of an Executive
Director with shareholders.
– Minimise risk taking for short-term gain.
– Encourage long-term commitment to the
Group.
awarded annually entirely in the form of
nil-cost options over the Group shares
subject to vesting (“discretionary deferred
shares”). The Group does not award cash
bonuses to Executive Directors of Georgia
Capital PLC.
• The Remuneration Committee will determine
annually whether an award is merited based
on an Executive Director’s achievement of
the KPIs set for the work year and the
performance of the Group during the work
year. If appropriate, where a strategic change
or change in business circumstances has
made one or more of the KPIs an inaccurate
gauge of an Executive Director’s
performance, the Remuneration Committee
may decide to base its assessment on
alternative measures. The outcome of an
Executive Director’s performance and the
Remuneration Committee’s determination
will be reported in the Directors’
Remuneration Report for the work year in
consideration.
• Any discretionary deferred shares are expected
to be granted following the end of the work year
and vest 25% in each of the second, third,
fourth and fifth years following the end of the
work year, although the Remuneration
Committee retains the discretion to determine
the timing of the award.
• Each tranche of vested discretionary
deferred shares must then be held for a
further one year.
• At vesting, an Executive Director receives
cash payments equal to the dividends paid
on the underlying shares between beginning
of the year immediately following the work
year and the vesting date.
• KPIs for an Executive Director are set
towards the beginning of each work year and
reflect each Executive Director’s targeted
contribution to the Group’s overall key
strategic and financial objectives for the
coming work year. KPIs may also include
non-tangible factors such as self-
development, mentoring and social
responsibility.
• There is no contractual right to discretionary
deferred shares and the Remuneration
Committee reserves the right to award no
discretionary deferred share remuneration if
the Group’s performance is unsatisfactory.
• Lapse provisions (natural malus) and
extended clawback and malus applies under
the circumstances as set out in the notes to
this Policy table.
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DIRECTORS’ REMUNERATION REPORT CONTINUED
PENSION
PURPOSE AND LINK TO STRATEGY
OPERATION
OPPORTUNITY
• The Group is required to comply
• Pension provision will be in line with
• The same arrangement applies to
with pension requirements set by the
Georgian Government.
Georgian pension legislation, which may
change from time to time.
employees across the Group in Georgia.
• Pension provision is the same for all
employees in the Group in Georgia.
• The most recent pension legislation that JSC
Georgia Capital must comply with has been
in effect since January 2019.
• There is no provision for the recovery or
withholding of pension payments.
•
In line with current Georgian legislation,
an Executive Director and the Group each
contribute 2% of total remuneration from
JSC Georgia Capital and the Georgian
Government contributes a further small
amount currently 0-2% depending on
income levels. However Irakli Gilauri has
agreed for pension contributions to be
waived.
• Pension contributors will only increase
above the level if mandated by Georgian
legislation or if mandated by any other
applicable legislation in any jurisdiction.
BENEFITS
PURPOSE AND LINK TO STRATEGY
OPERATION
OPPORTUNITY
• Non-cash benefits are in line with
Georgian market practice and are
designed to be sufficient to attract and
retain high-calibre talent.
• Benefits consist of: life insurance; health
• There is no prescribed maximum
insurance; incapacity/disability insurance;
Directors’ and Officers’ liability insurance;
physical examinations; tax gross-ups and
tax equalisation payments, company car
and driver; mobile phone costs; personal
security arrangements (if requested by the
Executive Director); assistance with
completing tax returns (where required);
relocation costs for Executive Director and
close family; and legal costs.
amount payable. The maximum amount
payable depends on the cost of
providing such benefits to an employee
in the location at which the Executive
Director is based.
• Shareholders should note that the cost
of providing comparable benefits in
different jurisdictions may vary widely.
• Disclosure of amounts paid will be
provided in the implementation report
and will be explained where the cost of
benefit is significant.
OTHER EXECUTIVE DIRECTOR POLICIES - SHAREHOLDING REQUIREMENTS
PURPOSE AND LINK TO STRATEGY
OPERATION
• To further align Executive Directors’
• Executive Directors are required to build and then maintain a shareholding equivalent to
interests with shareholders.
200% of salary. Such amount to be built up within a five-year period from appointment as
an Executive Director (the “Required Shareholding”).
• To ensure Executive Directors build and
then maintain a significant shareholding
over the long term.
• To ensure departing Executive Directors
make long-term decisions and maintain an
interest in the ongoing success of the
Group post-employment.
• For these purposes all beneficially owned shares as well as unvested (net of tax) and vested
deferred share salary and discretionary deferred shares will count towards the Required
Shareholding (as such awards are not subject to any performance conditions).
• Executive Directors are to retain the lower of (i) the Required Shareholding or (ii) the
shareholding at the time employment ceases, for a period of two years from the date on
which employment ceases unless the Remuneration Committee determines otherwise.
•
In very exceptional circumstances, for example, in the event of a serious conflict of interest,
the Remuneration Committee has the discretion to vary or waive the Required Shareholding
but must explain any exercise of the discretion in the Group’s next Remuneration Report. It
should be emphasised that there is no present intention to use the discretion.
Notes to the Policy Table – Executive Directors
Deferred Share Salary
At present there is no cash salary. The Remuneration Committee may determine that some cash salary is appropriate for an incoming Director
(see “Approach to Recruitment Remuneration”).
The deferred share salary comprises the most important element of the Executive Director’s fixed annual remuneration and is commensurate with
the Executive Director’s role within the Group. Paying salary solely as deferred share compensation rather than as cash means that an Executive
Director’s day-to-day actions are geared towards sustained Group performance over the long term. The deferred share salary component is
neither a bonus nor an LTIP, it is salary fixed at the outset of each Executive Director’s service contract and is therefore not subject to
performance targets or measures. The salary increases or declines in value depending on Group performance aligning an Executive Director’s
interests directly and naturally with those of the Group’s shareholders.
While it is not the current intention, the Remuneration Committee has the discretion under the Policy to increase the amount of deferred share
salary for incoming Executive Directors (i.e. not for the current CEO) by 10%.
Performance-Based Remuneration
Performance is measured entirely through the discretionary deferred share compensation plan (see Discretionary Deferred Remuneration, below),
which measures performance over the financial year. The vast majority of remuneration is inherently linked to performance and shareholder value
as the vast majority of remuneration is in the form of deferred share salary and discretionary deferred shares. The Group does not operate an
LTIP because it believes that there is sufficient long-term incentive built into its deferred share salary and discretionary deferred share
remuneration.
Discretionary Deferred Remuneration
Performance is measured over the course of the financial year, and is paid in nil-cost options which are granted following the financial year and
vest 25% in each of the second, third, fourth and fifth years following the end of the work year. A further one year holding period from the date
of vesting applies to the vested discretionary deferred shares. For example, any discretionary deferred remuneration in respect of 2019 will be
granted in 2020 and the vesting schedule will be 25% in each of January 2021, January 2022, January 2023 and January 2024, and are subject
to a further holding period of one year on each tranche. Therefore, the total maximum vesting and holding period is five years from the end of the
work year.
Performance measures are chosen to reflect strategic priorities for the Group and are chosen by the Remuneration Committee annually towards
the start of the relevant performance year. The aggregate pool of shares available for each year for awards of discretionary deferred shares for
the Executive Directors and the executive management team as a whole is determined annually by the Remuneration Committee in its absolute
discretion, based on a number of factors including:
financial objectives;
•
• strategic objectives; and
• people and culture objectives.
The Remuneration Committee does not utilise strict weighting of performance measures to ensure that flexibility is encouraged if, for example,
strategic objectives evolve as the Group does or business circumstances change during the year. The Remuneration Committee believes that
this flexibility ensures that the Board can work with an Executive Director so that he/she does not take excessive risk to achieve KPIs when, for
example, markets have turned. The Remuneration Committee has the discretion to reduce awards, including to zero, when performance
outcomes do not align to the shareholder experience. The precise measures will be determined by the Remuneration Committee and disclosed
retrospectively in the Remuneration Report following the year of the Remuneration Committee’s determination.
As mentioned in the Policy table above, the maximum value of discretionary deferred shares that the current CEO, Mr Gilauri, may be awarded
in a given year for the remainder of his service contract with the Group is capped at the same number of shares as his total deferred share salary.
In the event that it does introduce cash salary for a new Executive Director, the Remuneration Committee retains the discretion to determine how
total salary is measured for the purposes of the cap in the Policy table.
Clawback and Malus
Discretionary deferred shares are subject to malus, and clawback for up to two years from vesting, in the following circumstances:
• misconduct in the performance or substantial failure to perform duties;
• significant financial losses, serious failure of risk management or serious damage to the reputation of Georgia Capital PLC or JSC Georgia
Capital, caused by misconduct or gross negligence (including inaction in performance of his/her duties by the Executive Director);
• material misstatement or material errors in the Financial Statements that relates to the area of responsibility of the Executive Director or can
be attributed to their action (or inaction in performance of his/her duties);
• deliberately misleading Georgia Capital PLC or JSC Georgia Capital in relation to financial performance; and
• an award being made on the basis of erroneous or misleading data, provided that for payments based on erroneous or misleading data (other
than where such error has been caused by fraud, wilful misconduct, deliberate action/inaction and/or gross negligence of the Executive
Director), malus and clawback apply to discretionary deferred remuneration awarded for the year in question.
Provided that the Policy is approved by shareholders at the AGM 2019, the above provisions will form part of Mr Gilauri’s service contract.
The Group also intends to amend the Executive Equity Compensation Plan if and as required to reflect the above.
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For the Group’s current Executive Director, Mr Gilauri, the Group also has unusually strong malus provisions where all unvested shares (deferred
share salary and discretionary deferred shares) lapse when the service contract is terminated under certain circumstances, including for cause
such as gross misconduct, substantial and repeated failure to perform duties, fraud or conviction of a felony. This may be several years of salary
deferred shares and discretionary deferred shares. Please see the “Termination of the JSC Georgia Capital service agreement” in the table below
for more information.
Discretion
The Remuneration Committee retains a substantial degree of discretion in relation to Policy. This includes:
•
• selection of KPIs that will determine the discretionary deferred remuneration, which may vary from year to year in order to align with strategy
the determination of discretionary deferred shares, if any;
and financial objectives;
• any adjustments required to an Executive Director’s KPIs during the work year when, for example, there has been a change in strategy or
business circumstances which results in one or more of KPIs becoming an inaccurate gauge of performance; and
the discretion to override any formulaic outcomes when it considers it reasonable in the circumstances to do so.
•
Equity Compensation Trust and Dilution Limits
An equity compensation trust (“Trust”), was established for the purposes of satisfying deferred share salary and discretionary deferred share
compensation in the form of nil-cost options awarded to Executive Directors and eligible members of the Executive Management Team. The Trust
was established in 2018.
Business Expenses
Executive Directors are reimbursed for reasonable business expenses incurred in the course of carrying out duties under their service contract,
on provision of valid receipts.
Illustration of Application of Remuneration Policy
The chart below shows an estimate of the remuneration that could be received by Mr Gilauri, the Group’s sole Executive Director and CEO, in
respect of 2019 under the proposed Policy at five different performance levels.
The 50% share price appreciation disclosure is made voluntarily by the Group (as performance measures are limited to one year) for investor
information.
US$10,000,000
US$7,500,000
US$5,000,000
US$4,748,800
US$2,730,000
100%
43%
57%
US$2,500,000
US$0
US$8,421,000
US$5,614,000
51%
34%
34%
49%
32%
US$2,374,400
43%
57%
No share price growth
No share price growth
No share price growth 50% share price appreciation 50% share price decline
Minimum
Target
Maximum
Target
Fixed share salary
Discretionary deferred share compensation
50% share price appreciation
Notes:
1. Salary is comprised of deferred share salary and benefits. Mr Gilauri does not receive a cash salary and has waived all pension contributions. For illustration purposes, the value of the
deferred share salary payable to Mr Gilauri is US$2,730,000, calculated by reference to the share price of US$13.65 on 12 July 2018, being the date of the Remuneration Committee
meeting (the official share price of GBP 10.324 converted into Dollars using an exchange rate of 1.3223, being the official exchange rate published by the Bank of England on the same
date).
2. For the purpose of calculating the value of discretionary deferred shares for illustration in this chart a share price of US$14.42 per share was used. The actual value of the discretionary
deferred share award in respect of the performance of the 2019 work year will be reported in the 2019 Annual Report and Accounts as at latest closing share price before the
Remuneration Committee meeting at which the award is decided.
3. Minimum opportunity reflects a scenario whereby Mr Gilauri receives only fixed remuneration which is deferred share salary and benefits. No share price growth assumptions have been
made.
4. On-target opportunity reflects a scenario whereby Mr Gilauri receives fixed remuneration (as described in 1 above) and 140,000 discretionary deferred shares, being 70% of the maximum
opportunity. No share price growth assumptions have been made.
5. Maximum opportunity reflects a scenario whereby Mr Gilauri receives fixed remuneration (as described in 1 above) and discretionary deferred shares compensation award of 100% being
the number of shares granted under the deferred share salary. No share price growth assumptions have been made.
6. Maximum plus 50% share price growth reflects a scenario whereby Mr Gilauri receives fixed remuneration (as described in 1 above) and discretionary deferred shares compensation
award of 100% of the maximum opportunity and share price grows by 50%.
7. Target with 50% share price depreciation reflects a scenario whereby Mr Gilauri receives fixed remuneration (as described in 1 above) and discretionary deferred shares compensation
award of 70% of the maximum opportunity and share price depreciates by 50%.
8. For long-term incentive awards, disclosure of the value of the award in the event of a 50% share price appreciation is required by the Companies (Miscellaneous Reporting) Regulations
2018. Such disclosure is not required for short-term incentive awards, such as those made by the Group, where performance measures are limited to one year, nor is it required for salary
compensation in the form of shares. The reason for this is that an increase in the value of the deferred shares resulting from share price appreciation in the period through to the vesting
date is not considered to constitute remuneration for the purposes of the regulations. However, the Group has decided to voluntarily disclose information showing the value of a 50%
increase in the share price for investor information.
Approach to Recruitment Remuneration
Any new Executive Director appointed to the Board would be paid no more than the Remuneration Committee considers reasonably necessary
to attract a candidate with the relevant skills and experience. His or her maximum remuneration package would comprise the components
described in the Policy table above. The Remuneration Committee may, at its sole discretion and taking into account the role assumed by the
new Executive Director, vary the amount of any component in the package up to the limits set out in the Policy table above in relation to for new
Executive Directors. In particular, the Remuneration Committee may determine it is appropriate to also pay a cash salary to a newly-appointed
Director. Should the Remuneration Committee elect to pay some salary in cash, a commensurate reduction will be made to the fixed share salary.
These discretions will only be exercised to the extent required to facilitate the recruitment of the particular individual.
In addition to the components and outside the limits set out in the Policy table, the Remuneration Committee may also decide to provide to an
incoming Executive Director:
• Relocation support, tax support and legal fees depending on the individual’s circumstances, including, where relevant, to his or her family.
The Group has not set a maximum aggregate amount that may be paid in respect of any individual’s relocation support, but it will aim to
provide support of an appropriate level and quality on the best terms that can reasonably be obtained.
• Upon the recommendation of the Remuneration Committee, a “buy out” incentive award intended to compensate the incoming Executive
Director for any awards granted to an incoming Executive Director by a previous employer and which have been foregone as a result of the
individual’s employment with the Group. In these circumstances, the Group’s approach will be to match the estimated current value of the
foregone awards by granting awards of deferred share compensation which vest over a similar period to the awards being bought out or
longer. The application of performance conditions and/or clawback provisions may also be considered, where appropriate. Such new awards
may be granted in addition to any deferred share salary and discretionary deferred share compensation.
Service Agreements and Policy on Payments for Loss of Office for our Directors
The Group’s policy towards exit payments allows for a variety of circumstances whereby an Executive Director may leave the Group. The
Remuneration Committee reserves the right to determine exit payments other than those set out below where appropriate and reasonable in the
circumstances to do so, including where an Executive Director leaves by mutual agreement. The Remuneration Committee may decide to pay
some or all of the Executive Director’s legal fees in relation to the termination. In all circumstances, the Remuneration Committee does not intend
to reward failure and will make decisions based on the individual circumstances. The Remuneration Committee’s objective is that any such
agreements are determined on an individual basis and are in the best interests of the Group and shareholders at the time.
The following sections (1) and (2) summarise the termination and payments for loss of office provisions pursuant to Mr Gilauri’s service agreement
with Georgia Capital PLC and JSC Georgia Capital, respectively. The Remuneration Committee retains the discretion to apply different notice,
termination and payment for loss of office provisions to incoming Executive Directors. The termination provisions of Non-Executive Director letters
of appointment is described in section (3). The Executive Directors’ service agreements and letters of appointment are kept for inspection by
shareholders at the Group’s registered office.
Notice Periods
At the date of this Annual Report, Mr Gilauri is the sole Executive Director of the Group. Mr Gilauri has a service contract effective from 29 May
2018 with the Georgia Capital PLC for an indefinite term (subject to annual re-election at the AGM) which is terminable by either party on not less
than four months’ notice unless for cause where notice served by the Group shall have immediate effect.
Mr Gilauri also has a service agreement with JSC Georgia Capital effective from 29 May 2018 for an employment term of five years which is
terminable by either party on not less than three months’ notice unless for cause where notice served by the Group shall have immediate effect.
Both documents are available for inspection by shareholders at the Group’s registered office.
(1) Termination of Georgia Capital PLC Service Agreement
In the event that an Executive Director’s service agreement is terminated on notice, Georgia Capital PLC may put Mr Gilauri on garden leave for
some or all of the notice period during or after which period he will receive a pro-rata portion of the deferred salary.
Georgia Capital PLC may terminate Mr Gilauri’s employment early with immediate effect without notice or pay in lieu of notice in the case of,
among other circumstances, his dishonesty, gross misconduct, conviction of an offence (other than traffic-related where a non-custodial penalty
is imposed) or becoming of unsound mind.
The Company may also terminate the service agreement with immediate effect by payment in lieu of notice, in which case the payment in lieu of
notice shall be solely in respect of deferred share salary payable for the unworked portion of the notice period.
The vesting and lapse provisions of the deferred share salary under the service agreement with the Company follow the provisions in the service
agreement with the JSC set out in the third column of the table below.
(2) Termination of JSC Georgia Capital (the “JSC”) Service Agreement
This table sets out the default vesting and lapse provisions, but the Remuneration Committee retains the discretion to determine different
treatment upon agreement with the Executive Director.
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Termination Reason
Separation Payments
Vesting and Lapse of Awards
Termination by the JSC for cause (e.g. gross
misconduct, substantial and repeated failure
to perform duties, fraud or conviction of an
felony).
Vested deferred share salary (including divided
equivalents) to termination date and holiday
pay, unpaid business expenses and benefits.
Termination by the JSC without cause.
Six month’s deferred share salary plus deferred
share salary to termination date and any awarded
but unpaid discretionary deferred securities (all
awards including dividend equivalents), holiday
pay, unpaid business expenses and benefits.
Any unvested awarded deferred share salary
and discretionary deferred share
compensation as at the date when the
Executive Director ceases to be an Executive
Director shall lapse.
Any unvested awarded deferred share salary
and discretionary deferred share
compensation shall vest immediately.
Termination by the Chief Executive Officer for
good reason.
As above for Termination by the JSC without
cause.
As above.
Termination by the Chief Executive Officer
without good reason.
Vested deferred share salary (including
dividend equivalents) to termination date and
any awarded holiday pay, unpaid business
expenses and benefits.
Any unvested awarded deferred share salary and
discretionary deferred share compensation as at
the date when the Executive Director ceases to
be an Executive Director shall lapse.
In addition to the vesting and lapse provisions above, in certain other circumstances including if the Executive Director terminates by reason of
death, disability, redundancy or retirement, there is a change of control or, at the end of the term of the service agreement, the Executive Director
is not offered a new service contract upon substantially similar terms or continued Board membership, unvested awarded deferred share salary
and discretionary deferred shares will vest immediately.
The service contract also permits the JSC to put the Executive Director on Garden Leave for a period of up to four months from termination,
during such time the Executive Director will receive a pro-rata portion of deferred share salary, but will not be entitled to any other benefits,
bonuses, discretionary deferred shares or reimbursement expenses. The Executive Director is also subject to non-compete provisions for up
to six months after the termination of his/her employment, which period might be extended to two years in certain circumstances.
(3) Termination of Non-Executive Directors’ Appointments
Each Non-Executive Director is required to submit himself or herself for annual re-election at the AGM.
The letters of appointment for Non-Executive Directors provide for a one-month notice period although the Group may terminate the appointment
with immediate effect without notice or pay in lieu of notice if the Non-Executive Director has committed any material breach or non-observance
of his or her obligations to the Group is guilty of fraud or dishonesty, brings the Group or him/herself into disrepute or is disqualified as acting as a
Director, among other circumstances. Upon termination, the only remuneration a Non-Executive Director is entitled to accrued fees as at the date
of termination together with reimbursement of properly incurred expenses incurred prior to the termination date.
Consideration of Employment Conditions Elsewhere in the Group
The Remuneration Committee does not formally consult employees when drawing up Directors’ Remuneration Policy but in determining an
Executive Director’s remuneration, the Remuneration Committee considers:
(i) the pay and employment conditions of senior management including executive management;
(ii) any changes in pay and employment conditions across the Group as a whole;
(iii) whether employees across the Group are personally satisfied with the way they are remunerated; and
(iv) any feedback received during the year from the Human Resources department, executive management and other employees on the executive
remuneration structure.
Differences in The Remuneration Policy for Executives Relative to the Broader Employee Population
For a FTSE All-Share company of our size and depth making a meaningful impact on the Georgian economy, our Executive Directors must have
the skills, experience, work ethic and attitude required to successfully execute our strategy, manage evolving public policy demands, meet our
objectives and create value for shareholders over the long term. In order to recruit and retain this talent, we assess the value of remuneration
against other FTSE companies of similar size and sector listed in the UK. Executive Directors are not currently paid cash and therefore
remuneration in the form of deferred shares forms all their compensation and totally aligns them to the shareholder experience.
The principles of remuneration for the Executive Directors and the executive management are aligned; remuneration is designed to align
remuneration with the performance of the Group and shareholder experience. In particular the remuneration structure of the Deputy CEO is close
to that of the Executive Directors’ (although the vesting pattern among other matters may vary). Further, the majority of compensation delivered
to executive management is also in shares or phantom shares, however, most are also entitled to a modest cash salary.
The compensation of employees in the Group, other than Executive Directors and executive management, is benchmarked against the Georgian
labour market as this is the most relevant comparator. Our employees are offered competitive remuneration packages which include benefits
and the opportunity to participate in the pension scheme on the same terms as applicable to Executive Director and the executive management.
Bonuses are usually paid in cash. The Remuneration Committee are regularly updated by the Human Resources department in respect of the
pay and conditions of the wider workforce.
Non-Executive Directors’ Remuneration Policy
The table below sets out our Policy for the operation of Non-Executive Directors’ fees and benefits of Georgia Capital PLC. Each Non-Executive
Director also serves as a member of the Supervisory Board of JSC Georgia Capital. The fees for Non-Executive Directors are currently the same
as those disclosed in the prospectus of the Group. It is proposed that, if the Policy is approved, the Non-Executive Director fees stated below will
apply in each year that the Policy operates from the date of approval of the Policy.
Component
Base cash fee
PURPOSE AND LINK TO STRATEGY
OPERATION
OPPORTUNITY
• Attract and retain high-
• Cash payment on a quarterly
• The maximum aggregate
performing Non-Executive
Directors with the requisite
skills, knowledge, experience,
independence and other
attributes to add value to the
Group.
Georgia Capital PLC fees for all
Non-Executive Directors which
can be paid under Georgia
Capital PLC’s Articles of
Association is GBP 750,000.
• A specific maximum has not
been set for the individual base
cash fee.
• The Senior Independent
Non-Executive Director
receives a higher base fee
which reflects the extra time
commitment and responsibility.
• The Chairman receives a fee
which reflects the extra time
commitment and responsibility.
However no Chairman’s fee is
received when the Chairman
and CEO roles are combined.
• The fees paid to each
Non-Executive Director will be
disclosed in the relevant
reporting year’s Annual Report.
basis.
• The fee of the Chairman will
be determined by the
Remuneration Committee.
Fees for Non-Executive
Directors will be determined by
the Board.
• The amount of remuneration
may be reviewed from time to
time by the above, which may
take into account the time
commitment, responsibilities
and the technical skills required
to make a valuable contribution
to the Board, and by reference
to comparators, benchmarking,
results of the annual review and
other guidance. The Board also
reserves the right, in their
discretion, to amend and vary
the fees if there are genuinely
unforeseen and exceptional
circumstances which
necessitate such review and in
such circumstances any
significant increase shall be the
minimum reasonably required.
The Board reserves the right to
structure the Non-Executive
Directors’ fee differently in its
absolute discretion.
• Non-Executive Directors are
reimbursed for reasonable
business expenses, including
travel and accommodation,
which are incurred in the
course of carrying out duties.
Committee fees
Compensate for additional time
spent discharging Committee
duties.
• Cash payment on a quarterly
• The Chairman does not receive
basis.
Committee fees.
• The amount of remuneration
for Committee membership is
reviewed as above.
Consideration of Shareholder Views
A formal shareholder consultation process was undertaken in early 2019 to gather investor feedback on the proposed Remuneration Policy. The
Remuneration Committee members and the Senior Independent Director engaged extensively with our investors through letters to shareholders,
as well as were possible calls and face-to-face meetings with them on the new Policy in the United Kingdom, Europe and the USA. Shareholders
were generally supportive of the proposals and their feedback has been taken into account during the development of the new Remuneration
Policy set out here.
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Directors’ Remuneration Report
The Remuneration Committee and its Advisors
The Remuneration Committee is principally responsible to the Board for establishing a remuneration policy for the Executive Directors, the
Chairman and designated members of executive management team that rewards fairly and responsibly and is designed to support Georgia
Capital’s strategy and promote its long-term sustainable success. The Remuneration Committee will ensure that performance-related elements
of Executive Directors’ remuneration are transparent, stretching and rigorously applied. The Remuneration Committee’s full Terms of Reference
were updated in December 2018 to reflect the requirements of the Code and are available on our website: https://georgiacapital.ge/
governance/cgf/terms.
Under these new Terms of Reference, the Remuneration Committee will take into account pay and employment conditions elsewhere in the
Group. The Remuneration Committee will also oversee any major changes in employee benefits structures throughout the Group.
The Remuneration Committee is comprised of three independent Non-Executive Directors: Jyrki Talvitie who serves as Chairman; Kim Bradley;
and Bill Huyett. The members’ attendance is shown in the Board and Committee meetings attendance table on page 125.
Alternative remuneration table showing the Executive Director’s 2018 remuneration discounted for time value of money (unaudited)
For investor information, the alternative table below sets out the share remuneration earned by Irakli Gilauri in 2018 as per the previous table
(Single total figure of remuneration for the Executive Director) but taking into account the time value of money discounted at 15%, given that both
the salary shares and discretionary deferred shares vest over a number of years.
2018
Deferred share
salary (US$)
Discretionary
deferred shares
(US$)
Total salary and
discretionary
deferred shares
remuneration
941,579
1,520,050
2,462,629
The following table sets out details of total remuneration for the Chairman and Chief Executive Officer, Mr Gilauri, for the year ended 31 December
2018 and his discretionary compensation as a percentage of maximum opportunity. In future years the information will be provided on a current
year and historical basis.
In addition to the formal meetings held during the year, the Remuneration Committee participated in various discussions by telephone outside of
these meetings. Other attendees at the Remuneration Committee meetings who provided advice or assistance to the Remuneration Committee
on remuneration matters from time to time included the CEO, the other Board members and the UK General Counsel. Attendees at the
Remuneration Committee meetings do not participate in discussions or decisions related to their own remuneration.
Single total figure of remuneration (US$)
Discretionary compensation as a percentage of maximum opportunity (%)
Note: Maximum opportunity is 100% of total number of salary shares as set out in the section above.
2018
4,066,962
85
The Remuneration Committee received additional advice on compliance from Baker & McKenzie LLP, the Georgia Capital’s legal advisors.
The Remuneration Committee is of the view that the advice received from Baker & McKenzie LLP is objective and independent.
To aid in drafting the updated Director’s Remuneration Policy, Georgia Capital engaged a specialised remuneration consultant, Willis Towers
Watson (WTW), to conduct an independent review of the Company’s current Remuneration Policy. The findings of this review were subsequently
presented to the Remuneration Committee and have been used as a basis for the ongoing shareholder engagement in respect of the new Policy.
WTW are independent advisors appointed following a competitive tender process who have no other relationship with the Group. WTW’s fees are
typically charged on an hourly basis with estimates for work agreed in advance. During the year, WTW charged GBP 27,000 for Remuneration
Committee matters.
Shareholder Context
Georgia Capital PLC has not held an Annual General Meeting since listing and therefore there are no voting results on which to report. Details of
the remuneration-related voting will be reported on in the 2019 Directors’ Remuneration Report.
Directors’ Remuneration
Single total figure of remuneration for the Executive Director (audited)
The table below sets out the remuneration earned by the Georgia Capital PLC’s sole Executive Director, Irakli Gilauri during 2018, in respect of
his employment with the Georgia Capital for the year ended 31 December 2018. 100% of Mr Gilauri’s compensation as set out in the table below
is in the form of deferred shares that vest in tranches with a vesting period of up to six years from the beginning of the work year. The values
shown in the table are calculated at a constant share price as described in footnotes 1 and 2 to the table. The actual value of the compensation
as it is received over time will fluctuate with increases and decreases in the value of the share price as illustrated in the graph on page 144.
Cash salary
(US$)1
Deferred share
salary (US$)2
Total salary
compensation
(US$)
Discretionary
deferred shares
(US$)3
Taxable benefits
(US$)4
Pension
benefits
Total
(US$)
2018
–
1,615,562
1,615,562
2,451,400
–
–
4,066,962
Notes:
1 Mr Gilauri does not receive a cash salary.
2 Deferred share salary. The figures show the Georgia Capital PLC shares underlying nil-cost options granted in respect of the relevant year. 118,356 deferred salary shares were awarded
in 2018 (i.e. 200,000 annual salary pro rated since the listing on 29 May 2018). The value of US$1,615,730 is calculated by reference to the share price as the date of the Remuneration
Committee meeting, 12 July 2018, being US$13.65 a share (the official share price of GBP 10.324 converted into dollars using an exchange rate of 1.3223, being the official exchange rate
published by the Bank of England on the same date). Deferred share salary in respect of a work year will vest over five years with 20% vesting in each of the second, third, fourth, fifth and
sixth years following the end of the work year.
3 Discretionary deferred share remuneration. The figures show the value of Georgia Capital shares underlying nil-cost options granted in respect of bonus award for the year. For 2018,
awards were granted over 170,000 shares. The value is calculated by reference to the share price on 8 February 2019, which the last available price as the date of the Remuneration
Committee meeting which determined the discretionary deferred share award, 10 February 2019, being US$14.42 a share (the official share price of GBP 11.14 converted into dollars using
an exchange rate of 1.2942 being the official exchange rate published by the Bank of England on the same date). Discretionary deferred shares vest 25% in each of the second, third,
fourth and fifth years following the end of the work year.
4 There are no taxable benefits or pension benefits (nor dividends) for 2018. Mr Gilauri was reimbursed for reasonable business expenses, on the provision of valid receipts. No money or
other assets are received or receivable by Mr Gilauri in respect of a period of more than one financial year, where final vesting is determined by reference to achievement of performance
measures or targets relating to the relevant period.
Basis for Determining Mr Gilauri’s Discretionary Deferred Share Compensation in Respect of 2018
Mr Gilauri’s KPIs included both objective and non-tangible components. The below KPIs were set pre-demerger and the objective elements
largely track the Group’s KPIs as he is expected to deliver on the Group’s strategy, but the KPIs also include non-tangible factors such as
leadership, strategy development and implementation, as well as corporate and social responsibility.
The following table sets out the objective KPIs set for Mr Gilauri in respect of 2018 as well as Mr Gilauri’s performance against them.
Key Performance Indicator
2018 Target
2018 Performance
Committee evaluation
INVESTMENT BUSINESS
Growth of NAV of portfolio
companies in line with
strategy.
Achieve strategic priorities
of portfolio companies in line
with strategy.
Delivery on strategy.
Met expectations.
Delivery on strategy.
Met expectations.
Active and disciplined
pursuit of new investment
opportunities.
Continues growth
of portfolio.
Exceeded expectations.
Diversify the funding base
for portfolio companies.
Exceeded expectations.
GROUP-WIDE
Active mentoring and
development of senior
management.
Personal development.
Coaching and
mentoring.
Met expectations.
Continues
self-development.
Met expectations.
Growth of NAV of portfolio companies in line with
budget. Strong performance at portfolio companies
resulted in GEL 72.5 million dividend receipts by
Georgia Capital.
All strategic priorities of portfolio companies achieved
in line with strategy, including development of pipelines
in line with 1,000-hotel room target, secured new
projects at renewables business towards 500MW
target and increased vineyard base towards 1,000
hectares target.
Building of an investment process that allowed for
screening of 95 cases in the first year. Georgia Capital
developed valuation models. Robust prioritising of
investment cases and solid pipeline. Slight
underperformance at the Water Utility was mainly due
to weather (lack of snowfall).
Successful issuance of US$300 million Eurobond by
Georgia Capital at an attractive price. Local bond
issuance of US$30 million by m2 as well as diversified
IFI funding by the utility and renewable businesses.
Also good diversification of banking relationships
evidenced by deposit, lending and other banking
arrangements with virtually all banks in Georgia.
Through coaching and mentoring, good progress was
made in creating values that will further enhance senior
management’s critical competencies to become
strategic thinkers and future leaders.
Mr Gilauri has continued to prioritise his self-
development through feedback received from the
Board and his co-workers, as well as continuous
coaching and the leadership development programme.
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DIRECTORS’ REMUNERATION REPORT CONTINUED
The Remuneration Committee concluded that, in respect of 2018, Mr Gilauri met or exceeded all of his KPI targets. In addition to the pre-set KPIs,
Mr Gilauri’s performance was exceptional in respect of:
•
•
•
the formation of Georgia Capital;
the demerger process from BGEO Group PLC; and
the establishment of procedures and policies such as risk management, management accounts as well as robust motivation and
compensation structures. Mr Gilauri played a pivotal role in the demerger project, which was very well executed and received strong
shareholder support. The turnover of the investor base during the demerger process had been exceptionally well managed by Mr Gilauri,
avoiding unnecessary volatility in the share price.
In addition to the KPIs listed in the table above, the Remuneration Committee consider non-tangible factors such as leadership and forward-
looking strategy development when determining Mr Gilauri’s discretionary compensation. Mr Gilauri’s KPIs largely track the Group’s KPIs as he is
expected to deliver on the Group’s strategy, so that more information on the performance against the KPIs can be found in other sections of this
Annual Report. As a consequence of this performance, the Remuneration Committee approved an award of 85% of maximum opportunity which
the Remuneration Committee considers to be a fair reflection of his performance.
Percentage Change in Remuneration Of CEO
As Georgia Capital PLC listed during 2018, there is no disclosure of remuneration relating to prior years. Accordingly, this Remuneration Report
does not set out the percentage change in remuneration as there is no prior year comparator which can be shown. In 2018 no awards were made
over nil-cost options to Mr Gilauri in respect of deferred share salary and discretionary deferred shares.
Single Total Figure of Remuneration for Non-Executive Directors (audited)
The table below sets out the remuneration received by each Non-Executive Director for the year ended 31 December 2018.
David Morrison
Massimo Gesua’ Sive Salvadori
Kim Bradley
William Huyett
Caroline Brown
Jyrki Talvitie
Total
Georgia Capital
PLC fees
(US$)
2018
JSC Georgia
Capital fees
(US$)
2018
47,560
51,122
37,427
51,122
51,122
48,688
76,061
79,365
60,958
79,365
79,365
76,123
Total fees
(US$)
2018
123,621
130,487
98,385
130,487
130,487
124,811
287,041
451,237
738,278
Notes:
1 The Group has only been publicly listed since 29 May 2018. David Morrison and Kim Bradley waived their fees until 21 May 2019 as they were remunerated as BGEO Group PLC directors
until that date. BGEO Group PLC fees are not included in the above table as fees in this report are for Georgia Capital and its Group entities only.
Total Shareholder Return
The following graph compares the Total Shareholder Return (TSR) of Georgia Capital with the companies comprising the FTSE All Share Index
and FTSE Small Cap Index for the period from 29 May 2018 until 31 December 2018. Georgia Capital has been a member of the FTSE All Share
Index since its premium listing in 29 May 2018.
120
120
120
115
115
115
110
110
110
105
105
105
100
100
100
95
95
95
90
90
90
85
85
85
80
80
80
May 18
Jun 18
Jul 18
Aug 18
Sep 18
Oct 18
Nov 18
Dec 18
Georgia Capital
FTSE All Share
FTSE Small Cap
Source: Thomson Reuters Datastream
Relative importance of Spend on Pay
The following table shows the Georgia Capital’s actual spend on pay for all employees.
Year ended 31 December 2018 (US$ ‘000)
Remuneration paid to all employees of the Group
103,135
Directors’ Interests in Shares (Audited)
The following table sets forth the respective holdings of GCAP shares of each Director as at 31 December 2018.
Kim Bradley
Caroline Brown
Massimo Gesua’ sive Salvadori
Irakli Gilauri
William Huyett1
David Morrison
Jyrki Talvitie
Number of GCAP shares
held directly
7,950
–
11,699
592,424
500
43,457
5,762
Number of vested but
unexercised GCAP shares held
under option through deferred
share salary
and discretionary deferred
share compensation
(all nil-cost options with no
performance conditions)
Number of unvested and
unexercised GCAP shares held
under option through deferred
share salary
and discretionary deferred
share compensation
(all nil-cost options with no
performance conditions)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
412,515
N/A
N/A
N/A
Total number of
interests in
GCAP shares
7,950
–
11,699
1,004,939
500
43,457
5,762
Notes:
1 As at 31 December 2018, W.I. Huyett Revocable Trust, a PCA of Mr Huyett, also held 6,500 GCAP shares
2 As at 31 December 2018, Mr Gilauri vested and unvested shareholding was 1,004,939 GCAP shares, representing approximately 2.6% of the Company’s share capital (excluding shares
purchased under buyback programme and held in treasury). The vesting period for the majority of unvested shares exceeds three years. None of Mr Gilauri’s connected persons have any
interests in the shares of the Company.
The new Policy focuses on base salary in deferred salary shares and discretionary compensation in discretionary deferred shares. The long
vesting periods naturally result in Executive Directors building up large holdings of unvested nil-cost options; this also serves to achieve a delay
between vesting and performance. The Policy naturally results in Mr Gilauri and our executive management team holding a significant number
of unvested shares and achieves a delay between performance and vesting. We believe these results are consistent with the principles of the
Investment Association and to further strengthen this, under the new proposed Policy, Georgia Capital is introducing formal guidelines on
shareholding and on post-employment shareholding.
The Group does not require Non-Executive Directors to hold a specified number of shares in Georgia Capital. Notwithstanding this, some
Non-Executive Directors have chosen to become shareholders. There have been no changes in the Non-Executive Directors’ Georgia Capital
shareholdings since the date of their appointment to the Board further to those reported above.
Several of our Non-Executive Directors chose to subscribe in the GHG IPO on 12 November 2015. The following table sets forth the respective
holdings of GHG shares of each Director as at 31 December 2018.
As at 31 December 2018
Kim Bradley
Irakli Gilauri
David Morrison
Shares held at GHG directly
19,000
411,700
116,600
Mr Gilauri’s Interests in Group Debt Securities
On 9 March 2018, Mr Gilauri acquired an aggregate principal amount of US$1,000,000 notes issued by JSC Georgia Capital which are listed
on the Irish Stock Exchange.
Details of Non-Executive Directors’ Letters of Appointment
Georgia Capital has entered into letters of appointment with each Non-Executive Director. The letters of appointment require Non-Executive
Directors to provide one month’s notice prior to termination. The letters of appointment for the majority of current Non-Executive Directors are
effective from 24 February 2018. Each Non-Executive Director is put forward for election at each Annual General Meeting following his or her
appointment. Continuation of a Non-Executive Director’s employment is conditional on his or her continued satisfactory performance and
re-election by shareholders at each Annual General Meeting.
A succession plan adopted by the Board provides for a tenure of six years on both the Georgia Capital PLC and JSC Georgia Capital boards.
Upon the expiry of such six-year tenure, the appointment of the relevant Non-Executive Director may cease at the next upcoming AGM.
Notwithstanding the foregoing, if the Board determines that, in order to maintain the balance of appropriate skills and experience required for the
Board, it is important to retain a Non-Executive Director on the Board beyond the relevant six-year period, the Board may offer the Non-Executive
Director a letter of appointment for an additional one-year term. Such a one-year “re-appointment” may be renewed no more than two times, with
the effect that the usual six-year tenure may be extended to a maximum of nine years if circumstances were to warrant such extension.
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DIRECTORS’ REMUNERATION REPORT CONTINUED
Shareholding of Executive Management
The following table sets forth the respective Georgia Capital shares held by the top members of our Executive Management Team as at
31 December 2018.
2019 KPIs were selected based on our framework of value creation as presented below.
Avto Namicheishvili
Giorgi Alpaidze
Ekaterina Shavgulidze
Nikoloz Gamkrelidze
As at 31 December 2018
Number of GCAP
shares held directly
Number of unvested
Total number of interests
GCAP shares
in GCAP shares
212,415
–
25,627
23,200
149,000
11,468
72,400
50,000
361,415
11,468
98,027
73,200
Remuneration Committee Effectiveness Review
Given that the Group only listed in May 2018, the Remuneration Committee will undertake an effectiveness review in 2019.
Implementation of Remuneration Policy For 2019
Details of how the Policy will be implemented for the 2019 financial year if approved by shareholders at the 2019 Annual General Meeting are set
out below. Subject to shareholder approval, the Policy will take effect from the date of the 2019 Annual General Meeting and is intended to apply
until the date of Annual General Meeting in 2022.
For Irakli Gilauri
2019 FIXED PAY
Total deferred share salary
200,000 Georgia Capital deferred shares underlying nil-cost options.
Pension
Benefits
Mr Gilauri has agreed for all pension contributions to be waived.
Details of the benefits received by Executive Directors are on page 142.
There are circumstances in which unvested deferred shares may lapse, and narrow circumstances in which such shares may vest immediately
are set out in the Policy.
2019 Discretionary Deferred Share Remuneration
Opportunity
Deferral terms
Performance measures
Maximum is 100% of number of salary shares
The Remuneration Committee will determine whether an award is merited based on an Executive Director’s
achievement of the KPIs set for by the Remuneration Committee the work year and the performance of the
Group during the work year. If Mr Gilauri is awarded discretionary deferred shares with respect to 2019
work year, the award will vest 25% in January of each of 2021, 2022, 2023 and 2024. Each tranche will be
subject to a further holding period of one year.
Upon vesting, Mr Gilauri will receive (in addition to the vested shares) cash payments equal to the dividends
paid (if any) on the underlying shares between beginning of the year immediately following the work year
and the vesting date.
For 2019, the Remuneration Committee has determined that the performance measures will be based on
KPIs (see below). The Remuneration Committee has considered the detail of each KPI and ensured that
measurable targets are included. The KPIs will be reviewed by the Remuneration Committee throughout the
year and by the Board as appropriate.
See notes to the Policy for malus and clawback provisions.
The Remuneration Committee set the 2019 KPIs for the CEO as follows:
Performance targets:
- Growth of NAV per business plan – use newly developed valuation methodology.
- Generate cash at GCAP level as well as portfolio company level – in line with budget.
- Expense Ratio target.
- Active and disciplined pursuit of new investment opportunities.
- Achieve strategic priorities in portfolio companies.
Developmental targets:
- Active mentoring and development of management team including successor(s).
- Continue personal development.
-
Initiate cultural change in Georgia Capital PLC, JSC Georgia Capital and their portfolio companies.
#1
#2
#3
OPERATING THE
HOLDING COMPANY
INVESTMENT
PIPELINE FLOW
PORTFOLIO COMPANY
VALUE CREATION
EXIT AND
MONETISATION
VALUE
CREATION
Decisive allocation
of capital
Catalysing deal flow
Effective pricing
and negotiations
Attracting
great talent
Efficient operations
Value maximising mix
of growth and ROIC
improvement
Well-timed and value
creating exits to new
owner, public or private
Total shareholder
return
Expense ratio
NAV growth
Aggregate quality and
volume of deals
reviewed
Talent pipeline in the
portfolio companies
and holding company
Three year post
assessment of
performance against
pro-formas
Cash generation
ROIC and revenue
growth
Speed of corrective
action, adaptation
Gain on sale relative
to NAV
Decisiveness in
recognising “early fail”
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Non-Executive Director Remuneration
The table below shows the fee structure for Non-Executive Directors for 2019. Non-Executive Directors’ fees are determined by the Board.
Component
Base cash fee
Purpose and link to strategy
Operation
Opportunity
Cash payment on
quarterly basis.
The amount of remuneration may be reviewed
from time to time by the Board.
The fee for the Board is
competitive enough to attract and
retain individuals.
The Chairman receives a fee
which reflects the extra time
committed and responsibility.
However no Chairman’s fee is
received when Chairman and CEO
roles are combined.
The Senior Independent Non-
Executive Director receives a
higher base fee which reflects the
extra time and responsibility.
The fees may be amended and varied if there
are genuinely unforeseen and exceptional
circumstances which necessitate such review
and in such circumstances any significant
increase shall be the minimum reasonably
required.
The maximum aggregate for all Non-Executive
Directors which may be paid by Georgia
Capital PLC for PLC fees is GBP 750,000,
which is consistent with the current limit in the
PLC’s Articles of Association.
The amount of remuneration for the
membership may be reviewed from time to
time by the Board. The Chairman does not
receive Committee fees.
Cash fee for each Committee
membership
Additional fee to compensate for
additional time spent discharging
Committee duties.
Cash payment on
quarterly basis.
Signed on behalf of the Remuneration Committee
Jyrki Talvitie
Chairman of the Remuneration Committee
3 April 2019
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155
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
DIRECTORS’ REPORT
We confirm that to the best of our knowledge:
• The consolidated and stand-alone Financial Statements, prepared
in accordance with IFRS as adopted by the European Union, give a
true and fair view of the assets, liabilities, financial position and profit
or loss of the Company and the Group taken as a whole.
• The Strategic Report and Directors’ Report contained in this Annual
Report include a fair review of the development and performance
of the business and the position of the Company and the Group,
together with a description of the principal risks and uncertainties
that it faces.
We consider that the Annual Report and Accounts, taken as a whole,
is fair, balanced and understandable and gives shareholders the
information needed to assess the Group’s position and performance,
business model and strategy.
By order of the Board
Irakli Gilauri
Chairman and CEO
3 April 2019
The Directors are responsible for preparing the Annual Report and
the consolidated and stand-alone Financial Statements in accordance
with applicable law and regulations.
Company law requires us to prepare Financial Statements for each
financial year. As required, we have prepared the accompanying
consolidated and separate statements in accordance with International
Financial Reporting Standards (IFRS) as adopted by the European Union
and applicable law.
We must not approve the accompanying consolidated and stand-alone
Financial Statements unless we are satisfied that they give a true and
fair view of the state of affairs of the Group and the Company and of
the profit or loss of the Group and the Company for that period.
In preparing the accompanying consolidated and separate Financial
Statements, we are required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether they have been prepared in accordance with IFRS as
adopted by the European Union, subject to any material departures
disclosed and explained in the Financial Statements; and
• prepare the Financial Statements on the going concern basis unless
it is inappropriate to presume that the Company will continue in
business.
We are also responsible for keeping adequate accounting records that
are sufficient to show and explain the Company’s and the Group’s
transactions, to disclose with reasonable accuracy at any time the
financial position of the Company and the Group, and to enable us to
ensure that the consolidated and stand-alone Financial Statements and
the Directors’ Remuneration Report comply with the Companies Act
2006 and, as regards the consolidated and stand-alone Financial
Statements, Article 4 of the IAS Regulation.
We have further responsibility for safeguarding the assets of the
Company and the Group and for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
We are also responsible for the maintenance and integrity of the
Company’s website.
Legislation in the UK governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
The Directors present their Annual Report and the audited Consolidated
Financial Statements for the year ended 31 December 2018.
Strategic Review
The Strategic Report on pages 2 to 117 was approved by the Board
of Directors on 3 April 2019 and signed on its behalf by Irakli Gilauri,
Chief Executive Officer.
Management Report
This Directors’ Report together with the Strategic Review on pages
2 to 117 form the Management Report for the basis of DTR 4.1.5 R.
Information Contained Elsewhere in the Annual Report
Information required to be included in this Directors’ Report can be
found elsewhere in the Annual Report as indicated in the table below
and is incorporated into this report by reference:
Information
Future developments
Going Concern Statement
Viability Statement
Risk Management
Principal risks and uncertainties
Directors’ Governance Statement
The Board of Directors
Nomination Committee Report
Audit Committee Report
Remuneration Committee Report
Remuneration Policy
Investment Committee Report
Greenhouse gas emissions
Employee matters
Environmental matters
Share capital
Information on the Group’s financial risk
management objectives and policies, and its
exposure to credit risk, foreign currency risk
and financial instruments
Location in Annual Report
Pages 2 to 117
Page 69
Page 69
Pages 66 to 72
Pages 70 to 72
Pages 118 to 119
Pages 120 to 121
Pages 128 to 129
Pages 130 to 134
Pages 138 to 153
Pages 140 to 147
Pages 135 to 136
Pages 80 to 81
Pages 76 to 78
Pages 78 to 80
Note 24 on pages
223 to 224
Note 30 on pages
231 to 235
Articles of Association
Georgia Capital PLC’s (the “Company”) Articles of Association may
only be amended by a special resolution at a general meeting of
the shareholders. The process for the appointment and removal of
Directors is included in our Articles of Association. The Georgia Capital
PLC Articles of Association are available on the Company’s website at:
https://georgiacapital.ge/governance/cgf/articles.
Share Capital and Rights Attaching to the Shares
Details of the movements in share capital during the year are provided
in Note 24 to the consolidated Financial Statements on pages 223 to
224 of this Annual Report. As at the date of this Annual Report there
was a single class of 39,384,712 ordinary shares of one pence each in
issue, each with one vote. The rights and obligations attaching to the
Company’s ordinary shares are set out in its Articles of Association.
Holders of ordinary shares are entitled, subject to any applicable law
and the Company’s Articles of Association, to:
• have shareholder documents made available to them including
notice of any general meeting;
• attend, speak and exercise voting rights at general meetings,
either in person or by proxy; and
• participate in any distribution of income or capital.
The Company is permitted to make market purchases of its own
shares provided it is duly authorised by its members in a general
meeting and subject to and in accordance with section 701 of the
Companies Act 2006. Authority was given at a General Meeting of
the Company on 26 March 2018 for the Company to purchase up to
3,938,471 shares (approximately 10%) of Georgia Capital’s shares. This
authority will expire at the conclusion of the Company’s AGM in 2019
or, if earlier, the close of business on 23 June 2019.
An update and renewal of the authority to make market purchases will be
sought from shareholders at the AGM of the Company, for up to 5,671,823
shares, representing approximately 14.99% of the Company’s issued
ordinary share capital excluding treasury shares as at 3 April 2019.
Purchases of ordinary shares will be made within guidelines established
from time to time by the Board. Any purchase of ordinary shares would be
made only out of the available cash resources of the Company. Ordinary
shares purchased by the Company may be held in treasury or cancelled.
As part of its investment policy, in June 2018, the Board approved and
announced the commencement of a share buyback programme of up
to US$45 million in accordance with the terms of the general authority
granted by shareholders at the 2018 General Meeting. Repurchased
shares are held in treasury. As at 31 December 2018, 1,251,829 shares,
representing 3.2% of the Company’s issued share capital, were bought
back for an aggregate amount of US$17.9 million, with a nominal value
of GBP 0.01 per share. As at the date of this Report, an aggregate
amount of US$22.1 million shares have been bought back.
At a general meeting of the Company on 26 March 2018, the Directors
were given the power: a) to allot shares up to a maximum nominal
amount of GBP 131,282.33 representing approximately one-third
of the Company’s issued share capital as at 26 March 2018; and
b) to allot equity securities up to an aggregate nominal amount of
GBP 131,282.33, in connection with an offer by way of a rights issue:
(i) to holders of ordinary shares in proportion (as nearly as may be
practicable) to their existing holdings; and (ii) to holders of other equity
securities as required by the rights of those securities or, if the Directors
consider it necessary, as permitted by the rights of those securities,
such amount to be reduced by the aggregate nominal amount of
shares allotted or rights to subscribe for or to convert any securities
into shares granted under paragraph (a), and subject to the Directors
having the right to make such exclusions or other arrangements as they
may deem necessary or expedient in relation to treasury shares,
fractional entitlements, record dates or legal, regulatory or practical
problems in, or under the laws of, any territory. These authorities will
expire at the conclusion of the 2019 AGM (or, if earlier, at the close of
business on 23 June 2019) and approval will be sought at that meeting
to renew a similar authority for a further year.
None of the ordinary shares carry any special rights with regard to
control of Georgia Capital.
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DIRECTORS’ REPORT CONTINUED
There are no restrictions on transfers of shares other than:
• certain restrictions which may from time to time be imposed by laws
or regulations such as those relating to insider dealing or pursuant
to the Group’s Inside Information Disclosure Policy;
Powers of Directors
The Directors may exercise all powers of the Company subject to
applicable legislation and regulations and Georgia Capital’s Articles
of Association.
• pursuant to the Company’s Securities Dealing Policy and Code,
whereby the Directors and designated employees require approval
to deal in Georgia Capital’s shares or cannot deal in certain periods;
and
• where a person with an interest in the Company’s shares has been
served with a disclosure notice and has failed to provide the
Company with information concerning interests in those shares.
There are no restrictions on exercising voting rights save in situations
where Georgia Capital is legally entitled to impose such a restriction
(for example, under the Articles of Association where amounts remain
unpaid in the shares after request, or the holder is otherwise in default
of an obligation to Georgia Capital). Georgia Capital is not aware of any
arrangements between shareholders that may result in restrictions on
the transfer of securities or voting rights.
Results and Dividends
The Company made a profit before taxation of GEL 20.5 million.
The Company’s profit after taxation for the year was GEL 16.9 million.
Georgia Capital may by ordinary resolution declare dividends provided
that no such dividend shall exceed the amount recommended by
the Company’s Directors. The Directors may also pay such interim
dividends as appear to be justified by the profits of Georgia Capital
available for distribution.
As Georgia Capital is a holding company, Georgia Capital relies
primarily on dividends and other statutorily (if any) and contractually
permissible payments from its subsidiaries to generate the funds
necessary to meet its obligations and pay dividends to its
shareholders.
As stated in the prospectus, the Company expects to be a cash-
generative business with the opportunity for attractive capital
investment to enhance its growth prospects, both through organic
investments and acquisitions. The Board intends to pursue a
capital return policy that reflects this strategy whilst also delivering
shareholders high quality, long-term dividend growth, through share
buybacks or other potential exits. However, the Board may periodically
reassess the Company’s dividend policy and the payment of dividends
(or quantum of the same) will depend on the Group’s existing and
future financial condition, results of operations, capital requirements,
investment and divestment cycles, liquidity needs and other matters
the Board considers relevant from time to time.
Equity-Settled Option Plan (ESOP)
The Company operates an employee benefit trust (EBT) (the “ESOP”),
which holds ordinary shares on trust for the benefit of employees and
former employees of the Group, and their dependents, and which is
used in conjunction with the Group’s employee share schemes. Whilst
ordinary shares are held in the EBT, the voting rights in respect of these
ordinary shares are exercised by the trustees of the EBT.
In accordance with the ESOP documentation, Sanne Fiduciary Services
Limited has waived its right to receive any dividends. This waiver will
remain in place indefinitely, unless otherwise instructed by Georgia
Capital. The Company has committed that new shares issued in
satisfaction of deferred share compensation from the time of the
Company’s listing on the premium segment of the London Stock
Exchange will not exceed 10% of Georgia Capital’s ordinary share
capital over any ten-year period.
Conflicts of Interest
In accordance with the Companies Act 2006, the Directors have
adopted a policy and procedure for the disclosure and authorisation (if
appropriate) of conflicts of interest, and these have been followed during
2018. The Company’s Articles of Association also contain provisions to
allow the Directors to authorise potential conflicts of interest so that a
Director is not in breach of his or her duty under company law.
Directors’ Remuneration
Directors’ fees are determined by the Remuneration Committee from
time to time. The remuneration of Directors must be in accordance with
the Directors’ Remuneration Policy. A Remuneration Policy will be put
to the shareholders for approval at the 2019 AGM. In the meantime,
remuneration has been determined as approved by shareholders of
BGEO Group during the demerger in accordance with the Circular.
The fees paid to the Non-Executive Directors in 2018 pursuant to their
letters of appointment are shown on page 150. The fees paid to our
sole Executive Director in 2018 pursuant to his service agreements with
Georgia Capital are shown on page 148.
Directors’ Interests
The Directors’ beneficial interests in ordinary shares of Georgia Capital
as at 31 December 2018 are shown on page 151 together with any
changes in those interests between the financial year end and the
date on which this Directors’ Report was approved by the Board.
Indemnity
Subject to applicable legislation, every current and former Director
or other officer of the Company (other than any person engaged by
the Company as auditor) shall be indemnified by the Company against
any liability in relation to Georgia Capital, other than (broadly) any
liability to the Company or a member of the Company, or any criminal
or regulatory fine. In addition, the Company has put in place Directors’
and Officers’ indemnity insurance.
Related Party Disclosures
Details of related party disclosures are set out in Note 33 to the
consolidated Financial Statements on pages 239 to 240 of this
Annual Report.
Significant Agreements
On 29 May 2018, Georgia Capital entered into a Relationship
Agreement with Georgia Healthcare Group PLC (GHG) and JSC
Georgia Capital which regulates the degree of control that the
Company and its associates may exercise over the management
and business of GHG.
The principal purpose of the Relationship Agreement is to ensure that
GHG and its subsidiaries are capable at all times of carrying on their
business independently of Georgia Capital and its associates. The
Relationship Agreement will continue until the earlier of: (i) GHG shares
ceasing to be admitted to listing on the Official List; and (ii) Georgia
Capital, together with its associates, ceasing to own or control (directly
or indirectly) 20% or more of the voting share capital of GHG. If Georgia
Capital ceases to be a controlling shareholder (within the meaning
of LR 6.1.2A of the Listing Rules), and continues to exercise control
over the votes indicated in clause (ii) above, then it may terminate the
Relationship Agreement by giving one month’s written notice to GHG.
Under the Relationship Agreement, for so long as Georgia Capital and
its associates together hold 20% or more of the voting share capital of
GHG, Georgia Capital and its associates shall amongst other things:
• conduct all transactions, agreements or arrangements entered into
between: (i) Georgia Capital and its associates; and (ii) GHG or any
of its subsidiaries on an arm’s length basis and on normal
commercial terms and in accordance with the related party
transaction rules set out in the Listing Rules;
• not take any action that has or would have the effect of preventing
GHG or any of its subsidiaries from complying with their obligations
under the Listing Rules;
• not propose or procure the proposal of any resolution of the
shareholders (or any class thereof) which is intended, or appears
to be intended, to circumvent the proper application of the Listing
Rules; and/or
• abstain from voting on any resolution required by LR 11.1.7R(3)
of the Listing Rules to approve a transaction with a related party
involving Georgia Capital.
The Relationship Agreement entitles Georgia Capital to appoint one
person to be a Non-Executive Director of GHG for so long as it
(together with its associates) holds at least 20% of the voting share
capital of GHG.
The Relationship Agreement also provides that (subject to permitted
exceptions) neither Georgia Capital nor its associates shall compete
with the business of GHG nor use any names associated with GHG
and that GHG shall not use any names associated with Georgia Capital
or its associates. The Company has complied with the terms of the
Relationship Agreement and, in so far as it is aware, GHG has
complied with the mandatory provisions of the Relationship Agreement
during the financial year.
Copies of both Relationship Agreements are available to view at the
Company’s registered office.
As disclosed in the Company’s prospectus dated 26 March 2018
(“Prospectus”), for such time as the Company (or its concert parties)
holding in Bank of Georgia Group PLC is greater than 9.99% of the
voting rights exercisable at a general meeting of Bank of Georgia
Group PLC, the Company will exercise its voting rights at general
meetings of Bank of Georgia Group PLC in accordance with the votes
cast by all other Bank of Georgia Group PLC shareholders. This is
known as proportional voting and does not apply to Excluded
Resolutions (as such term is defined in the Bank of Georgia Group
PLC’s articles of association).
Presence Outside of Georgia
We have our Group office in London: see page 244.
Employee Disclosures
Our disclosures relating to the number of women in senior
management, employee engagement and our policies on human
rights, including employment of disabled persons, are included
in the section Employee matters on pages 76 to 78.
Political Donations
The Company did not make any political donations or expenditure
during 2018. Authority to make political donations and incur political
expenditure will be put to shareholder vote at the 2019 AGM.
Code of Conduct and Ethics
The Board has adopted a Code of Conduct relating to the lawful and
ethical conduct of the business, supported by the Company’s core
values. The Code of Conduct has been communicated to all Directors
and employees, all of whom are expected to observe high standards
of integrity and fair dealing in relation to customers, staff and regulators
in the communities in which the Company operates. Our Code of
Conduct is available on our website at: https://georgiacapital.ge/
governance/cgf/policies.
Independent Auditors
A resolution to reappoint Ernst & Young LLP as auditors of Georgia
Capital will be put to shareholders at the upcoming AGM.
Major Interests in Shares
The table below lists shareholders with voting rights of more than 3%
as of 31 December 2018. (outstanding share capital excluding shares
purchased under buyback programme and held in treasury):
Shareholder
As of 31 December 2018
Number of voting
rights % of voting rights
M&G Investment Management Ltd
Schroder Investment Management Ltd
LGM Investments Ltd
Norges Bank Investment Management
Dimensional Fund Advisors (DFA)
2,909,062
2,018,210
1,469,631
1,275,172
1,163,967
7.63
5.29
3.85
3.34
3.05
Source: Georgeson, Computershare
The Company has not received any further notifications in respect
of changes in voting rights for the period 1 January 2019 up to and
including 3 April 2019. https://georgiacapital.ge/ir/news/
regulatory-announcements and the London Stock Exchange
website: https://www.londonstockexchange.com/home/
homepage.htm.
Post-Balance Sheet Events
On 6 February 2019, the Group’s hospitality and commercial business,
owned through m2 Real Estate, acquired the remaining 40% equity
stake in Kass 1 LLC. The total consideration for the buyout was US$5.2
million (GEL 13.9 million), where US$0.3 million (GEL 0.8 million) was
paid in cash and US$4.9 million (GEL 13.1 million) was settled through
bonds issues by the commercial real estate Business.
On 26 March 2019, Georgia Healthcare Group announced its
recommendation of a final dividend of GEL 0.053 per share, to be paid
in respect of the 2018 financial year, subject to shareholder approval.
On 25 March 2019 the Group’s beverages business acquired the
brand name and commercial assets of Georgia’s oldest beer brand
– Kazbegi, brewed since 1881. Total cash consideration for the
acquisition is US$3.65 million. Kazbegi, the fifth largest market player
with its focus on HORECA market, has up to 4% and 5% market shares
in beer and lemonade, respectively.
Statement of Disclosure of Information to the Auditor
We confirm that, so far as we are aware, there is no relevant audit
information of which the Company’s auditors are unaware and we have
taken all steps that we reasonably believe should be taken as Directors
in order to make ourselves aware of any relevant audit information
and to establish that the Company’s statutory auditors are aware of
such information.
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DIRECTORS’ REPORT CONTINUED
Information to be Disclosed in Accordance With the Listing
Rule 9.8.4R
The following information required to be disclosed in terms of Listing
Rule 9.8.4R is not applicable unless stated otherwise:
•
•
the amount of interest capitalised during the period under review
and details of any related tax relief;
information in relation to the publication of unaudited financial
information;
• any arrangements under which a Director has waived emoluments,
or agreed to waive any future emoluments, from the Company;
• details of any non-pre-emptive issues of equity for cash by the
Company;
• any non-pre-emptive issues of equity for cash by the Company or
by any unlisted major subsidiary undertaking;
• parent participation in a placing by a listed subsidiary;
• any contract of significance in which a Director is or was materially
interested;
• any waiver of dividends by a shareholder; and
• details of any long-term incentive schemes.
The Directors’ Report on pages 155 to 158 was approved by the Board
of Directors on 3 April 2019 and signed on its behalf:
By order of the Board
Link Company Matters Limited
Company Secretary
3 April 2019
Financial Statements
INDEPENDENT AUDITOR’S REPORT
Opinion
In our opinion:
• Georgia Capital PLC’s Group Financial Statements and Parent Company Financial Statements (the “financial statements”) give a true and fair
•
•
•
view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2018 and of the Group’s profit for the year then ended;
the Group Financial Statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
the Parent Company Financial Statements have been properly prepared in accordance with IFRSs as adopted by the European Union as
applied in accordance with the provisions of the Companies Act 2006; and
the Financial Statements have been prepared in accordance with the requirements of the Companies Act 2006, and, as regards the Group
financial statements, Article 4 of the IAS Regulation.
We have audited the Financial Statements of Georgia Capital PLC which comprise:
Group
Parent Company
Consolidated Statement of Financial Position as at
31 December 2018
Consolidated Income Statement for the year ended
31 December 2018
Separate Statement of Financial Position as at
31 December 2018
Separate Statement of Changes in Equity for the year ended
31 December 2018
Consolidated Statement of Comprehensive Income for the year ended
31 December 2018
Separate Statement of Cash Flows for the year ended
31 December 2018
Consolidated Statement of Changes in Equity for the year ended
31 December 2018
Related Notes 1 to 34 to the extent they apply to the Company Financial
Statements, including a summary of significant accounting policies
Consolidated statement of cash flows for the year ended
31 December 2018
Related Notes 1 to 34 to the Financial Statements, including a
summary of significant accounting policies
The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union and, as regards the Parent Company Financial Statements, as applied in accordance with the
provisions of the Companies Act 2006.
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under
those standards are further described in the auditor’s responsibilities for the audit of the Financial Statements section of our report below. We are
independent of the Group and Parent Company in accordance with the ethical requirements that are relevant to our audit of the Financial
Statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions Relating to Principal Risks, Going Concern and Viability Statement
We have nothing to report in respect of the following information in the Annual Report, in relation to which the ISAs (UK) require us to report
to you whether we have anything material to add or draw attention to:
•
•
•
the disclosures in the Annual Report set out on page 70 to 72 that describe the principal risks and explain how they are being managed
or mitigated;
the Directors’ confirmation set out on page 69 in the Annual Report that they have carried out a robust assessment of the principal risks facing
the entity, including those that would threaten its business model, future performance, solvency or liquidity;
the Directors’ Statement set out on page 69 in the Financial Statements about whether they considered it appropriate to adopt the going
concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so
over a period of at least twelve months from the date of approval of the Financial Statements;
• whether the Directors’ Statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is
•
materially inconsistent with our knowledge obtained in the audit; or
the Directors’ explanation set out on page 69 in the Annual Report as to how they have assessed the prospects of the entity, over what period
they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation
that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any
related disclosures drawing attention to any necessary qualifications or assumptions.
Overview of our Audit Approach
Key audit matters
• Risk of fraud in recognition of revenue across the different businesses within the Group.
• Valuation of investment properties and infrastructure assets.
• Assessment of the recoverable amount of property, plant and equipment in the beer business.
•
Impairment of goodwill allocated to the pharmaceutical, healthcare and medical insurance businesses.
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Key Observations Communicated to
the Audit Committee
Based on the results of our audit
procedures, we concluded that
the valuations of investment
properties are within a
reasonable range and fairly
stated as at 31 December 2018.
We are satisfied that the carrying
value of infrastructure assets is
not materially different from its
fair value as at 31 December
2018.
We also concluded that the
related disclosures provided in
the Group’s financial statements
are appropriate.
INDEPENDENT AUDITOR’S REPORT CONTINUED
Audit scope
• We performed an audit of the complete financial information of seven components and audit procedures on
Risk
Our Response to the Risk
specific balances for a further two components.
• The components where we performed full or specific audit procedures accounted for 95% of profit before tax
and non-recurring items, 95% of revenue and 90% of total assets.
Materiality
• Overall Group materiality of GEL 3.1 million which represents 5% of profit before tax and non-recurring items.
Key Audit Matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Statements of the
current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These
matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the
efforts of the engagement team. These matters were addressed in the context of our audit of the Financial Statements as a whole, and in our
opinion thereon, and we do not provide a separate opinion on these matters.
Risk
Our Response to the Risk
Risk of fraud in recognition of revenue across the
different businesses within the Group (GEL 1,283
million, 2017: GEL 1,127 million)
Refer to the Audit Committee Report (page 131);
Accounting policies (pages 192 to 194 ); and
Note 25 (pages 224 to 227) to the Consolidated
Financial Statements.
Our procedures were performed by component teams and
the primary audit team in all full and specific scope
components.
• We obtained an understanding of the different revenue
streams and revenue models covering all businesses:
healthcare, commercial and hospitality, housing
development, water utility, P&C insurance and
beverages.
Key Observations Communicated to
the Audit Committee
Based on the procedures
performed, including those in
respect of top side adjustments
and cut off, we did not identify
any evidence of material
misstatement in the revenue
recognised in the year.
Investors’ and analysts’ expectations of the Group and
its separate portfolio investments could result
in pressure on management to overstate revenue. There
is a risk that management may override controls
through manipulating revenue and hence increasing
profit.
In 2017 the Group early adopted IFRS 15 – Revenue
from contracts with customers. There were no material
misstatements identified in the prior year audit, however
application of IFRS 15 remains a high risk area due to
the complexity of the standard and the relatively limited
experience in its application.
Whilst most of the Group’s sales arrangements are
generally straightforward, requiring some or limited
judgement to be exercised, revenue is accounted for at
each business differently, and there is a risk that
management could manipulate the timing of the
revenue through top side adjustments or by creating
fictitious sales. A certain degree of judgement is
generally present in those sales arrangements which
are executed over a longer period of time, namely those
coming from the healthcare, housing development,
water utility and insurance businesses.
There is a risk that management may override controls
to intentionally misstate revenue transactions, either
through the judgements made in calculating the cut off
or by recording fictitious revenue transactions across
the business.
• We evaluated the relevant controls in the revenue cycle
by assessing the design and tested the operational
effectiveness of key controls, across the major revenue
streams.
We are satisfied that the
disclosures in the financial
statements are in accordance
with IFRS.
• We discussed key contractual arrangements with
management and obtained relevant documentation,
where applicable, and validated compliance with IFRS
15 requirements.
• We performed cut-off testing for a sample of revenue
transactions around the period end date, and ensured
they were recognised in the appropriate period.
• We performed test of details by testing key items and
representative samples by agreeing back to supporting
documentation.
• We recalculated and substantively tested on a sample
basis the inputs present in the manual adjustments
posted by management at year-end, including
consignment sales adjustment at the beverages
business; completion rates at the housing development
business; as well as those used in the adjustment to
long-term treatments in the healthcare business and in
the water utility business. For the insurance businesses,
we recalculated the multi-year adjustment and verified
the inputs such as premium amount, commencement,
expiry and cancellation dates.
• Within the healthcare business, we validated the
accuracy of the corrections and rebates through
analytical calculations and performed hindsight
analysis over changes to prior period rebate estimates
to challenge the assumptions made, including
assessing the estimates for evidence of management
bias.
• We used data analytics on beverages and
pharmaceutical revenue streams, and ran correlation
analysis between the cash receipts during the year and
the revenue recorded in the Income Statement.
• We performed other substantive analytical procedures
on the water utility business designed
to identify unusual trends.
• We performed other audit procedures specifically
designed to address the risk of management override
of controls including journal entry testing, paying
particular focus to the timing of revenue transactions,
covering the cut-off risk and occurrence of revenue
throughout the year.
Valuation of investment properties and
infrastructure assets
Net book value investment properties of
GEL 151 million (2017: GEL 160 million) and
infrastructure assets of GEL 386 million
(2017: GEL 253 million)
Refer to the Audit Committee Report (page 131);
Accounting policies (pages 190 and 191); Accounting
judgments and estimates (page 202); and Notes 13
(page 215), 14 (pages 216 and 217) and 31 (page 237)
to the Consolidated Financial Statements.
The Group applies fair value model for measurement
of investment properties and revaluation model for
measurement of infrastructure assets.
Real estate valuations are inherently uncertain and
subject to an estimation process, particularly due
to the fact that the Group’s real estate is located
primarily in Georgia, where the market for such
assets is relatively illiquid. Although the real estate
valuations are performed by appropriately qualified
valuers, there remains a risk that individual assets
might be inappropriately valued.
The Group’s infrastructure assets are unique by
nature and their fair value is relatively difficult to
measure.
Revaluations should be performed with sufficient
regularity to ensure that the carrying amount
does not differ materially from that which would
be determined using fair value at the end of the
reporting period.
The risk has remained consistent with the
prior year.
Our procedures were performed by component teams
and the primary audit team, including our valuation
specialists, in all full and specific scope components.
• We understood the methodology applied by
management in valuing the investment properties and
infrastructure assets and walked through the controls
over the process;
• We used a risk-based approach based on market
movements to select properties for review by our
real estate specialists;
• For a sample representing 97% of the net fair value
movement and 88% of the fair value of the investment
property at year-end we analysed the data, application
of the methods and logic and reasoning applied by the
valuers. We compared this information to the publicly
available information on norms and benchmarks in the
Georgian market;
• We tested the accuracy of the underlying property
database by verifying the location and total area of the
properties selected to the Georgian public registry;
• We engaged our real estate specialists to assist
us in evaluating the appropriateness of the Group’s
valuations of investment properties, including
the following:
– the competence, professional qualifications and
objectivity of the external valuers engaged by
the Group;
– through examining the valuation reports and
discussion with management and the valuers, we
obtained an understanding of the objectives and
scope of the valuers’ work, the methods and
assumptions that they had used and the
conclusions that they had reached;
• challenging the methods and assumptions used in the
valuation reports, including consideration as to
whether there was contrary market intelligence that
had not been taken into account in the valuers’
analyses;
In respect of the valuation of infrastructure assets we:
– compared whether the fair value measurement
methodology adopted by management was
consistent with the prior year;
•
– obtained the discounted cash flow model prepared
by management and engaged our internal
valuations specialists to assist us with testing the
integrity of the financial model and evaluating the
appropriateness of the discount rate; challenging
the key assumptions underpinning the cash flow
projections, including but not limited to water tariffs
and supply volumes, maintenance CAPEX, useful
life of core assets, and EBITDA margin; and
– challenged the growth forecasts during the plan
period, having regard to historical performance and
market expectations.
• We assessed the appropriate recognition of the
results of the valuations in accordance with IAS 16
‘Property, Plant and Equipment’ and IAS 40
‘Investment Property’.
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INDEPENDENT AUDITOR’S REPORT CONTINUED
Risk
(New in 2018)
Assessment of the recoverable amount
of property, plant and equipment in the
beer business (GBG) (GEL 98 million,
2017: GEL 95 million)
Refer to the Audit Committee Report (page 131);
Accounting policies (page 190); Accounting judgments
and estimates (page 203); and Note 14 (pages 216 and
217) to the Consolidated Financial Statements.
We focused on this area due to the size of the
carrying value of the assets being assessed, the
underperformance of the beer business and because
the assessment of the recoverable amount of the
property, plant and equipment in the beer business
involves significant judgements about the future
results of the business, long-term growth rate and the
discount rate applied to the future cash flow forecast.
Key Observations Communicated to
the Audit Committee
Based on the results of our
procedures, we consider
management’s estimate of the
recoverable amounts to fall
within a reasonable range of
outcomes, whilst noting that the
recoverable amount of property,
plant and equipment in the beer
business is highly sensitive to
reasonably possible changes in
the key assumptions.
Management describes these
sensitivities appropriately in
the significant accounting
judgements and estimates
note to the Group Financial
Statements.
We concluded that the related
disclosures provided in the
Group Financial Statements are
appropriate.
Our Response to the Risk
Audit procedures were performed by the relevant
component and the primary team, including valuation
specialists.
• We obtained an understanding of the beer business
fixed assets’ impairment assessment performed by
management and walked through the controls over
the process;
• We agreed the carrying value of the fixed assets to
the accounting records;
• We assessed the appropriateness of the valuation
methodology applied by management in determining
the value in use (VIU) by comparing with the
requirements of IAS 36 Impairment of assets;
• We checked the integrity of the discounted cash
flow models prepared by management, and tested
key assumptions:
– We validated that the cash flows underpinning the
calculation are consistent with the four-year budget;
– We tested the projected sales volumes, sales
prices, operating margin, CAPEX level with
reference to peer and external market data, taking
into consideration planned commercial initiatives;
– We challenged the growth forecasts during the plan
period, having regard to market expectations;
– We engaged our internal valuations specialists to
assist with our consideration of the discount rates
and the long-term growth rates by comparing the
rates utilised to third party evidence and in relation
to the discount rate, our independently estimated
discount rates; and
– Independently recalculated the sensitivity of the key
inputs, stressing each of the above assumptions
individually and in combination to best reflect what
we considered to be reasonably foreseeable
changes in the key assumptions.
• We assessed whether the disclosures in the Group
Financial Statements appropriately reflect the
estimation uncertainty.
Our Response to the Risk
Audit procedures on goodwill impairment were
performed by the integrated primary team, including EY
valuation specialists.
• We understood the methodology applied by
management in performing its impairment test for each
of the relevant CGUs and walked through the controls
over the process;
• We assessed the appropriateness of the valuation
methodology applied by management in determining
the value in use (VIU) by comparing it with the
requirements of IAS 36 Impairment of assets;
• For CGUs where there were indicators of impairment
or low levels of headroom, we checked the integrity of
the discounted cash flow models prepared by
management, and tested key assumptions by:
– validating that the cash flows underpinning the
calculation were consistent with the three-year
strategic plan approved by the Board;
– challenging the short and long-term growth
forecasts, by analysing the accuracy of budgeting
historically to evaluate the robustness of
forecasting;
– engaging our internal valuations specialists to assist
with our consideration of the discount rates; and
– assessing the adequacy of sensitivity analysis
performed by management, stressing each of the
above assumptions individually and in combination
to reflect what we considered to be reasonably
foreseeable changes in the key assumptions.
• We considered the appropriateness of the related
disclosures in Note 4 and Note 15 of the financial
statements.
Risk
(New in 2018)
Impairment of goodwill allocated to the
pharmaceutical, healthcare and medical
insurance businesses (Goodwill, GEL 142 million,
2017: GEL 22 million)
Refer to the Audit Committee Report (page 131);
Accounting policies (pages 184, 185 and 191);
and Note 15 (page 218) to the Consolidated Financial
Statements.
The Group has a significant amount of goodwill
allocated to the pharmaceutical (GEL 78 million),
healthcare (GEL 34 million) and medical insurance
(GEL 3 million), beverage (GEL 12 million) and P&C
Insurance (GEL 15 million) businesses, which is
tested for impairment annually.
The amount of goodwill has increased from GEL 22
million as at 31 December 2017 to GEL 142 million
as at 31 December 2018 because the investment in
Georgia Healthcare Group plc is no longer classified
as a discontinued operation as at 31 December 2018.
There is a risk that these cash generating units
(‘CGUs’) may not achieve the anticipated business
performance to support their carrying value, leading
to an impairment charge that has not been
recognised by management.
Significant judgement is required in forecasting the
future cash flows of each CGU and the rate at which
they are discounted.
We have focused the risk of goodwill impairment
to the pharmaceutical, healthcare and medical
insurance businesses, as historically there has been
sufficient headroom and profitable operations in P&C
Insurance and beverage (wine) business units such
that impairment is unlikely when considering
reasonably possible scenarios.
The risk has increased from the prior year as the
investment in Georgia Healthcare Group plc is no
longer classified as a discontinued operation as
at 31 December 2018.
Key Observations Communicated to
the Audit Committee
We concluded that for each
CGU, management’s evaluation
of the recoverable amount of
goodwill falls within a reasonable
range whilst noting that the
headroom relating to the
healthcare business remains
sensitive to reasonably possible
changes in key assumptions.
We further conclude that:
•
the allocation of goodwill to
CGUs is appropriate and in
line with the requirements of
IAS 36;
the forecasts used are a
reasonable basis upon which
to perform the impairment
assessment;
the assumptions for the
pre-tax discount rate and
long-term growth applied by
management are within an
acceptable range, and are
consistent with independent
economic forecasts; and
the related disclosures
provided in the financial
statements are appropriate.
•
•
•
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INDEPENDENT AUDITOR’S REPORT CONTINUED
2018 is the first financial year of Georgia Capital PLC post demerger from BGEO plc. The key audit matters set out in the table previously are
consistent with those in the prior year report of BGEO plc to the extent they apply to Georgia Capital PLC, with the exception of the addition
of the assessment of the recoverable amount of property, plant and equipment in the beer business, and impairment of goodwill allocated
to the pharmaceutical, healthcare and medical insurance businesses. Given the size of the property, plant and equipment, and continued
underperformance of the beer business mainly caused by the delay in launching Heineken beer brands, we have focused on this area in 2018.
The amount of goodwill has increased from the prior year as the investment in Georgia Healthcare Group plc is no longer classified as a
discontinued operation at 31 December 2018.
An Overview of the Scope of our Audit
Tailoring the Scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity
within the Group. Taken together, this enables us to form an opinion on the Consolidated Financial Statements. We take into account size, risk
profile and changes in the business environment when assessing the level of work to be performed at each entity.
These visits involved discussing the audit approach with the Georgian members of the integrated primary team and the component teams and
any issues arising from their work, meeting with Group and local management, attending planning and closing meetings and reviewing key audit
working papers on risk areas. The primary team interacted regularly with the component teams throughout the audit, reviewed key working
papers and were responsible for the scope and direction of the audit process. This, together with the additional procedures performed at Group
level, gave us appropriate evidence for our opinion on the Group Financial Statements.
Our Application of Materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit
and in forming our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic
decisions of the users of the Financial Statements. Materiality provides a basis for determining the nature and extent of our audit procedures.
In scoping the audit, we reflect the Group’s structure (holding companies, healthcare, pharmacy and distribution, medical insurance, property and
casualty insurance, beverages, real estate and water utility and renewable energy). In assessing the risk of material misstatement to the Group
Financial Statements, and to ensure we had adequate quantitative coverage of significant accounts in the Financial Statements, we performed full
or specific scope audit procedures over nine components covering entities within the UK and Georgia, which represent the principal business
units within the Group.
We determined materiality for the Group to be GEL 3.1 million (2017: GEL 5.3 million), which is 5% (2017: 5%) of profit before tax and non-recurring
items. We believe that profit before tax and non-recurring items best represents the results of the operations of the Group as GEL 33 million out of
GEL 41 million of non-recurring expenses related to demerger costs which is a significant one-off event and is not related to the ongoing trading
of the Group. We therefore, considered profit before tax and non-recurring items to be the most appropriate performance metric on which to
base our materiality calculation.
Of the nine components selected, we performed an audit of the complete financial information of seven components (“full scope components”)
which were selected based on their size or risk characteristics. For another two components (“specific scope components”), we performed audit
procedures on specific accounts within the component that we considered had the potential for the greatest impact on the significant accounts in
the Financial Statements either because of the size of these accounts or their risk profile. In 2018 the remaining components not subject to full or
specific Group scoping mainly represent certain entities within the beverages and water utility and renewable energy segments which are not
significant individually or in the aggregate. The size of remaining components ranges from -5% to 3.3% of the Group’s profit before tax and
non-recurring items and from nil% to 1% of the Group’s revenue.
The table below illustrates the coverage obtained from the work we performed:
Full scope1
Specific scope2
Full and specific scope coverage
Remaining components3
Total reporting components
No.
Revenue
Profit4
Total assets
No.
Revenue
Profit4
Total assets
2018
2017
7
2
9
9
85%
10%
95%
5%
125%
-30%
95%
5%
84%
6%
90%
10%
100%
100%
100%
7
1
8
8
89%
5%
94%
6%
113%
-15%
98%
2%
85%
10%
95%
5%
100%
100%
100%
1 We audited the complete financial information.
2 We audited specific accounts within these components. The audit scope of these components may not have included testing of all significant accounts of the components but will have
contributed to the coverage of significant accounts tested for the Group.
3 We performed other procedures, including analytical review and testing of consolidation journals and intercompany eliminations to respond to any potential risks of material misstatement
to the Group Financial Statements. We also performed specified procedures in respect of the Kindzmarauli acquisition.
4 Profit before non-recurring items and tax. The coverage of 125% by full scope components represents six full scope components having a positive contribution of 195% offset by one full
scope component having a negative contribution of 70%.
Starting Basis
• Profit before tax – GEL 20.5 million
• Non-recurring expenses, net – GEL 41.3 million (Note 28 to
Adjustments
the Group’s Financial Statements)
Materiality
• Totals GEL 61.8 million profit before tax and non-recurring items
• Materiality of GEL 3.1 million (5% of materiality basis)
Performance Materiality
The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the
probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that
performance materiality was 50% (2017: 50%) of our planning materiality, namely GEL 1.54 million (2017: GEL 2.6 million). We have set
performance materiality at this percentage as this is the first year for the Company as a listed company.
Audit work at component locations for the purpose of obtaining audit coverage over significant Financial Statement accounts is undertaken
based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale
and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year,
the range of the final revised performance materiality allocated to components was GEL 0.38 million to GEL 1.16 million (2017: GEL 0.6 million
to GEL 1.8 million).
Changes From the Prior Year
In 2018 the scope of JSC Insurance Co Imedi L within the healthcare segment was changed from “other procedures” to “specific scope” due
to its risk profile and relative size in the Group.
Reporting Threshold
An amount below which identified misstatements are considered as being clearly trivial.
Involvement with Component Teams
In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the components
by us, as the primary audit engagement team, or by component auditors from EY Georgia operating under our instruction. For the five full scope
components and the two specific scope components, where the work was performed by component auditors, we determined the appropriate
level of involvement to enable us to determine that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a
whole.
During the current year’s audit cycle, we held an audit team event led by the Senior Statutory Auditor, where the primary audit team and the
component teams considered the audit risk and strategy. The primary audit team continued to follow a programme of planned visits that has
been designed to ensure that the audit is executed and delivered in accordance with the planned approach and to confirm the quality of the audit
work undertaken. The Senior Statutory Auditor is based in the UK, but since Group management and operations reside in Georgia, the primary
audit team operates as an integrated team including members from the UK and Georgia. During the current year’s audit cycle, visits were
undertaken by the primary audit team to the component teams in Georgia. The Senior Statutory Auditor visited Georgia six times during the
current year’s audit and there was regular interaction between team members in the UK and Georgia.
We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of GEL 0.15 million (2017: GEL 0.26
million), which is set at 5% of final materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant
qualitative considerations in forming our opinion.
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167
INDEPENDENT AUDITOR’S REPORT CONTINUED
Other Information
The other information comprises the information included in the Annual Report, other than the Financial Statements and our Auditor’s Report
thereon, including the following sections in the Annual Report:
In preparing the Financial Statements, the Directors are responsible for assessing the Group and Parent Company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either
intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.
• Strategic Report set out on pages 2 to 117;
• Governance section, including Directors’ Governance Statement, Shareholder Engagement, Board and Executive Management, Corporate
Governance Framework, Nomination Committee Report, Audit Committee Report, Investment Committee Report, Directors’ Remuneration
Report, Statement of Directors’ Responsibilities and Directors’ Report, set out on pages 118 to 158; and
• Additional Information, including Abbreviations, Glossary and Shareholder Information, set out on pages 241 to 244.
The Directors are responsible for the other information.
Our opinion on the Financial Statements does not cover the other information and, except to the extent otherwise explicitly stated in this report,
we do not express any form of assurance conclusion thereon.
In connection with our audit of the Financial Statements, our responsibility is to read the other information and, in doing so, consider whether the
other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be
materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there
is a material misstatement in the Financial Statements or a material misstatement of the other information. If, based on the work we have
performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.
We have nothing to report in this regard.
In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and
to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions:
• Fair, balanced and understandable set out on page 154 – the statement given by the Directors that they consider the Annual Report
and Financial Statements taken as a whole to be fair, balanced and understandable and provide the information necessary for shareholders
to assess the Group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
• Audit Committee reporting set out on pages 130 to 134 – the section describing the work of the Audit Committee does not appropriately
address matters communicated by us to the Audit Committee; or
• Directors’ statement of compliance with the UK Corporate Governance Code set out on page 118 – the parts of the Directors’
statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing
provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant
provision of the UK Corporate Governance Code.
Opinions on Other Matters Prescribed by the Companies Act 2006
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
•
•
the information given in the Strategic Report and the Directors’ Report for the financial year for which the Financial Statements are prepared
is consistent with the financial statements; and
the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.
Matters on Which we are Required to Report by Exception
In the light of the knowledge and understanding of the Group and the Parent Company and its environment obtained in the course of the audit,
we have not identified material misstatements in the Strategic Report or the Directors’ Report.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if,
in our opinion:
• adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from
•
branches not visited by us; or
the Parent Company Financial Statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the
accounting records and returns; or
• certain disclosures of Directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
Responsibilities of Directors
As explained more fully in the Directors’ Responsibilities Statement set out on page 154, the Directors are responsible for the preparation
of the Financial Statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine
is necessary to enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is
not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these Financial Statements.
Explanation as to What Extent the Audit was Considered Capable of Detecting Irregularities, Including Fraud
The objectives of our audit, in respect to fraud, are: to identify and assess the risks of material misstatement of the Financial Statements due to
fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and
implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary
responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management.
Our approach was as follows:
• We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the most
significant are those that relate to the reporting framework (IFRS, Companies Act 2006, the UK Corporate Governance Code and the Listing
Rules of the UK Listing Authority requirements) and those laws and regulations relating to the provision of healthcare and pharmaceutical
services, water supply services, property and casualty and health insurance services in Georgia.
• We understood how the Group is complying with those frameworks by making enquiries of management, internal audit, those responsible for
legal and compliance procedures and the Company Secretary. We corroborated our enquiries through our review of Board minutes, papers
provided to the Audit Committee and correspondence received from regulatory bodies.
• We assessed the susceptibility of the Group’s Financial Statements to material misstatement, including how fraud might occur by considering
the controls that the Group has established to address risks identified by the entity or that otherwise seek to prevent, deter or detect fraud.
We also considered performance and incentive plans targets and their potential to influence management to manage earnings or influence
the perceptions of investors.
• Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations identified in above.
Our procedures involved: journal entry testing, with a focus on journals indicating large or unusual transactions based on our understanding
of the business; enquiries of legal counsel, Group management, Internal Audit, management of business segments; and focused testing as
referred to in the Key Audit Matters section above.
If any instance of non-compliance with laws and regulations were identified, these were communicated to the relevant local EY teams who
performed sufficient and appropriate audit procedures supplemented by audit procedures performed at the Group level.
•
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at
https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Other Matters We Are Required to Address
• We were appointed by the Company and signed the engagement letter on 23 July 2018 to audit the Financial Statements for the year ending
31 December 2018 and subsequent financial periods.
• Following the recommendation of the Audit Committee, a resolution proposing to reappoint EY will be proposed at the 2019 AGM.
• The period of total uninterrupted engagement including previous renewals and reappointments is one year, covering the year ended
31 December 2018.
• The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Parent Company and we remain
independent of the Group and the Parent Company in conducting the audit.
• The audit opinion is consistent with the additional report to the Audit Committee.
Use of Our Report
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit
work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the
Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Richard Addison (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
3 April 2019
Notes:
1 The maintenance and integrity of the Georgia Capital PLC website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these
matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the Financial Statements since they were initially presented on the website.
2 Legislation in the UK governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.
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169
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2018 (THOUSANDS OF GEORGIAN LARI)
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2018 (THOUSANDS OF GEORGIAN LARI)
Notes
31 December
2018
31 December
2017
Notes
2018
2017
(Represented)*
Assets
Cash and cash equivalents
Amounts due from credit institutions
Debt securities owned
Equity investments at fair value
Accounts receivable
Insurance premiums receivable
Inventories
Investment properties
Prepayments
Income tax assets
Property and equipment
Goodwill
Intangible assets
Other assets
Assets of disposal group held for sale
Total assets
Liabilities
Accounts payable
Insurance contracts liabilities
Income tax liabilities
Deferred income
Borrowings
Debt securities issued
Other liabilities
Liabilities of disposal group held for sale
Total liabilities
Equity
Share capital
Additional paid-in capital
Treasury shares
Other reserves
Retained earnings
Total equity attributable to shareholders of Georgia Capital PLC
Non-controlling interests
Total equity
Total liabilities and equity
8
9
10
10
11
12
13
17
14
15
15
16
6
22
18
17
21
19
20
16
6
24
256,930
40,299
71,824
457,495
170,228
57,801
278,615
151,232
117,909
2,405
1,671,917
142,095
51,634
251,462
–
346,241
38,141
31,907
1,153
35,337
30,855
80,110
159,989
87,760
1,374
657,635
21,935
5,457
69,870
1,148,584
3,721,846
2,716,348
143,114
68,207
1,119
62,059
764,355
916,401
235,771
–
42,987
46,403
860
73,066
650,734
77,835
63,206
619,029
2,191,026
1,574,120
1,293
–
(118)
415,473
785,167
10,000
466,187
–
171,254
197,222
1,201,815
844,663
329,005
297,565
1,530,820
1,142,228
3,721,846
2,716,348
The Financial Statements on pages 168 to 240 were approved by the Board of Directors on 3 April 2019 and signed on its behalf by:
Irakli Gilauri
Chief Executive Officer
Georgia Capital PLC
Registered No. 10852406
The accompanying notes on pages 178 to 240 are an integral part of these Financial Statements.
Revenue
Cost of sales
Gross profit
Salaries and other employee benefits
Administrative expenses
Other operating expenses
Expected credit loss/impairment charge on financial assets
Impairment charge on insurance premium receivables, other assets and provisions
EBITDA
Share in profit of associates
Dividend income
Depreciation and amortisation
Net foreign currency loss
Interest income
Interest expense
Net operating income before non-recurring items
Net non-recurring items
Profit before income tax expense
Income tax expense
Profit for the year
Total (loss)/profit attributable to:
– shareholders of Georgia Capital PLC
– non-controlling interests
(Loss)/Earnings per share:
– basic and diluted
1,282,866
(796,191)
486,675
(137,068)
(107,526)
(11,601)
(10,610)
(2,179)
1,127,170
(695,709)
431,461
(107,212)
(85,699)
(12,837)
(6,171)
(1,421)
(268,984)
(213,340)
217,691
247
23,875
(74,155)
(37,546)
23,275
(91,619)
61,768
(41,251)
20,517
(3,606)
16,911
(9,496)
26,407
16,911
218,121
376
–
(54,031)
(6,737)
8,909
(60,903)
105,735
(5,330)
100,405
(6,136)
94,269
70,125
24,144
94,269
(0.2572)
2.3378
25
26
26
27
27
28
24
* 2017 Consolidated Income Statement and respective notes have been re-presented to include the figures of Georgia Healthcare Group PLC, a subsidiary of the Group previously presented
as disposal group held for sale. For details, please refer to Note 6.
The accompanying notes on pages 178 to 240 are an integral part of these Financial Statements.
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171
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2018 (THOUSANDS OF GEORGIAN LARI)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2017 (THOUSANDS OF GEORGIAN LARI)
Profit for the year
Other comprehensive income/(loss)
Other comprehensive income/(loss) to be reclassified to profit or loss in subsequent periods:
Income/(Loss) from currency translation differences
Changes in the fair value of debt instruments at FVOCI (2017: available-for-sale)
Realised loss on financial assets measured at FVOCI (2017: available-for-sale) reclassified to
the Consolidated Income Statement
Change in allowance for expected credit losses on investments in debt instruments measured
at FVOCI
Income tax impact
Net other comprehensive income/(loss) to be reclassified to profit or loss in subsequent
periods
Other comprehensive loss not to be reclassified to profit or loss in subsequent periods:
Changes in fair value of equity instruments designated at FVOCI (Note 24)
Net other comprehensive loss not to be reclassified to profit or loss in subsequent periods
Other comprehensive loss for the year, net of tax
Total comprehensive (loss)/income for the year
Total comprehensive (loss)/income attributable to:
– shareholders of Georgia Capital PLC
– non-controlling interests
Notes
2018
16,911
2017
(Represented)
94,269
17
9,185
(1,207)
–
117
–
(1,984)
47
(2)
–
165
8,095
(1,774)
(248,505)
(248,505)
(240,410)
(223,499)
(250,882)
27,383
(223,499)
–
–
(1,774)
92,495
68,618
23,877
92,495
Attributable to shareholders of Georgia Capital
Share
capital
Additional
paid-in
capital
Other
reserves
Retained
earnings
Non-
controlling
interests
Total
Total equity
31 December 2016
8,482
368,166
118,869
151,536
647,053
228,814
875,867
Effect of early adoption of IFRS 15
–
–
–
(17,622)
(17,622)
(601)
(18,223)
1 January 2017
8,482
368,166
118,869
133,914
629,431
228,213
857,644
Profit for the year
Other comprehensive loss for the year
Total comprehensive income for the year
Transfer of revaluation reserve at disposals
Issue of share capital (Note 24)
Increase in equity arising from share-based payments
(Note 29)
Dividends paid by subsidiaries
Sale of interests in existing subsidiaries*
Dilution of interests in subsidiaries
Increase in share capital of subsidiaries
Acquisition of non-controlling interests in existing
subsidiaries
Non-controlling interests arising on acquisition of subsidiary
Contributions under share-based payment plan
–
–
–
–
1,518
–
–
–
–
101,279
11,202
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,152)
(1,152)
(540)
–
–
–
71,980
506
–
70,125
(357)
69,768
540
–
–
(7,000)
–
–
–
70,125
(1,507)
68,618
–
102,795
11,202
(7,000)
71,980
506
–
24,144
(267)
23,877
–
–
1,495
–
36,623
1,547
14,493
94,269
(1,774)
92,495
–
102,795
12,697
(7,000)
108,603
2,053
14,493
–
–
(14,460)
(18,409)
–
–
–
–
–
(18,409)
–
(14,460)
(43,919)
35,236
–
(62,328)
35,236
(14,460)
31 December 2017
10,000
466,187
171,254
197,222
844,663
297,565
1,142,228
* The Group sold approximately 7% equity interest in Georgia Healthcare Group PLC. Following the sale, the Group held 57% equity interests in GHG in 2017 and 2018.
The accompanying notes on pages 178 to 240 are an integral part of these Financial Statements.
The accompanying notes on pages 178 to 240 are an integral part of these Financial Statements.
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173
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2018 (THOUSANDS OF GEORGIAN LARI)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2018 (THOUSANDS OF GEORGIAN LARI)
Attributable to shareholders of Georgia Capital
31 December 2017
Effect of adoption of IFRS 9 (Note 3)
1 January 2018
Share
capital
Additional
paid-in
capital
10,000
466,187
–
–
10,000
466,187
(Loss)/Profit for the year
Other comprehensive (loss) income for the year
Total comprehensive loss for the year
Issue of share capital (Note 24)
Formation of new Parent Company (Note 24)
Capital Reduction and demerger transactions
–
–
–
1,526
1,644,011
–
–
–
127,843
–
Treasury
Shares
Other
reserves
Retained
earnings
Non-
controlling
interests
Total
Total equity
–
–
–
171,254
197,222
844,663
297,565
1,142,228
192
(10,808)
(10,616)
(3,216)
(13,832)
171,446
186,414
834,047
294,349 1,128,396
–
–
(241,386)
–
(241,386)
–
–
577,913
– (1,644,011)
(9,496)
–
(9,496)
(2,298)
–
(9,496)
(241,386)
(250,882)
704,984
–
26,407
976
27,383
–
–
16,911
(240,410)
(223,499)
704,984
–
(Note 24)
(1,654,244) (600,525)
– 1,644,011
610,758
–
–
–
Increase in equity arising from share-based
payments (Note 29)
Dilution of interests in subsidiaries
Increase in share capital of subsidiaries*
Acquisition of non-controlling interests in
existing subsidiaries***
Non-controlling interests arising on acquisition
of subsidiary (Note 5)
Dividends paid by subsidiaries**
Other purchases of treasury shares (Note 24)
Contributions under share-based payment plan
–
–
–
–
–
–
–
–
25,865
–
–
–
–
–
–
(19,370)
–
–
–
–
–
–
(41)
(77)
6,694
2,760
–
(13,080)
–
–
(44,676)
(44,198)
–
–
–
–
32,559
2,760
–
6,062
(2,760)
23,348
38,621
–
23,348
(13,080)
(8,629)
(21,709)
–
(211)
–
–
–
(211)
(44,717)
(63,645)
44
(10,792)
–
–
44
(11,003)
(44,717)
(63,645)
31 December 2018
1,293
–
(118)
415,473
785,167 1,201,815
329,005 1,530,820
*
The minority shareholder of the Group in Georgian Renewable Power Company JSC contributed GEL 23,348 thousands to the equity in 2018.
** JSC GEPHA, a subsidiary of the Group’s healthcare business, paid dividend to its minority shareholders in the amount of GEL 10,792 thousands.
*** GEL (6,446) change in non-controlling interest is related to deemed acquisition of NCI arising from share acquisition put option issued in 2017 to non-controlling shareholders of GEPHA”.
Cash flows from operating activities
Revenue received
Cost of goods sold paid
Net realised loss from foreign currencies
Net other (expense paid)/income received
Salaries and other employee benefits paid
General, administrative and operating expenses paid
Interest received
Net change in operating assets and liabilities
Net cash flows (used in) from operating activities before income tax
Income tax paid
Net cash flow from operating activities
Cash flows used in investing activities
Net withdrawals of amounts due from credit institutions
Loans issued/(repaid)
Acquisition of subsidiaries, net of cash acquired
Repayment of remaining holdback amounts from previous year acquisitions
Purchase of debt securities
Proceeds from sale and redemption of debt securities
Proceeds from sale of investment properties
Purchase and construction of investment properties
Proceeds from sale of property and equipment and intangible assets
Purchase of property and equipment
Purchase of intangible assets
Dividends received
Notes
2018
2017
(Represented)
1,196,852
(818,201)
–
(13,701)
(108,376)
(110,616)
22,291
(2,324)
165,925
(2,423)
163,502
14,586
(135,785)
(25,339)
(14,820)
(62,297)
28,780
2,566
(20,397)
1,496
(378,928)
(23,919)
23,875
1,039,032
(718,745)
(483)
1,741
(82,143)
(89,919)
8,909
2,767
161,159
(6,135)
155,024
18,074
1,617
(59,076)
(6,390)
(2,463)
–
402
(17,199)
6,968
(352,880)
(17,547)
–
5
13
13
Net cash flows used in investing activities
(590,182)
(428,494)
The accompanying notes on pages 178 to 240 are an integral part of these Financial Statements.
The accompanying notes on pages 178 to 240 are an integral part of these Financial Statements.
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewFinancial Statements 174
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175
CONSOLIDATED STATEMENT OF CASH FLOWS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2018 (THOUSANDS OF GEORGIAN LARI)
SEPARATE STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2018 (THOUSANDS OF GEORGIAN LARI)
Cash flows from financing activities
Proceeds from borrowings
Repayment of borrowings
Proceeds from debt securities issued
Redemption and buyback of debt securities issued
Other purchases of treasury shares
Proceeds from issue of share capital
Dividends paid
Interest paid
Contributions under share-based payment plan
Increase in share capital of subsidiaries
Purchase of additional interest in existing subsidiaries
Transaction costs incurred in relation to share issue
Proceeds from sale of interests in existing subsidiaries
Proceeds from sale of interests in existing subsidiaries
Net cash from financing activities
Effect of exchange rates changes on cash and cash equivalents
Effect of change in expected credit losses for cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents of disposal group held for sale, beginning of the year
Cash and cash equivalents of disposal group held for sale, end of the year
Cash and cash equivalents, end of the year
The accompanying notes on pages 178 to 240 are an integral part of these Financial Statements.
Notes
2018
2017
(Represented)
19
19
19
19
24
24
24
8
6
6
8
247,574
(393,981)
747,184
(80,747)
(44,717)
–
(10,012)
(96,312)
(66,701)
2,675
(5,719)
(2,298)
–
–
296,946
(8,416)
(1)
(138,151)
346,241
48,840
–
256,930
454,374
(8,503)
40,000
(18,533)
–
24,244
(7,000)
(71,036)
(14,460)
14,651
–
–
108,603
–
522,340
(12,657)
236,213
158,868
–
48,840
346,241
Assets
Cash and cash equivalents
Accounts receivable
Prepayments
Investments in subsidiary
Total assets
Liabilities
Other liabilities
Total liabilities
Equity
Share capital
Treasury shares
Retained earnings
Net (loss)/profit for the year
Total equity
Total liabilities and equity
Notes
31 December
2018
31 December
2017
2
24
3,581
–
90
1,377,083
1,380,754
591
591
1,293
(41)
1,395,861
(16,950)
1,380,163
1,380,754
–
175
–
–
175
–
–
172
–
–
3
175
175
The Parent Company distributable reserves as at 31 December 2018 were GEL 1,378,911 (31 December 2017: 3).
The Financial Statements on pages 168 to 240 were approved by the Board of Directors on 3 April 2019 and signed on its behalf by:
Irakli Gilauri
Chief Executive Officer
Georgia Capital PLC
Registered No. 10852406
The accompanying notes on pages 178 to 240 are an integral part of these Financial Statements.
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Georgia Capital PLC Annual Report 2018
177
SEPARATE STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2018 (THOUSANDS OF GEORGIAN LARI)
SEPARATE STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2018 (THOUSANDS OF GEORGIAN LARI)
Share capital
Additional
paid-in capital
Treasury shares
Retained
earnings
At incorporation on 5 July 2017
Profit for the year
Issue of share capital (Note 24)
31 December 2017
Loss for the year
Increase in equity arising from share-based payments
Issue of share capital (Note 24)
Capital reduction (Note 24)
Cancellation of deferred redeemable shares
Purchase of treasury shares (Note 24)
31 December 2018
–
–
172
172
–
–
1,644,011
(1,642,718)
(172)
–
1,293
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(41)
(41)
The accompanying notes on pages 178 to 240 are an integral part of these Financial Statements.
–
3
–
3
Total
–
3
172
175
(16,950)
277
(202,460)
1,642,718
–
(44,677)
(16,950)
277
1,441,551
–
(172)
(44,718)
1,378,911
1,380,163
Interest income received
Salaries and other employee benefits paid
General, administrative and operating expenses paid
Net other (expense paid)/income received
Cash flows from operating activities
Capital redemption from subsidiary
Cash flows from investing activities
Cash flows from financing activities
Purchase of treasury shares
Net cash from financing activities
Effect of exchange rates changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of the period
Cash and cash equivalents, end of the period
The accompanying notes on pages 178 to 240 are an integral part of these Financial Statements.
Notes
2018
2017
38
(810)
(1,443)
(14,063)
(16,278)
64,468
64,468
(44,718)
(44,718)
109
3,581
–
3,581
24
–
–
–
–
–
–
–
–
–
–
–
–
–
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Georgia Capital PLC Annual Report 2018
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179
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2018 (THOUSANDS OF GEORGIAN LARI)
1. Principal Activities
Georgia Capital PLC (“Georgia Capital”) is a public limited liability company incorporated in England and Wales with registered number 10852406.
Georgia Capital PLC holds 100% of the share capital of the JSC Georgia Capital, which makes up a group of companies (the “Group”), focused
on investing in and developing businesses in Georgia. Group principally operates in utility and renewable energy, property and casualty
insurance, housing development, hospitality and commercial property construction and development, wine and beer production businesses
through privately held subsidiaries. In addition to its privately held subsidiaries, the Group owns healthcare, pharmaceutical and medical
insurance businesses through London Stock Exchange premium-listed Georgia Healthcare Group PLC and has significant investment in London
Stock Exchange premium listed Bank of Georgia Group PLC. The shares of Georgia Capital are admitted to the premium listing segment of the
Official List of the UK Listing Authority and admitted to trading on the London Stock Exchange PLC’s Main Market for listed securities under the
ticker CGEO, effective 29 May 2018.
JSC Georgia Capital was established on 6 August 2015 as a joint stock company (JSC) under the laws of Georgia. As of 31 December 2017,
the Group’s ultimate 100% owner was BGEO Group PLC (“BGEO” currently BGEO Group Limited), a company incorporated in England and listed
on the London Stock Exchange.
On 29 May 2018 BGEO Group PLC (BGEO) completed demerger of its business activities into a London-listed banking business (the “Banking
Business”), Bank of Georgia Group PLC, and a London-listed investment business (the “Investment Business”), Georgia Capital PLC. As a result,
Georgia Capital PLC became ultimate parent of Investment business, i.e. the Group.
Georgia Capital’s registered legal address is: 84 Brook Street, London W1K 5EH, United Kingdom.
As at 31 December 2018, the following shareholders owned more than 5% of the total outstanding shares* of Georgia Capital. Other shareholders
individually owned less than 5% of the outstanding shares.
Shareholder
M&G Investment Management Ltd
Schroder Investment Management
Others
Total
As at
31 December
2018
8%
5%
87%
100%
* For the purposes of calculating percentage of shareholding, the denominator includes total number of issued shares which includes shares held in the trust for share-based compensation
purposes of the Group and treasury shares bought as part of buyback programme announced on 14 June 2018.
2. Basis of Preparation
General
The Consolidated Financial Statements of Georgia Capital PLC represent continuation of consolidated financial statements of JSC Georgia
Capital prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards
Board (IASB).
The Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted
by the European Union (EU) and International Financial Reporting Interpretations Committee (IFRIC) interpretations issued by the International
Accounting Standards Board (IASB) effective for 2018 reporting and with those parts of the Companies Act 2006 applicable to companies
reporting under IFRS.
These Financial Statements are prepared under the historical cost convention except for:
•
•
the measurement at fair value of debt securities owned and equity investments, derivative financial assets and liabilities, investment properties,
and revalued property and equipment;
the measurement of inventories at lower of cost and net realisable value; and
The Financial Statements are presented in thousands of Georgian Lari (GEL), except per-share amounts and unless otherwise indicated.
Going Concern
The Board of Directors of Georgia Capital has made an assessment of the Group’s and Company’s ability to continue as a going concern and is
satisfied that it has the resources to continue in business for a period of at least 12 months from the date of approval of the Financial Statements.
Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Group’s and Company’s ability to
continue as a going concern for the foreseeable future. Therefore, the separate and Consolidated Financial Statements continue to be prepared
on a going concern basis.
2. Basis of Preparation continued
Basis of Consolidation
The Consolidated Financial Statements comprise the Financial Statements of the Group and its subsidiaries as at 31 December 2018. The Group
consolidates a subsidiary when it controls it. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement
with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and
only if the Group has:
• power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee);
• exposure, or rights, to variable returns from its involvement with the investee; and
•
the ability to use its power over the investee to affect its returns.
When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances
in assessing whether it has power over an investee, including:
•
•
•
the contractual arrangement with the other vote holders of the investee;
rights arising from other contractual arrangements; and
the Group’s voting rights and potential voting rights.
The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the
three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group
loses control of the subsidiary. Income and expenses of a subsidiary acquired or disposed of during the year are included in the Statement of
Comprehensive Income from the date the Group gains control until the date the Group ceases to control the subsidiary.
Profit or loss and each component of other comprehensive income are attributed to the equity holders of the parent of the Group and to the
non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to
the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-Group assets and
liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.
A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control
over a subsidiary, it:
• Derecognises the assets (including goodwill) and liabilities of the subsidiary.
• Derecognises the carrying amount of any non-controlling interests.
• Derecognises the cumulative translation differences recorded in equity.
• Recognises the fair value of the consideration received.
• Recognises the fair value of any investment retained.
• Recognises any surplus or deficit in profit or loss.
• Reclassifies the Parent’s share of components previously recognised in other comprehensive income to profit or loss or retained earnings,
as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities.
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewFinancial Statements 180
Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
181
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
2. Basis of Preparation continued
Subsidiaries and Associates
Total amount of investment in subsidiaries in the Company’s separate Statement of Financial Position as at 31 December 2018 was GEL
1,377,083 (31 December 2017: nil), represented by direct investment in JSC Georgia Capital. The deemed cost of the investment was determined
as quoting price of the Company as at listing date adjusted for subsequent capital reductions. The Consolidated Financial Statements as at
31 December 2018 and 31 December 2017 include the following subsidiaries and associates:
Proportion of voting rights and
ordinary share capital held
Subsidiaries
31 December
2018
31 December
2017
Country of
incorporation
Address
Industry
Date of
incorporation
Date of
acquisition
JSC Georgia Capital
100.00%
–
JSC m2 Real Estate
100.00%
100.00%
m2 Residential, LLC
100.00%
100.00%
Optima ISANI, LLC
Tamarashvili 13, LLC
100.00%
100.00%
100.00%
100.00%
m2 at Hippodrome, LLC
m2 Skyline, LLC
m2 at Kazbegi, LLC
m2 at Tamarashvili, LLC
m2 at Nutsubidze, LLC
M Square Park, LLC
Optima Saburtalo, LLC
m2 at Vake, LLC
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
m2 Hospitality, LLC
100.00%
100.00%
m2, LLC (formerly JSC m2)
100.00%
100.00%
m2 Kutaisi, LLC
m2 at Melikishvili, LLC
Kass 1, LLC
Kakheti Wine and Spa,
LLC
100.00%
100.00%
67.00%
100.00%
100.00%
100.00%
60.00%
–
m2 at Gudauri, LLC
100.00%
m2 Zugdidi, LLC
100.00%
m2 Svaneti, LLC
100.00%
–
–
–
m2 at Chavchavadze LLC
100.00%
100.00%
m2 Commercial Properties
100.00%
100.00%
LLC
Georgia
Georgia
Georgia
Georgia
Georgia
Kazbegi street 3-5,
Tbilisi Georgia
29 Ilia chavchavadze Ave.,
Tbilisi, 0105
29 Ilia chavchavadze Ave.,
Tbilisi, 0105
16 a Moscow ave., Tbilisi
13 Tamarashvili Str.,
Tbilisi, 0179
10 Givi Kartozia st., Tbilisi
Georgia
Georgia
3 Maro Makashvili st., Tbilisi
Georgia 25 Kazbegi Ave., Tbilisi, 0160
6 Tamarashvili Str.,
Georgia
Tbilisi, 0177
Georgia
71 Vaja Pshavela Ave., 0186
Georgia1 Marshal Gelovani ave., Tbilisi
Georgia 2 Mikheil Shavishvili st, Tbilisi
50 I. Chavchavadze ave.,
Georgia
Tbilisi
29 Ilia chavchavadze Ave.,
Tbilisi, 0105
29 Ilia chavchavadze Ave.,
Tbilisi, 0105
10 Melikishvili ave., Tbilisi
10 Melikishvili ave., Tbilisi
20 Merab Kostava st., Tbilisi
80 Aghmashenebeli ave.,
Tbilisi, 0102
80 Aghmashenebeli ave.,
Tbilisi, 0102
80 Aghmashenebeli ave.,
Tbilisi, 0102
80 Aghmashenebeli ave.,
Tbilisi, 0102
50 I. Chavchavadze Ave.,
Tbilisi
Georgia 80 Chavchavadze Ave., Tbilisi
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Caucasus Autohouse, LLC 100.00%
100.00%
Georgia
Land, LLC
100.00%
100.00%
Georgia
BK Construction, LLC
100.00%
100.00%
Georgia
80 Aghmashenebeli ave.,
Tbilisi, 0102
Between university and
Kavtaradze st.,Tbilisi
80 Aghmashenebeli ave.,
Tbilisi, 0102
Investment
6/8/2015
Real estate
27/9/2006
Real estate
17/8/2015
Real estate
Real estate
25/7/2014
3/11/2011
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
6/7/2015
23/7/2015
21/5/2013
21/5/2013
21/5/2013
15/9/2015
15/9/2015
3/8/2016
Real estate
17/8/2015
Real estate
12/2/2014
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Real estate
Real estate
Real estate
Real estate
17/5/2017
17/5/2017
–
–
16/10/2014 27/12/2017
–
23/4/2018
Real estate
24/4/2018
Real estate
7/11/2018
Real estate
14/11/2018
Real estate
5/9/2016
Real estate
11/6/2014
Real estate
29/3/2011
Real estate
3/10/2014
–
–
–
–
–
–
–
m2 Commercial Assets,
100.00%
LLC
Melikishvili Business
100.00%
Centre, LLC
Georgia Hospitality
100.00%
–
–
–
Management Group, LLC
JSC Georgian Renewable
Power Company
65.00%
65.00%
Georgia Tbilisi, Chavchavadze ave. 29
Real estate
4/10/2018
Georgia
Georgia
80 Aghmashenebeli ave.,
Tbilisi, 0102
Kazbegi street 3-5, Tbilisi
Georgia
Georgia 79 David Agmashenebeli Ave,
0102, Tbilisi
Real estate
4/12/2018
Real estate
22/8/2018
Renewable
Energy
14/9/2015
–
–
–
2. Basis of Preparation continued
Subsidiaries and Associates continued
Proportion of voting rights and
ordinary share capital held
Subsidiaries
JSC Geohydro
85.00%
85.00%
JSC Svaneti Hydro
100.00%
100.00%
JSC Zoti Hydro
100.00%
100.00%
JSC Caucasian Wind
100.00%
100.00%
Company
JSC Caucasian Solar
100.00%
100.00%
Company
JSC A Group
100.00%
–
JSC Insurance Company
100.00%
100.00%
Aldagi
JSC Insurance Company
100.00%
100.00%
Tao
Aliance, LLC
Auto Way LLC (formerly
known as Green Way,
LLC)
100.00%
100.00%
100.00%
100.00%
31 December
2018
31 December
2017
Country of
incorporation
Address
Industry
Date of
incorporation
Date of
acquisition
Georgia
Georgia
Georgia
Georgia
Georgia
79 D. Agmashenebeli Ave,
Tbilisi, 0102
29a, Gagarin Street, Tbilisi
0160
79 D.Agmashenebeli Ave,
Tbilisi, 0102
79 D.Agmashenebeli Ave,
Tbilisi, 0102
79 D.Agmashenebeli Ave,
Tbilisi, 0102
1, Berbuki str., Saburatlo,
Tbilisi
Old Tbilisi, Pushkini str #3,
Tbilisi
Old Tbilisi, Pushkini str #3,
Tbilisi
Georgia 20, Chavchavadze ave., floor
2, Vake-Saburtalo, Tbilisi
Georgia 20, Chavchavadze ave., Vake,
Tbilisi
Georgia
Georgia
Georgia
Renewable
Energy
Renewable
Energy
Renewable
Energy
Renewable
Energy
Renewable
Energy
Various
11/10/2013
6/12/2013
20/8/2015
14/9/2016
27/10/2016
20/9/2018
Insurance
31/7/2014
–
–
–
–
–
–
–
Insurance
22/8/2007 21/1/2015
Various
3/1/2000 30/4/2012
Various
9/8/2004 30/4/2012
Insurance Informational
22.50%
22.50%
Georgia
Bureau, LLC
JSC Uno Leasing
100.00%
100.00%
Georgia
Baratashvili bridge
underground crossing,
Mtkvari Left Bank, Old
Tbilisi, Tbilisi
3, Pushkini str., Krtsanisi,
Tbilisi
Insurance
23/7/2007
Leasing
17/11/2017
–
–
100.00%
100.00%
Georgia 6, University str., Vake, Tbilisi
Vehicle
Inspection
9/7/2010
1/5/2012
(formerly known as JSC
AMF)
JSC Greenway Georgia
(formerly known as
Premium Residence,
LLC)
GreenWash, LLC
Georgia Healthcare Group
100.00%
57.05%
–
57.05%
PLC
JSC Georgia Healthcare
100.00%
100.00%
Group
JSC Insurance Company
100.00%
100.00%
Imedi L
JSC GEPHA
67.00%
67.00%
JSC ABC Pharamcia
100.00%
100.00%
(Armenia)
ABC Pharmalogistics,
100.00% 100.00%
LLC
Georgia
Healthcare
United
Kingdom
Georgia
Car wash
Healthcare
Georgia 6, University str., Vake, Tbilisi
84 Brook Street, London, W1K
5EH
40 Vazha-Pshavela Ave.,
Tbilisi
9, Anna Politkovskaias Str.
Vake-Saburtalo District,
Tbilisi
Georgia Old Tbilisi, Sanapiro str. #6,
Tbilisi
Kievnaia sts. #2/8, 2/10,
Erevan
Sanapiro Str.#6, Tbilisi Pharmaceutical
Pharmaceutical
Healthcare
Insurance
Armenia
Georgia
31/8/2018
–
27/8/2015 28/8/2015
29/4/2015
22/6/2007
–
–
19/10/1995
4/5/2016
28/4/2013
6/1/2017
24/2/2004
6/1/2017
JSC Medical Corporation
100.00%
100.00%
Georgia40 Vazha-Pshavela Ave., Tbilisi
Healthcare
31/7/2014
–
Treatment and Diagnostic
Centre for Mothers and
Children
Academician Z.
66.70%
66.70%
Georgia
Tskhakaia National
Centre of Intervention
Medicine of Western
Georgia, LLC
85 Djavakhishvili street,
Kutaisi, 4600
Medical
services
5/5/2003 29/11/2011
83 A Djavakhishvili street,
Kutaisi
Medical
services
15/10/2004 12/9/2011
Tskaltubo Regional
66.70%
66.70%
Georgia 16 Eristavi street, Tskhaltubo
Hospital, LLC
Medical
services
29/9/1999 12/9/2011
Real estate
18/5/2017
2/6/2017
EVEX
JSC Kutaisi County
66.70%
66.70%
Georgia
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewFinancial Statements 182
Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
183
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
2. Basis of Preparation continued
Subsidiaries and Associates continued
Subsidiaries
Patgeo, LLC
Proportion of voting rights and
ordinary share capital held
31 December
2018
31 December
2017
Country of
incorporation
100.00%
100.00%
Georgia
GN KO, LLC
50.00%
50.00%
Georgia
High Technology Medical
100.00%
100.00%
Georgia
Address
Industry
Gldani Nadzaladevi district,
Mukhiani, II mcr. District,
Building #22, 1a, Tbilisi
Chavchavadze ave. N 16,
Tbilisi
Tsinandali str. N 9, Tbilisi
Centre, LLC
Geolab, LLC
–
50.00%
Georgia
Tsinandali str. N 9, Tbilisi
Nephrology Development
80.00%
80.00%
Georgia
Tsinandali str. N 9, Tbilisi
100.00%
100.00%
Georgia U. Chkeidze str. N 10, Tbilisi
Clinic Centre, LLC
Catastrophe Medicine
Pediatric Centre, LLC
JSC Pediatria
Emergency Service, LLC
100.00%
100.00%
Georgia
76.00%
76.00%
Georgia
1, t. Chkheidze str., Didube-
Chugureti District, Tbilisi
#2, D. Uznadze st., Tbilisi
JSC Poti Central Hospital
100.00%
100.00%
Georgia
Guria str. 171, Poti
(merged with JSC
Medical Corporation
EVEX)
Deka, LLC
97.20%
97.20%
Georgia 23, P. Kavtaradze Str., Tbilisi
EVEX-Logistics, LLC
100.00%
100.00%
Georgia
EVEX Collection, LLC
100.00%
100.00%
Georgia
Unimed Achara, LLC
(merged with JSC
Medical Corporation
EVEX)
100.00%
100.00%
Georgia
Unimedi Samtskhe, LLC
100.00%
100.00%
Georgia
Vazha Pshavela ave. #40,
Tbilisi
Vazha Pshavela ave. #40,
Tbilisi
Vazha Pshavela ave. #40,
Tbilisi
Date of
incorporation
Date of
acquisition
13/10/2010 27/9/2016
6/4/2001
5/8/2015
16/4/1999
5/8/2015
3/5/2011
5/8/2015
18/6/2013
5/8/2015
5/9/2003
5/7/2016
28/7/2009
6/1/2016
29/10/2014
1/1/2016
12/1/2012 11/6/2015
2/2/2015
25/3/2016
–
–
29/6/2010
1/5/2012
Vazha Pshavela ave. #40,
Tbilisi
Medical
services
29/6/2010
1/5/2012
100.00%
100.00%
Georgia
20 Chavchvadze ave, Tbilisi
100.00%
100.00%
Georgia
2/6 Lubliana Street, Tbilisi
29/6/2010
1/5/2012
3/5/2011 19/2/2014
Medical
services
Medical
services
Healthcare
Service
Healthcare
Service
Healthcare
Service
Medical
services
Medical
services
Medical
services
Medical
services
Medical
services
Medical
services
Medical
services
Medical
services
Medical
services
Medical
Service
Medical
Service
Institute of Pediatrics,
100.00%
100.00%
Georgia
5 Lubliana Street 5, Tbilisi
100.00%
100.00%
Georgia
Kindzmarauli I turn, N1,
Isan-Samgori, Tbilisi
Medical
Service
16/3/2017
–
96.87%
96.87%
Georgia 9 Paolo Iashvili street, Kutaisi
Medical
services
3/11/2000 20/5/2008
(merged with JSC
Medical Corporation
EVEX)
Unimedi Kakheti, LLC
(merged with JSC
Medical Corporation
EVEX)
M. Iashvili Children’s
Central Hospital, LLC
(merged with JSC
Medical Corporation
EVEX)
Alergology and
Rheumatology Centre,
LLC (merged with JSC
Medical Corporation
EVEX)
Iv Bokeria Tbilisi Referral
Hospital (merged with
JSC Medical Corporation
EVEX)
JSC Kutaisi St. Nicholas
Surgical and Oncological
Hospital (merged with
JSC Medical Corporation
EVEX)
Referral Centre of
Pathology, LLC
28/9/2010
5/8/2015
LLC
JSC Polyclinic Vere
97.80%
97.80%
Georgia
18-20 Kiacheli str.,Tbilisi
2. Basis of Preparation continued
Subsidiaries and Associates continued
Proportion of voting rights and
ordinary share capital held
Subsidiaries
31 December
2018
31 December
2017
Country of
incorporation
Address
Industry
Date of
incorporation
Date of
acquisition
EVEX Learning Centre
100.00%
100.00%
Georgia
JSC Mega-Lab
100.00%
100.00%
Georgia
#83A, Javakhishvili street,
Tbilisi
23 Kavtaradze str., Tbilisi
New Clinic, LLC
100.00%
100.00%
Alliance Medi, LLC
100.00%
100.00%
Medical Centre Alimedi,
–
100.00%
Georgia
Vazha Pshavela ave. #40,
Tbilisi
Vazha Pshavela ave. #40,
Tbilisi
Georgia 17 R. Tabukashvili str., Tbilisi
Georgia
Georgia
Georgia
Vazha Pshavela ave. #40,
Tbilisi
Georgia37. Bochorishvili Str. Saburtalo
district, Tbilisi
33 Porter Road, PO Box 3169
PMB 103, Road Town,
Tortola
33, Kostava st. 1st Lane,
Tbilisi
5, St. Nino St., Rustavi
33, Kostava st. 1st Lane,
Tbilisi
Aghmashenebeli St.,
Mtskheta
33, Kostava st. 1st Lane,
Tbilisi
Georgia
Georgia
Georgia
Georgia
New Dent, LLC
JSC Vabaco
Georgian Global Utilities,
LLC
75.00%
67.00%
100.00%
–
–
100.00% British Virgin
Islands
Georgian Water and
100.00%
100.00%
Power, LLC
Rustavi Water, LLC
Gardabani Sewage
Treatment, LLC
100.00%
100.00%
100.00%
100.00%
Mtskheta Water, LLC
100.00%
100.00%
Georgian Engineering and
Management Company
(GEMC), LLC
100.00%
100.00%
JSC Saguramo Energy
100.00%
100.00%
JSC Teliani Valley
Georgia Logistics and
77.62%
100.00%
75.75%
100.00%
Distribution, LLC
(Formerly known as
Teliani Trading (Georgia),
LLC)
Education
20/12/2013
–
–
6/6/2017
1/3/2013 26/7/2017
7/7/2015 26/7/2017
27/9/2003 8/11/2017
22/11/2017 25/12/2017
24/12/2017
–
3/9/2013 28/9/2018
16/8/2007 31/12/2014
Medical
services
Medical
services
Medical
services
Medical
services
Medical
services
Medical
services
Software
developer
Utilities
Utilities
25/6/1997 31/12/2014
Utilities
Utilities
31/8/1999 31/12/2014
20/12/1999 31/12/2014
Utilities
1/9/1999 31/12/2014
Utilities
20/3/2011 31/12/2014
Georgia
33, Kostava st. 1st Lane,
Tbilisi
Georgia
3 Tbilisi highway, Telavi.
Georgia 2 Marshal Gelovani St, Tbilisi
Utilities
11/12/2008 31/12/2014
Winery
Distribution
30/6/2000 28/2/2007
10/1/2006 27/3/2007
Teliani Trading (Ukraine),
100.00%
100.00%
Ukraine
18/14 Khvoiki St. Kiev
3/10/2006 31/12/2007
LLC
Le Caucase, LLC
100.00%
100.00%
Georgia 2 Marshal Gelovani St, Tbilisi
Kupa, LLC
70.00%
70.00%
Georgia
3 Tbilisi highway, Telavi
6/3/2000 19/2/2014
Global Beer Georgia, LLC
100.00%
100.00%
Georgia
Tsilkani, Mtskheta Region,
Georgia
Global Coffee Georgia,
100.00%
Georgia
29a Gagarini street, Tbilisi
LLC
New Coffee Company,
100.00%
Georgia
Tskneti Highway, No. 16/18,
app. 36
LLC
Genuine Brewing
Company, LLC
100.00%
JSC Georgian beverages
100.00%
Kindzmarauli Marani, LLC
100.00%
–
–
–
Georgia 75 Chavchavadze Ave., Tbilisi Beer production
14/11/2016
7/2/2018
Georgia
Georgia
Kazbegi street 3-5, Tbilisi
Georgia
56 A. Tsereteli Ave., Tbilisi
74a Chavchavadze Ave,
and distribution
Oak barrel
production
Winery
7/6/2016
–
18/12/2001 25/4/2018
Distribution
Cognac
production
Oak barrel
production
Production and
distribution of
alcohol and
non-alcohol
beverages
Coffee
distribution
Coffee
distribution
23/9/2006 20/3/2007
12/10/2006 20/3/2007
24/12/2014
26/12/2016
–
–
23/9/2009 15/2/2017
100.00%
100.00%
Georgia
40 Vazha-Pshavela Ave.,
Tbilisi
Medical
services
29/12/2014
–
JSC Liberty Consumer
75.10%
98.28%
Georgia
Tbilisi, 0162
Investments
24/5/2006
–
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewFinancial Statements 184
Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
185
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
2. Basis of Preparation continued
Subsidiaries and Associates continued
Proportion of voting rights and
ordinary share capital held
Subsidiaries
31 December
2018
31 December
2017
Country of
incorporation
Address
Industry
Date of
incorporation
Date of
acquisition
JSC Intertour
99.94%
99.94%
Georgia
49a, Chavchavadze Ave,
Tbilisi, 0162
78 Chavchavadze Ave,
JSC Prime Fitness
100%
100.00%
Georgia
Tbilisi, 0162
Travel
agency
Fitness
centre
29/3/1996 25/4/2006
7/3/2006
–
In May 2017, the Group sold 7.21% equity interests in Georgia Healthcare Group PLC, received net proceeds of GEL 96,998 and recognised GEL
63,382 unrealised gain on sale of interests in existing subsidiaries.
Proportion of voting rights and
ordinary share capital held
Associates
31 December
2018
31 December
2017
Country of
incorporation
Address
Industry
Date of
incorporation
Date of
acquisition
#5 Clinic hospital, LLC
JSC Isani Parki
35.00%
6.00%
35.00%
6.00%
Georgia
Georgia
Temka XI M/D, Q.1, Tbilisi,
Georgia
Kakheti Highway, Isani, Tbilisi
Healthcare
Real estate
16/9/1999
18/12/2017
8/2/2016
–
3. Summary of Significant Accounting Policies
The following are the significant accounting policies applied by the Group in preparing its Consolidated Financial Statements:
Business Combinations and Goodwill
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration
transferred measured at acquisition date fair value and the amount of any non-controlling interests in the acquiree. For each business combination,
the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s
identifiable net assets and other components of non-controlling interests at their acquisition date fair values. Acquisition-related costs are expensed
as incurred and included in administrative expenses.
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in
accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation
of embedded derivatives in host contracts by the acquiree.
If the business combination is achieved in stages, any previously held equity interest is re-measured at its acquisition date fair value and any
resulting gain or loss is recognised in profit or loss. It is then considered in the determination of goodwill.
Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Contingent consideration
classified as an asset or liability that is a financial instrument and within the scope of IFRS 9, Financial Instruments is measured at fair value with
changes in fair value recognised either in the statement of profit or loss or as a change to other comprehensive income. If the contingent
consideration is not within the scope of IFRS 9, it is measured in accordance with the appropriate IFRS. Contingent consideration that is classified
as equity is not re-measured and subsequent settlement is accounted for within equity.
Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for non-
controlling interests, and any previous interest held, over the net identifiable assets acquired and liabilities assumed. If the fair value of the net
assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all of the assets
acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date.
If the re-assessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain
is recognised in profit or loss.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill
acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to
benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
Where goodwill has been allocated to a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with
the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in
these circumstances is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained.
3. Summary of Significant Accounting Policies continued
Business Combination Under Common Control
The business combinations under common control are accounted for using pooling of interest method with restatement of periods prior to the
combination under common control.
The assets and liabilities acquired are recognised at carrying amounts to reflect the combination as if it had occurred from the beginning of the
earliest period presented and no adjustments are made to reflect fair values at the date of combination. The difference between consideration
transferred and net assets acquired is recorded as an adjustment to the equity. No goodwill is recognised as a result of business combination
under common control.
Investments in Associates and Joint Ventures
Associates are entities in which the Group generally has between 20% and 50% of the voting rights, or is otherwise able to exercise significant
influence, but which it does not control or jointly control.
A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the
joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant
activities require the unanimous consent of the parties sharing control.
Investments in associates and joint ventures are accounted for under the equity method and are initially recognised at cost, including goodwill.
Subsequent changes in the carrying value reflect the post-acquisition changes in the Group’s share of net assets of the associate or joint venture.
The Group’s share of its associates’ and joint ventures’ profits or losses is recognised in the Consolidated Income Statement, and its share of
movements in reserves is recognised in other comprehensive income. However, when the Group’s share of losses in an associate or joint venture
equals or exceeds its interest in the associate or joint venture, the Group does not recognise further losses, unless the Group is obliged to make
further payments to, or on behalf of, the associate or joint venture.
Unrealised gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in the
associates and joint ventures; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
The Group is considered an organisation similar to a venture fund. When the Group acquires an associate, at initial recognition, the Group makes an
irrevocable choice to measure investment in associate under the equity method or at fair value through profit or loss under IFRS 9.
Investments in Subsidiaries in Parent Company Financial Statements
For the purposes of Parent Company Financial Statements investments in subsidiaries are accounted at cost. Investments in subsidiaries are
accounted in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations when they are classified as held for sale
or distribution. Dividends from a subsidiary are recognised in the Parent Company Financial Statements when the Parent’s right to receive the
dividend is established.
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewFinancial Statements 186
Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
187
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
3. Summary of Significant Accounting Policies continued
Fair Value Measurement
The Group measures financial instruments, such as debt securities owned, equity investments, derivatives and non-financial assets such as
investment properties and revalued property, plant and equipment at fair value at each balance sheet date. Also, fair values of financial instruments
measured at amortised cost are disclosed in Note 31.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes
place either:
•
•
in the principal market for the asset or liability; or
in the absence of a principal market, in the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible by the Group. The fair value of an asset or a liability is measured using the
assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best
interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using
the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value,
maximising the use of relevant observable inputs and minimising the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the Consolidated Financial Statements are categorised within the fair value
hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
• Level 1 − Quoted (unadjusted) market prices in active markets for identical assets or liabilities.
• Level 2 − Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.
• Level 3 − Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.
For assets and liabilities that are recognised in the Consolidated Financial Statements on a recurring basis, the Group determines whether
transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the
fair value measurement as a whole) at the end of each reporting period.
Non-Current Assets Held For Sale and Discontinued Operations
The Group classifies non-current assets and disposal groups as held for sale if their carrying amounts will be recovered principally through a sale
transaction rather than through continuing use. Non-current assets and disposal groups classified as held for sale are measured at the lower of
their carrying amount and fair value less costs to sell. Costs to sell are the incremental costs directly attributable to the disposal of an asset
(disposal group), excluding finance costs and income tax expense.
The criteria for held for sale classification is regarded as met only when the sale is highly probable and the asset or disposal group is available for
immediate sale in its present condition. Actions required to complete the sale should indicate that it is unlikely that significant changes to the sale
will be made or that the decision to sell will be withdrawn. Management must be committed to the plan to sell the asset and the sale expected to
be completed within one year from the date of the classification.
Property, plant and equipment and intangible assets are not depreciated or amortised once classified as held for sale.
Assets and liabilities classified as held for sale are presented separately from other assets and liabilities in the Statement of Financial Position.
A disposal group qualifies as discontinued operation if it is a component of an entity that either has been disposed of, or is classified as held for
sale, and:
•
•
•
represents a separate major line of business or geographical area of operations;
is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or
is a subsidiary acquired exclusively with a view to resale.
Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as profit or loss after tax
from discontinued operations in the Statement of Profit or Loss. Net cash flows attributable to the operating, investing and financing activities of
discontinued operations are presented separately in the Statement of Cash Flows.
The asset or disposal group ceases to be classified as held for sale if the criteria for classification are no longer met. Non-current asset or disposal
group that ceased to be classified as held for sale is measured at the lower of: (a) carrying amount before the asset or disposal group was
classified as held for sale, adjusted for any depreciation, amortisation or revaluations that would have been recognised had the asset or disposal
group not been classified as held for sale; and (b) recoverable amount at the date of the subsequent decision not to sell. Any adjustment to carrying
amount of non-current asset that ceases to be classified as held for sale is recognised in the Income Statement in the period in which criteria for
held for sale classification are no longer met. Financial Statements for the periods since classification as held for sale are amended accordingly if
the disposal group that ceases to be classified as held for sale is a subsidiary, joint operation, joint venture, associate, or a portion of an interest in a
joint venture or an associate.
3. Summary of Significant Accounting Policies continued
Non-Current Assets Held For Sale and Discontinued Operations continued
The results of operations of the component previously presented in discontinued operations is reclassified and included in income from continuing
operations for all periods presented. Amounts presented for non-current assets or for the assets and liabilities of disposal groups classified as held
for sale in the Statements of Financial Position for prior periods are not reclassified to reflect the classification in the Statement of Financial Position
for the latest period presented.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and amounts due from credit institutions that mature within 90 days of the date of contract
origination and are free from contractual encumbrances and readily convertible to known amount of cash.
Financial Assets
Initial Recognition
Financial assets in the scope of IFRS 9 are classified at initial recognition, as subsequently measured at amortised cost, fair value through other
comprehensive income (OCI), and fair value through profit or loss.
The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s
business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which the
Group has applied the practical expedient, the Group initially measures a financial asset at its fair value plus, in the case of a financial asset not at
fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which the Group
has applied the practical expedient are measured at the transaction price determined under IFRS 15.
In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows that
are “solely payments of principal and interest (SPPI)” on the principal amount outstanding. This assessment is referred to as the SPPI test and
is performed at an instrument level.
The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows.
The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.
Date of Recognition
All regular way purchases and sales of financial assets are recognised on the trade date i.e. the date that the Group commits to purchase or sell
the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally
established by regulation or convention in the marketplace.
Subsequent Measurement
For purposes of subsequent measurement, financial assets are classified in four categories:
• Financial assets at amortised cost (debt instruments).
• Financial assets at fair value through OCI with recycling of cumulative gains and losses (debt instruments).
• Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon derecognition (equity instruments).
• Financial assets at fair value through profit or loss.
Financial Assets at Amortised Cost (Debt Instruments)
The Group measures financial assets at amortised cost if both of the following conditions are met:
•
•
the financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; and
the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the
principal amount outstanding.
Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and
losses are recognised in profit or loss when the asset is derecognised, modified or impaired.
The Group’s financial assets at amortised cost includes cash and cash equivalents, trade receivables, amounts due from credit institutions and
loans disbursed included under other assets.
Financial Assets at Fair Value Through OCI (Debt Instruments)
The Group measures debt instruments at fair value through OCI if both of the following conditions are met:
•
•
the financial asset is held within a business model with the objective of both holding to collect contractual cash flows and selling; and
the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest
on the principal amount outstanding.
For debt instruments at fair value through OCI, interest income, foreign exchange revaluation and impairment losses or reversals are recognised
in the Statement of Profit or Loss and computed in the same manner as for financial assets measured at amortised cost. The remaining fair value
changes are recognised in OCI. Upon derecognition, the cumulative fair value change recognised in OCI is recycled to profit or loss.
The Group’s debt instruments at fair value through OCI includes investments in quoted debt instruments included under debt securities owned.
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewFinancial Statements 188
Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
189
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
3. Summary of Significant Accounting Policies continued
Financial Assets continued
Financial Assets Designated at Fair Value Through OCI (Equity Instruments)
Upon initial recognition, the Group can elect to classify irrevocably its equity investments as equity instruments designated at fair value through
OCI when they meet the definition of equity under IAS 32 Financial Instruments: Presentation and are not held for trading. The classification is
determined on an instrument-by-instrument basis.
Gains and losses on these financial assets are never recycled to profit or loss. Dividends are recognised as other income in the Statement of
Profit or Loss when the right of payment has been established, except when the Group benefits from such proceeds as a recovery of part of the
cost of the financial asset, in which case, such gains are recorded in OCI. Equity instruments designated at fair value through OCI are not subject
to impairment assessment.
The Group elected to classify irrevocably its non-listed equity investments and listed equity investment in Bank of Georgia Group PLC under this
category.
Financial Assets at Fair Value Through Profit or Loss
Financial assets at fair value through profit or loss include financial assets held for trading, financial assets designated upon initial recognition at
fair value through profit or loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for
trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives,
are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are not
solely payments of principal and interest are classified and measured at fair value through profit or loss, irrespective of the business model.
Notwithstanding the criteria for debt instruments to be classified at amortised cost or at fair value through OCI, as described above, debt
instruments may be designated at fair value through profit or loss on initial recognition if doing so eliminates, or significantly reduces, an
accounting mismatch.
Financial assets at fair value through profit or loss are carried in the Statement of Financial Position at fair value with net changes in fair value
recognised in the Statement of Profit or Loss. This category includes derivative instruments.
A derivative embedded in a hybrid contract, with a financial liability or non-financial host, is separated from the host and accounted for as a separate
derivative if: the economic characteristics and risks are not closely related to the host; a separate instrument with the same terms as the embedded
derivative would meet the definition of a derivative; and the hybrid contract is not measured at fair value through profit or loss. Embedded derivatives
are measured at fair value with changes in fair value recognised in profit or loss. Reassessment only occurs if there is either a change in the terms of
the contract that significantly modifies the cash flows that would otherwise be required or a reclassification of a financial asset out of the fair value
through profit or loss category.
A derivative embedded within a hybrid contract containing a financial asset host is not accounted for separately. The financial asset host together
with the embedded derivative is required to be classified in its entirety as a financial asset at fair value through profit or loss.
Impairment of Financial Assets
The Group recognises an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are
based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to
receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of
collateral held or other credit enhancements that are integral to the contractual terms.
ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition,
ECLs are provided for credit losses that result from default events that are possible within the next 12 months (a 12-month ECL). For those credit
exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses
expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).
For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes
in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix
that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.
The Group considers a financial asset in default when contractual payments are 90 days past due. However, in certain cases, the Group may also
consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding
contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no
reasonable expectation of recovering the contractual cash flows. Subsequent recoveries of amounts previously written off decrease the charge for
impairment of financial assets in the consolidated profit or loss.
3. Summary of Significant Accounting Policies continued
Derecognition of Financial Assets and Liabilities
Financial Assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e.
removed from the Group’s Consolidated Statement of Financial Position) when:
•
•
the rights to receive cash flows from the asset have expired; or
the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full
without material delay to a third party under a “pass-through” arrangement and either: (a) the Group has transferred substantially all the risks
and rewards of the asset; or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has
transferred control of the asset.
When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if, and
to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and
rewards of the asset, nor transferred control of the asset, the Group continues to recognise the transferred asset to the extent of its continuing
involvement. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a
basis that reflects the rights and obligations that the Group has retained.
Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of
the asset and the maximum amount of consideration that the Group could be required to repay.
Financial Liabilities
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability
are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new
liability, and the difference in the respective carrying amounts is recognised in the Consolidated Income Statement.
Financial Liabilities
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables,
or as derivatives designated as hedging instruments in an effective hedge, as appropriate.
All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable
transaction costs.
The Group’s financial liabilities include accounts payable, borrowings including bank overdrafts and debt securities issued.
Borrowings and Debt Securities Issued
Borrowings and debt securities issued are initially recognised at fair value of the consideration received less directly attributable transaction costs.
After initial recognition, borrowings and debt securities issued are subsequently measured at amortised cost using the effective interest method.
Gains and losses are recognised in the consolidated income statement when borrowings are derecognised as well as through the
amortisation process.
Borrowing Costs
Borrowing costs comprise interest expense calculated using the effective interest method and exchange differences arising from foreign currency
borrowings to the extent they are regarded as an adjustment to interest costs. Borrowing costs directly attributable to the acquisition, construction
or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the
cost of such asset. All other borrowing costs are expensed in the year in which they occur.
Offsetting
Financial assets and liabilities are offset and the net amount is reported in the Consolidated Statement of Financial Position when there is a legally
enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability
simultaneously.
Insurance and Reinsurance Receivables
Insurance and reinsurance receivables are recognised based upon insurance policy terms and measured at cost. The carrying value of insurance
and reinsurance receivables is reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be
recoverable, with any impairment loss recorded in the Consolidated Statement of Income.
Reinsurance receivables, included in other assets, primarily comprise of balances due from both insurance and reinsurance companies for ceded
insurance liabilities. Premiums on reinsurance assumed are recognised as revenue in the same manner as they would be if the reinsurance were
considered direct business, taking into account the product classification of the reinsured business. Amounts due to reinsurers are estimated in a
manner consistent with the associated reinsured policies and in accordance with the reinsurance contract. Premiums ceded and claims
reimbursed are presented on a gross basis.
An impairment review is performed on all reinsurance assets when an indication of impairment occurs. Reinsurance receivables are impaired only if
there is objective evidence that the Group may not receive all amounts due to it under the terms of the contract that this can be measured reliably.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
3. Summary of Significant Accounting Policies continued
Insurance Liabilities
General Insurance Liabilities
General insurance contract liabilities are based on the estimated ultimate cost of all claims incurred but not settled at the reporting date, whether
reported or not, together with related claims handling costs and reduction for the expected value of salvage and other recoveries. Significant
delays can be experienced in the notification and settlement of certain types of general insurance claims, particularly in respect of liability
business, environmental and pollution exposures – therefore the ultimate cost of which cannot be known with certainty at the reporting date.
Provision for Unearned Premiums
The proportion of written premiums, gross of commission payable to intermediaries, attributable to subsequent periods is deferred as unearned
premium. The change in the provision for unearned premium is taken to the Consolidated Income Statement in order that revenue is recognised
over the period of risk or, for annuities, the amount of expected future benefit payments.
Liability Adequacy Test
At each reporting date, a liability adequacy test is performed, to ensure the adequacy of unearned premiums net of related deferred acquisition
costs. In performing the test, current best estimates of future contractual cash flows, claims handling and policy administration expenses, as well
as investment income from assets backing such liabilities, are used. Any inadequacy is immediately charged to the Consolidated Income Statement
by establishing an unexpired risk provision.
Deferred Acquisition Costs
Deferred acquisition costs (DAC), included in insurance premiums receivable, are capitalised costs related to the issuance of insurance policies.
They consist of commissions paid to agents, brokers and some employees. They are amortised on a straight-line basis over the life of the contract.
Investment Properties
Investment property is a land or building or a part of a building held to earn rental income or for capital appreciation purposes and which is not
used by the Group or held for sale in the ordinary course of business. Property that is under construction, is being developed or redeveloped for
future use as an investment property is also classified as an investment property.
Investment property is initially recognised at cost, including transaction costs, and subsequently remeasured at fair value reflecting market
conditions at the end of the reporting period. Fair value of the Group’s investment property is determined on the basis of various sources, including
reports of independent appraisers who hold a recognised and relevant professional qualifications and who have recent experience in valuation of
property of similar location and category. Gains and losses resulting from changes in the fair value of investment property are recorded in the
Income Statement in the period in which they arise.
Subsequent expenditure is capitalised only when it is probable that future economic benefits associated with it will flow to the Group and the cost
can be measured reliably. All other repairs and maintenance costs are expensed when incurred. If an investment property becomes owner-
occupied, it is reclassified to property and equipment, and its carrying amount at the date of reclassification becomes its deemed cost to be
subsequently depreciated.
Investment properties are derecognised either when they have been disposed of or they are permanently withdrawn from use and no future
economic benefit is expected from their disposal. The difference between the net disposal proceeds and the carrying amount of the asset is
recognised in the Consolidated Income Statement in the period of derecognition.
Property and Equipment
Property and equipment, except for infrastructure assets, is carried at cost less accumulated depreciation and any accumulated impairment in
value. Such cost includes the cost of replacing part of the equipment when that cost is incurred if the recognition criteria are met. Infrastructure
assets are measured at fair value less depreciation and impairment charged subsequent to the date of the revaluation.
Infrastructure assets comprise a network of systems consisting of raw water aqueducts, mains and sewers, impounding and pumped raw water
storage reservoirs and sludge pipelines. Investment expenditure on infrastructure assets relating to increase in capacity or enhancements of the
network and asset replacements to maintain the operating capability of the network is treated as an addition and initially recorded at cost, whilst
repair and maintenance expenditure which does not enhance the asset base is charged as an operating cost.
The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying
value may not be recoverable.
Following initial recognition at cost infrastructure assets are carried at a revalued amount, which is the fair value at the date of the revaluation less any
subsequent accumulated depreciation and subsequent accumulated impairment losses. Valuations are performed frequently enough (market value
changes are monitored at least once in a year) to ensure that the fair value of a revalued asset does not differ materially from its carrying amount.
Accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated
to the revalued amount of the asset. Any revaluation surplus is credited to the revaluation reserve for property and equipment included in other
comprehensive income, except to the extent that it reverses a revaluation decrease of the same asset previously recognised in the Consolidated
Income Statement, in which case the increase is recognised in the Consolidated Income Statement. A revaluation deficit is recognised in the
Consolidated Income Statement, except that a deficit directly offsetting a previous surplus on the same asset is directly offset against the surplus
in the revaluation reserve for property and equipment.
3. Summary of Significant Accounting Policies continued
Property and Equipment continued
Depreciation of an asset commences from the date the asset is ready and available for use. Depreciation is calculated on a straight-line basis over
the following estimated useful lives:
Office buildings
Hospitals and clinics
Hotels
Infrastructure assets
Factory and equipment
Furniture and fixtures
Computers and equipment
Motor vehicles
Years
Up to 100
100
Up to 100
10-40
7-30
10
5-10
5
The asset’s residual values, useful lives and methods are reviewed, and adjusted as appropriate, at each financial year end.
Assets under construction are stated at cost and are not depreciated until the time they are available for use and reclassified to respective groups
of property and equipment.
Leasehold improvements are depreciated over the life of the related leased asset or the expected lease term if lower.
Costs related to repairs and renewals are charged when incurred and included in other operating expenses, unless they qualify for capitalisation.
Inventories
Inventories are valued at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of
business, less estimated costs of completion and the estimated costs necessary to make the sale.
The cost of inventory includes expenditure incurred in acquiring inventory and bringing it to its existing location and condition including borrowing
costs. The cost of inventory is determined on a weighted average basis for beverages and inventory in healthcare segment and first in first out
basis (FIFO) in the pharma segment. The cost of inventory in real estate segment is determined with reference to the specific costs incurred on
the property sold and allocated non-specific costs based on the relative size of the property sold.
Biological Assets
Biological assets comprise grapes on the vine. Upon harvest the grapes are measured at fair value less costs to sell with any fair value gain or
loss recognised in the Consolidated Income Statement.
Intangible Assets
The Group’s intangible assets include computer software and licenses and exclusive rights.
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination
is fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and
any accumulated impairment losses. The economic lives of intangible assets are assessed to be finite and amortised over four to 20 years and
assessed for impairment whenever there is an indication that the intangible asset may be impaired. Amortisation periods and methods for
intangible assets are reviewed at least at each financial year end.
Costs associated with maintaining computer software programmes are recorded as an expense as incurred. Software development costs
(relating to the design and testing of new or substantially improved software) are recognised as intangible assets only when the Group can
demonstrate the technical feasibility of completing the software so that it will be available for use or sale, its intention to complete the asset and its
ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the asset and the
ability to measure reliably the expenditure during the development. Other software development costs are recognised as an expense as incurred.
Goodwill Impairment
Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying amount may be
impaired.
For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s
cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of
whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill
is allocated:
•
•
represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and
is not larger than a segment as defined in IFRS 8 “Operating Segments”.
Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units), to which the goodwill
relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment
loss is recognised. Impairment losses cannot be reversed in future periods.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
3. Summary of Significant Accounting Policies continued
Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow
of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of obligation can be made.
3. Summary of Significant Accounting Policies continued
Income and Expense Recognition continued
Insurance Income and Expense continued
• Provision for unearned premiums
Contingencies
Contingent liabilities are not recognised in the Consolidated Statement of Financial Position but are disclosed unless the possibility of any outflow
in settlement is remote. A contingent asset is not recognised in the Consolidated Statement of Financial Position but disclosed when an inflow of
economic benefits is probable.
Share-Based Payment Transactions
Equity-Settled Transactions
The cost of equity-settled transactions with employees is measured by reference to the fair value of shares at the grant date.
The cost of equity-settled transactions is recognised together with the corresponding increase in equity, over the period in which the performance
and/or service conditions are fulfilled, ending on the date when the relevant employee is fully entitled to the award (the “vesting date”). The
cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting
period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The Consolidated Income Statement
charge or credit for the period represents the movement in cumulative expense recognised as at the beginning and end of that period.
No expense is recognised for the awards that do not ultimately vest except for the awards where vesting is conditional upon market conditions
which are treated as vesting irrespective of whether the market condition is satisfied, provided that all other performance conditions are satisfied.
Where the terms of an equity-settled award are modified, the minimum expense is recognised as if the terms had not been modified. An additional
expense is recognised for any modification which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial
to the employee as measured at the date of the modification.
Where an equity-settled award is cancelled, it is treated as if it has vested on the date of cancellation, and any expense not yet recognised for the
award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as the replacement award on
the date that it is granted, the cancelled and the new awards are treated as if they were a modification of the original award, as described in the
previous paragraph.
Share Capital
Share Capital
Ordinary shares are classified as equity. External costs directly attributable to the issue of new shares, other than on a business combination, are
shown as a deduction from the proceeds in equity. Any excess of the fair value of consideration received over the par value of shares issued is
recognised as additional paid-in capital.
The proportion of written premiums attributable to subsequent periods is deferred as unearned premium. The change in the provision for
unearned premium is taken to the consolidated statement of comprehensive income in the order that revenue is recognised over the period
of risk or, for annuities, the amount of expected future benefit payments.
• Benefits and claims
General insurance claims incurred include all claim losses occurring during the year, whether reported or not, including the related handling
costs and reduction for the value of salvage and other recoveries and any adjustments to claims outstanding from previous years. Claims
handling costs include internal and external costs incurred in connection with the negotiation and settlement of claims.
Income and Expense Recognition Healthcare and Pharma Revenue
The Group recognises revenue at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring
goods or services to a customer.
Healthcare services that the Group provides to the clients are satisfied over time given that the customer simultaneously receives and consumes
the benefits provided by the Group. Healthcare revenue comprises the fair value of the consideration received or receivable for providing inpatient
and outpatient services and includes the following components:
• Healthcare revenue from insurance companies – the Group recognises revenue from the individuals who are insured by various insurance
companies by reference to the stage of completion of the actual medical service and agreed-upon terms between the counterparties.
• Healthcare revenue from state – the Group recognises the revenue from the individuals who are insured under the state programmes by
reference to the stage of completion of the actual medical service and the agreed-upon terms between the counterparties.
• Healthcare revenue from out-of-pocket and other – the Group recognises the revenue from non-insured individuals based on the completion
of the actual medical service and approved prices by the Group. Sales are usually in cash or by credit card. Other revenue from medical
services includes revenue from municipalities and other hospitals, which the Group has contractual relationship with. Sales of services are
recognised in the accounting period in which the services are rendered calculated according to contractual tariffs.
Revenue is presented net of corrections and rebates that occasionally arise as a result of reconciliation of detailed bills with counterparties (mostly
with the state). Invoice corrections are estimated at contract inception. The estimation of potential future corrections and rebates is calculated
based on statistical average correction rate which is applied to gross amount of invoices that were not approved by the state as at reporting date.
The Group’s gross revenue (before deducting its corrections and rebates) is based on the official invoices submitted to and formally accepted by
the customers (state, insurance companies, provider clinics and individuals) and accruals for already performed but not yet billed service.
Revenue from pharma comprises the fair value of the consideration received or receivable both from wholesale and retail sales and drug exchange
transactions. The pharma business sometimes receives drugs in exchange for sale of drugs from other wholesalers. The consideration received is
assessed with reference to its actual wholesale price which is deemed fair value of consideration received.
Treasury Shares
Where the Group purchases Georgia Capital’s shares, the consideration paid, including any attributable transaction costs, net of income taxes,
is deducted from total equity as treasury shares until they are cancelled or reissued. Where such shares are subsequently sold or reissued, any
consideration received is included in equity. Treasury shares are stated at par value, with adjustment of premiums against other reserves.
Utility and Energy Revenue
The Group recognises revenue from utility when the Group satisfies a performance obligation at an amount that reflects the consideration to which
the Group expects to be entitled in exchange for transferring the goods and services to a customer. The following specific recognition criteria must
be met before revenue is recognised:
Dividends
Dividends are recognised as a liability and deducted from equity at the reporting date only if they are declared before or on the reporting date.
Dividends are disclosed when they are proposed before the reporting date or proposed or declared after the reporting date but before the
consolidated financial statements are authorised for issue. All expenses associated with dividend distribution are added to dividend amount and
recorded directly through equity.
Income and Expense Recognition
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured.
The following specific recognition criteria must also be met before revenue and expense is recognised:
Dividend Income
Dividend revenue is recognised when the Group’s right to receive the payment is established.
Insurance Income and Expense
• Premiums written
Insurance premiums written are recognised on policy inception and earned on a pro rata basis over the term of the related policy coverage.
Insurance premiums written reflect business incepted during the year before deduction of commission and exclude any sales-based taxes
or duties. Unearned premiums are those proportions of the premiums written in a year that relate to periods of risk after the reporting date.
Unearned premiums are computed principally on monthly pro-rata basis.
• Premiums ceded
Premiums payable in respect of reinsurance ceded are recognised in the period in which the reinsurance contract is entered into and include
estimates where the amounts are not determined at the reporting date. Premiums are expensed over the period of the reinsurance contract,
calculated principally on a daily pro-rata basis.
• Revenue from water supply – includes amounts billed to the customers based on the metered or estimated usage of water by legal entities
and by application of the relevant tariff for services set per unit of water supplied. Meters are read on a cyclical basis and the Group
recognises revenue for unbilled amounts based on estimated usage from the last billing through to the end of the financial year.
• Revenue from water supply to population – includes amounts billed on monthly basis to the residential customers (with meter) based on the
metered usage of water and by application of the relevant tariff for services set per unit of water supplied or based on the number of individual
person registered by respective city municipality per each residential address (without meter) by application of the relevant tariff set per capita
per month for the general population.
• Revenue from connection and water meter installation – includes non-refundable amounts billed upfront for connecting customers to water
system and providing them with the access to water supply. Revenue from connection and water meter installation is recognised over the time
in line with the satisfaction of performance obligation over the life of water meters.
Revenue from electric power sales is recognised on the basis of metered electric power transferred.
Real Estate Revenue
Gross real estate profit comprises revenue from sale of developed real estate property, revenue from construction services, revenue from
hospitality operations and revaluation gains on investment properties.
Revenue from sale of developed real estate property is recognised over the time based on the progress towards complete satisfaction of a
performance obligation using input method (proportion of costs incurred up to date to total expected project cost). Percentage of completion
calculated based on total costs of the building is applied to apartment selling price to recognise revenue from apartment sale. Payment
arrangements of the sale of developed real estate property usually include advance payment of part of transaction price and progress payments
during the construction by the customer, such payments are recognised as deferred income. Significant financing component is usually
immaterial.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
3. Summary of Significant Accounting Policies continued
Income and Expense Recognition continued
Real Estate Revenue continued
Revenue from construction services is recognised over the time based on the progress towards complete satisfaction of a performance obligation
using output method based on the completion level reflected in monthly completion reports. Payment arrangements for construction services
usually include advance payment of part of transaction price (usually up to 10%) and monthly progress payments during the construction by the
customer, 5% from each monthly progress payment is usually retained by the customer as guarantee for a year after the completions of
construction. Significant financing component is usually immaterial.
Revenue from hospitality operations is generated through hotel room and meeting space rental and sale of foods and beverages. Revenue is
recognised when the Group satisfies a performance obligation, i.e. over the time the customer stays in the hotel and food and beverages are
delivered to the customer, at an amount that reflects the consideration to which the Group expects to be entitled in exchange for transferring
the goods and services to a customer.
Beverages Revenue
Revenue from the sale of beverages is recognised when the Group satisfies the performance obligation, i.e. when the control of the goods has
passed to the buyer, usually on delivery of the goods. For the finished goods sold on consignment basis, revenue is recognised when the goods
are transferred to the end-customer or on expiration of specified period. Revenue recognised in connection to the sale of finished goods reflects
an adjustment for the consideration payable to the customer (cash amounts that the Group pays, or expects to pay, to a customer).
Gain on measurement of grapes at fair value less costs to sell is recognised at the point of harvest.
Revenue from Customer Loyalty Programme
Customer loyalty programme points accumulated in the business are treated as deferred revenue and recognised in revenues gradually as they
are earned. The Group recognises gross revenue earned from customer loyalty program when the performance obligation is satisfied, i.e. when
the customer redeems the points or the points expire, where the Group acts as a principal. At reach reporting date the Group estimates portion
of accumulated points that is expected to be utilised by customers based on statistical data. These points are treated as liability in the Statement
of Financial Position and are only recognised in revenues when points are earned or expired.
Interest and Similar Income and Expense
For all debt financial instruments measured at amortised cost and fair value through OCI interest income or expense is recorded at the effective
interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial
instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into
account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are
directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the
financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated
based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense.
Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income
continues to be recognised using the original effective interest rate applied to the new carrying amount.
EBITDA
The Group separately presents EBITDA on the face of the consolidated income statement. EBITDA is defined as earnings before interest, taxes,
depreciation and amortisation and is derived as the Group’s profit before income tax expense but excluding the following line items: depreciation
and amortisation, interest income, interest expense, net foreign currency (loss) gain, profits from associates and net non-recurring items.
Non-Recurring Items
The Group separately classifies and discloses those income and expenses that are non-recurring by nature. The Group defines non-recurring
income or expense as an income or expense triggered by or originated from an economic, business or financial event that is not inherent to
the regular and ordinary business course of the Group and is caused by uncertain or unpredictable external factors that cannot be reasonably
expected to occur in the future and thus they should not be taken into account when making projections of the future results.
Taxation
The current income tax expense is calculated in accordance with the regulations in force in the respective territories in which the Group and its
subsidiaries operate.
The annual profit earned by entities is not taxed in Georgia, except for insurance companies. Corporate income tax is paid on dividends,
donations, abnormal losses, non-business related disbursements, etc. The corporate income tax arising from the payment of dividends is
accounted for as a liability and expensed in the period in which dividends are declared, regardless of the actual payment date or the period
for which the dividends are paid. The corporate income tax rate is 15% in Georgia.
According to the UK tax legislation, UK companies pay corporation tax on all its profits. UK corporate tax rate is 19%. Georgia also has various
operating taxes that are assessed on the Group’s activities. These taxes are included as a component of general and administrative expenses.
3. Summary of Significant Accounting Policies continued
Functional, Presentation Currencies and Foreign Currency Translation
The Consolidated Financial Statements are presented in Georgian Lari, which is the Group’s presentation currency. Each entity in the Group
determines its own functional currency and items included in the consolidated financial statements of each entity are measured using that
functional currency. Transactions in foreign currencies are initially recorded in the functional currency, converted at the rate of exchange ruling at
the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated into functional currency at functional
currency rate of exchange ruling at the reporting date. Gains and losses resulting from the translation of foreign currency transactions are
recognised in the Consolidated Income Statement as net foreign currency gain (loss). Non-monetary items that are measured in terms of
historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items
measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. When a gain
or loss on a non-monetary item is recognised in other comprehensive income, any exchange component of that gain or loss is recognised in
other comprehensive income. Conversely, when a gain or loss on a non-monetary item is recognised in profit or loss, any exchange component
of that gain or loss is recognised in profit or loss.
Differences between the contractual exchange rate of a certain transaction and the National Bank of Georgia (NBG) exchange rate on the date of
the transaction are included in net foreign currency gain (loss). The official NBG exchange rates at 31 December 2018 and 31 December 2017
were as follows:
31 December 2018
31 December 2017
Lari to GBP
Lari to US$
Lari to EUR
3.3955
3.5005
2.6766
2.5922
3.0701
3.1044
As at the reporting date, the assets and liabilities of the entities whose functional currency is different from the presentation currency of the Group
are translated into Georgian Lari at the rate of exchange ruling at the reporting date and, their income statements are translated at the weighted
average exchange rates for the year. The exchange differences arising on the translation are taken to other comprehensive income. On disposal
of a subsidiary or an associate whose functional currency is different from the presentation currency of the Group, the deferred cumulative
amount recognised in other comprehensive income relating to that particular entity is recognised in the Consolidated Income Statement.
Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities
arising on the acquisition are treated as assets and liabilities of the foreign operations and translated at the rate at the reporting date.
Adoption of New or Revised Standards and Interpretations
The nature and the effect of these changes are disclosed below:
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after
1 January 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and
hedge accounting.
The Group adopted the new standard from the effective date by recognising the estimated impact from adoption in opening retained earnings on
1 January 2018 and as allowed by IFRS 9 did not restate comparative information.
The details of new significant accounting policies and the nature and effect of the changes to previous accounting policies are set out below.
(a) Classification and Measurement
Under IFRS 9, the Group initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or
loss, transaction costs.
Under IFRS 9, debt financial instruments are subsequently measured at fair value through profit or loss (FVPL), amortised cost, or fair value
through other comprehensive income (FVOCI). The classification is based on two criteria: the Group’s business model for managing the assets;
and whether the instruments’ contractual cash flows represent “solely payments of principal and interest” on the principal amount outstanding
(the “SPPI criterion”).
The new classification and measurement of the Group’s debt financial assets are, as follows:
• Debt instruments at amortised cost for financial assets that are held within a business model with the objective to hold the financial assets in
order to collect contractual cash flows that meet the SPPI criterion. This category includes the Group’s accounts receivables, cash and cash
equivalents, amounts due from credit institutions and loans disbursed. These assets are subsequently measured at amortised cost using the
effective interest method. The amortised cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and
impairment are recognised in profit or loss. Any gain or loss on derecognition is recognised in profit or loss.
• Debt instruments at FVOCI, with gains or losses recycled to profit or loss on derecognition. Financial assets in this category are the Group’s quoted
debt instruments that meet the SPPI criterion and are held within a business model both to collect cash flows and to sell. Under IAS 39, the Group’s
quoted debt instruments were classified as available-for-sale (AFS) financial assets. These assets are subsequently measured at fair value. Interest
income calculated using the effective interest method, foreign exchange gains and losses and impairment are recognised in profit or loss. Other net
gains and losses are recognised in OCI. On derecognition, gains and losses accumulated in OCI are reclassified to profit or loss.
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197
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
3. Summary of Significant Accounting Policies continued
Adoption of New or Revised Standards and Interpretations continued
IFRS 9 Financial Instruments continued
Other financial assets are classified and subsequently measured, as follows:
• Equity instruments at FVOCI, with no recycling of gains or losses to profit or loss on derecognition. This category only includes equity
instruments, which the Group intends to hold for the foreseeable future and which the Group has irrevocably elected to so classify upon initial
recognition or transition. The Group classified its unquoted and some quoted equity instruments as equity instruments at FVOCI. Equity
instruments at FVOCI are not subject to an impairment assessment under IFRS 9. Under IAS 39, the Group’s investment in equity instruments
were classified as AFS financial assets. These assets are subsequently measured at fair value. Dividends are recognised as income in profit or
loss unless the dividend clearly represents a recovery of part of the cost of the investment. Other net gains and losses are recognised in OCI
and are never reclassified to profit or loss.
• Financial assets at FVPL comprise derivative instruments and quoted equity instruments which the Group had not irrevocably elected, at initial
recognition or transition, to classify at FVOCI. This category would also include debt instruments whose cash flow characteristics fail the SPPI
criterion or are not held within a business model whose objective is either to collect contractual cash flows, or to both collect contractual cash
flows and sell. Net gains and losses, including any interest or dividend income from financial assets at FVPL, are recognised in profit or loss
Under IAS 39, the Group’s quoted equity securities were classified as AFS financial assets.
The assessment of the Group’s business models was made as of the date of initial application, 1 January 2018, and then applied retrospectively to
those financial assets that were not derecognised before 1 January 2018. The assessment of whether contractual cash flows on debt instruments
are solely comprised of principal and interest was made based on the facts and circumstances as at the initial recognition of the assets.
The accounting for the Group’s financial liabilities remains largely the same as it was under IAS 39. Similar to the requirements of IAS 39, IFRS 9
requires contingent consideration liabilities to be treated as financial instruments measured at fair value, with the changes in fair value recognised
in the Statement of Profit or Loss.
Under IFRS 9, embedded derivatives are no longer separated from a host financial asset. Instead, financial assets are classified based on their
contractual terms and the Group’s business model. The accounting for derivatives embedded in financial liabilities and in non-financial host
contracts has not changed from that required by IAS 39.
The effect of adopting IFRS 9 on the carrying amounts of financial assets at 1 January 2018 relates solely to the new impairment requirements,
as described further below.
The following table below summarises the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for
each class of the Group’s financial assets and liabilities as at 1 January 2018 and shows the adjustments recognised for each individual line item.
Line items that were not affected by the changes have not been included. As a result, the sub-totals and totals disclosed cannot be recalculated
from the numbers provided. The adjustments are explained in more detail below.
Assets
Cash and cash equivalents
Amounts due from credit institutions
Debt securities owned
Debt securities
Equity investments at fair value
Corporate shares
Accounts receivable
Total assets
Total liabilities
Original classification
New classification under
under IAS 39
IFRS 9
Original carrying
amount under
IAS 39
New carrying
amount under
IFRS 9
ECL
Loan and receivables
Loan and receivables
Amortised cost
Amortised cost
Available for sale
FVOCI–debt
Available for sale
Loan and receivables
FVOCI–designated
Amortised cost
346,241
38,141
31,907
31,907
1,153
1,153
158,725
(2)
–
–
–
–
–
(13,830)
346,239
38,141
31,907
31,907
1,153
1,153
144,895
2,716,348
(13,832)
2,702,516
1,574,120
–
1,574,120
In addition to the application of new measurement categories under IFRS 9, the Group changed the presentation of debt and equity investment
securities, which are presented separately as “debt securities owned” and “equity investments at fair value” in the Statement of Financial Position.
Prior to the change, debt and equity investment securities were presented together as “investment securities”.
(b) Impairment
The adoption of IFRS 9 has fundamentally changed the Group’s accounting for impairment losses for financial assets by replacing IAS 39’s
incurred loss approach with a forward-looking expected credit loss (ECL) approach.
IFRS 9 requires the Group to record an allowance for ECLs for all loans disbursed and other debt financial assets not held at FVPL. ECLs are
based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects
to receive. The shortfall is then discounted at an approximation to the asset’s original effective interest rate.
For contract assets and accounts receivable, the Group has applied the standard’s simplified approach and has calculated ECLs based on
lifetime expected credit losses. The Group has established a provision matrix that is based on the Group’s historical credit loss experience,
adjusted for forward-looking factors specific to the debtors and the economic environment.
3. Summary of Significant Accounting Policies continued
Adoption of New or Revised Standards and Interpretations continued
IFRS 9 Financial Instruments continued
For other debt financial assets (i.e., amounts due from credit institutions and loans at amortised cost and debt securities at FVOCI), the ECL is
based on the 12-month ECL. The 12-month ECL is the portion of lifetime ECLs that results from default events on a financial instrument that are
possible within 12 months after the reporting date. However, when there has been a significant increase in credit risk since origination, the
allowance will be based on the lifetime ECL. In all cases, the Group considers that there has been a significant increase in credit risk when
contractual payments are more than 30 days past due.
The Group considers a financial asset in default when contractual payment are 90 days past due. However, in certain cases, the Group may also
consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding
contractual amounts in full before taking into account any credit enhancements held by the Group.
The adoption of the ECL requirements of IFRS 9 resulted in increases in impairment allowances of the Group’s debt financial assets. The increase
in allowance resulted in adjustment to retained earnings.
The following table summarises the impact, net of tax, of transition to IFRS 9 on the opening balance of reserves, retained earnings and NCI: Line
items that were not affected by the changes have not been included. As a result, total equity cannot be recalculated from the numbers provided.
Closing balance under IAS 39 (31 December 2017)
Reclassifications under IFRS 9
Recognition of expected credit loss under IFRS 9 for assets at amortised cost
Recognition of expected credit loss under IFRS 9 for assets at FVOCI
Retained
earnings
197,222
–
(10,616)
(192)
Other reserves
Non-controlling
interest
171,254
–
–
192
297,565
–
(3,216)
–
Total equity
1,142,228
–
(13,832)
–
Opening balance under IFRS 9 (1 January 2018)
186,414
171,446
294,349
1,128,396
The following table demonstrates the impact on opening balance of loss allowance:
Loans and receivables (IAS 39)/Financial assets at amortised cost (IFRS 9)
Cash and cash equivalents
Debt securities owned
Accounts receivable
Total impact of adopting IFRS 9 at 1 January 2018
(c) Hedge Accounting
The Group continues to apply the hedge accounting requirements of IAS 39.
Loss allowance
under IAS 39/IAS
37
at 31 December
2017
Loss allowance
under IFRS 9 at
1 January 2018
ECL
–
–
(18,695)
(18,695)
(2)
(192)
(13,830)
(13,832)
(2)
(192)
(32,525)
(32,527)
(d) Other Adjustments
In addition to the adjustments described above, upon adoption of IFRS 9, other items of the primary Financial Statements such as assets held for
sale and liabilities associated with them and exchange differences on translation of foreign operations were adjusted as necessary.
IFRIC Interpretation 22 Foreign Currency Transactions and Advance Considerations
The Interpretation clarifies that, in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part
of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the
date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the advance consideration. If there are
multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance
consideration. This Interpretation does not have any impact on the Group’s Consolidated Financial Statements.
Amendments to IAS 40 Transfers of Investment Property
The amendments clarify when an entity should transfer property, including property under construction or development into, or out of investment
property. The amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property
and there is evidence of the change in use. A mere change in management’s intentions for the use of a property does not provide evidence of a
change in use. These amendments do not have any impact on the Group’s Consolidated Financial Statements.
Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions
The IASB issued amendments to IFRS 2 Share-Based Payment that address three main areas: the effects of vesting conditions on the
measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement
features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based payment transaction
changes its classification from cash-settled to equity-settled. On adoption, entities are required to apply the amendments without restating prior
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199
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
3. Summary of Significant Accounting Policies continued
Adoption of New or Revised Standards and Interpretations continued
Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions continued
periods, but retrospective application is permitted if elected for all three amendments and other criteria are met. The Group’s accounting policy for
share-based transactions with net settlement features for withholding tax obligations is consistent with the approach clarified in the amendments.
In addition, the Group has no cash-settled share-based payment transactions and had not made modifications to the terms and conditions of its
share-based payment transaction where modification changed classification from cash-settled to equity-settled. Therefore, these amendments do
not have any impact on the Group’s Consolidated Financial Statements.
3. Summary of Significant Accounting Policies continued
Standards Issued But Not Yet Effective continued
Transition to IFRS 16
The Group plans to adopt IFRS 16 using modified retrospective approach, i.e. the Group will recognise cumulative catch-up adjustment on opening
balance sheet without the restatement of prior period comparatives. At transition the Group will recognise a lease liability for leases previously
classified as an operating lease applying IAS 17. Lease liability will be measured at the present value of the remaining lease payments, discounted
using the incremental borrowing rate at the date of initial application. The Group will also recognise a right-of-use asset for such leases at an
amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the
Statement of Financial Position immediately before the date of initial application. The Group applies the following practical expedients:
Amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts
The amendments address concerns arising from implementing the new financial instruments standard, IFRS 9, before implementing IFRS 17
Insurance Contracts, which replaces IFRS 4. The amendments introduce two options for entities issuing insurance contracts: a temporary exemption
from applying IFRS 9 and an overlay approach. These amendments did not have impact on the Group’s Consolidated Financial Statements.
• The Group applies a single discount rate to a portfolio of leases with reasonably similar characteristics.
• The Group relies on its assessment of whether leases are onerous applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets
immediately before the date of initial application as an alternative to performing an impairment review.
• The Group excludes initial direct costs from the measurement of the right-of-use asset at the date of initial application.
Amendments to IAS 28 Investments in Associates and Joint Ventures – Clarification That Measuring Investees at Fair Value Through
Profit or Loss is an Investment-by-Investment Choice
The amendments clarify that an entity that is a venture capital organisation, or other qualifying entity, may elect, at initial recognition on an
investment-by-investment basis, to measure its investments in associates and joint ventures at fair value through profit or loss. If an entity, that is
not itself an investment entity, has an interest in an associate or joint venture that is an investment entity, the entity may, when applying the equity
method, elect to retain the fair value measurement applied by that investment entity associate or joint venture to the investment entity associate’s
or joint venture’s interests in subsidiaries. This election is made separately for each investment entity associate or joint venture, at the later of the
date on which: (a) the investment entity associate or joint venture is initially recognised; (b) the associate or joint venture becomes an investment
entity; and (c) the investment entity associate or joint venture first becomes a parent. These amendments do not have any impact on the Group’s
Consolidated Financial Statements.
Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards – Deletion of Short-Term Exemptions for
First-Time Adopters
Short-term exemptions in paragraphs E3–E7 of IFRS 1 were deleted because they have now served their intended purpose. These amendments
do not have any impact on the Group’s Consolidated Financial Statements.
Standards Issued But Not Yet Effective
Up to the date of approval of the Consolidated Financial Statements, certain new standards, interpretations and amendments to existing
standards have been published that are not yet effective for the current reporting period and which the Group has not early adopted. Such
standards that are expected to have an impact on the Group, or the impacts of which are currently being assessed, are as follows:
IFRS 17 Insurance Contracts
In May 2017, the IASB issued IFRS 17 Insurance Contracts, a new accounting standard for insurance contracts covering recognition and
measurement, presentation and disclosure. Once effective, it will replace IFRS 4 Insurance Contracts that was issued in 2005. In contrast to the
requirements in IFRS 4, IFRS 17 provides a comprehensive model for insurance contracts covering all relevant accounting aspects. IFRS 17 is
effective for reporting periods starting on or after 1 January 2022, with comparative figures required. Early application is permitted using either a full
retrospective or a modified retrospective approach, provided the entity also applies IFRS 9 and IFRS 15 on or before the date it first applies IFRS 17.
The Group is currently evaluating the impact.
IFRS 16 Leases
IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an arrangement contains a lease, SIC-15
Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the
principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single
on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees
– leases of “low-value” assets (e.g. personal computers) and short-term leases (i.e. leases with a lease term of 12 months or less). At the
commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e. the lease liability) and an asset representing the
right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognise the interest
expense on the lease liability and the depreciation expense on the right-of-use asset.
Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g. a change in the lease term, a change in
future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognise the
amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.
Lessor accounting under IFRS 16 is substantially unchanged from today’s accounting under IAS 17. Lessors will continue to classify all leases
using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases.
IFRS 16, which is effective for annual periods beginning on or after 1 January 2019, requires lessees and lessors to make more extensive
disclosures than under IAS 17.
The Group will elect to use the exemptions proposed by the standard on lease contracts for which the lease terms ends within 12 months for
leased vehicles and equipment and lease contracts for which the underlying asset is of low value.
During 2018, the Group has performed a detailed impact assessment of IFRS 16. In summary the impact of IFRS 16 adoption is expected to be,
as follows:
Impact on the Statement of Financial Position (Increase/(Decrease)) as at 31 December 2018
Property and equipment
Prepayment
Total assets
Lease liabilities
Total liabilities
31 December
2018
83,758
(261)
83,497
83,497
83,497
Due to the adoption of IFRS 16, the Group’s EBITDA will improve, while its interest expense will increase. This is due to the change in the
accounting for expenses of leases that were classified as operating leases under IAS 17.
IAS 23 Interpretation: Recognition of Borrowing Costs in Arrangements to Sell Properties Where the Property is Transferred Over
Time
In March 2019, IFRS Interpretations Committee adopted the final agenda decision in relation to recognition of borrowing costs in arrangements to
sell properties (units in a building) where the property is transferred over time under IFRS 15. According to the agenda decision, capitalisation of
borrowing costs under to cost of sold or unsold units would not be appropriate under IAS 23. As the result of new interpretation arising from the
IFRS Interpretations Committee decision, the Company considers changing its existing accounting policy in relation to borrowing costs
capitalisation to cost of inventory property. The Group is currently estimating the effect of the expected change in accounting policy.
IFRIC Interpretation 23 Uncertainty over Income Tax Treatment
The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 and
does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties
associated with uncertain tax treatments. The Interpretation specifically addresses the following:
• Whether an entity considers uncertain tax treatments separately.
• The assumptions an entity makes about the examination of tax treatments by taxation authorities.
• How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates.
• How an entity considers changes in facts and circumstances.
An entity has to determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments.
The approach that better predicts the resolution of the uncertainty should be followed. The interpretation is effective for annual reporting periods
beginning on or after 1 January 2019, but certain transition reliefs are available. The Group will apply the interpretation from its effective date.
Amendments to IFRS 9: Prepayment Features with Negative Compensation
Under IFRS 9, a debt instrument can be measured at amortised cost or at fair value through other comprehensive income, provided that the
contractual cash flows are “solely payments of principal and interest on the principal amount outstanding” (the SPPI criterion) and the instrument
is held within the appropriate business model for that classification. The amendments to IFRS 9 clarify that a financial asset passes the SPPI
criterion regardless of the event or circumstance that causes the early termination of the contract and irrespective of which party pays or receives
reasonable compensation for the early termination of the contract.
The amendments should be applied retrospectively and are effective from 1 January 2019, with earlier application permitted. These amendments
have no impact on the Consolidated Financial Statements of the Group.
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201
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
3. Summary of Significant Accounting Policies continued
Standards Issued But Not Yet Effective continued
Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
The amendments address the conflict between IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an
associate or joint venture. The amendments clarify that the gain or loss resulting from the sale or contribution of assets that constitute a business, as
defined in IFRS 3, between an investor and its associate or joint venture, is recognised in full. Any gain or loss resulting from the sale or contribution
of assets that do not constitute a business, however, is recognised only to the extent of unrelated investors’ interests in the associate or joint venture.
The IASB has deferred the effective date of these amendments indefinitely, but an entity that early adopts the amendments must apply them
prospectively. These amendments have no impact on the Consolidated Financial Statements of the Group.
3. Summary of Significant Accounting Policies continued
Standards Issued But Not Yet Effective continued
Annual Improvements 2015-2017 Cycle (issued in December 2017) continued
•
IAS 23 Borrowing Costs
The amendments clarify that an entity treats as part of general borrowings any borrowing originally made to develop a qualifying asset when
substantially all of the activities necessary to prepare that asset for its intended use or sale are complete. An entity applies those amendments
to borrowing costs incurred on or after the beginning of the annual reporting period in which the entity first applies those amendments. An
entity applies those amendments for annual reporting periods beginning on or after 1 January 2019, with early application permitted. Since
the Group’s current practice is in line with these amendments, the Group does not expect any effect on its Consolidated Financial Statements.
Amendments to IAS 19: Plan Amendment, Curtailment or Settlement
The amendments to IAS 19 address the accounting when a plan amendment, curtailment or settlement occurs during a reporting period. The
amendments specify that when a plan amendment, curtailment or settlement occurs during the annual reporting period, an entity is required to:
Reclassifications
As at 31 December 2018 the Group changed the presentation of its Consolidated Income Statement and aggregated all the revenue and cost of
sales under two separate line items respectively.
The following reclassification was made to year ended 31 December 2017 Consolidated Income Statement to conform to the year ended
31 December 2018 presentation requirements.
Utility and energy revenue
Cost of utility and energy
Gross utility and energy profit
Real estate revenue
Cost of real estate
Gross real estate profit
Net insurance premiums earned
Net insurance claims incurred
Gross insurance profit
Beverage revenue
Cost of beverage
Gross beverage profit
Healthcare and pharma revenue
Cost of healthcare and pharma services
Gross healthcare and pharma profit
Other income
Revenue
Cost of sales
Gross profit
As previously
reported*
Reclassification
As
Reclassified
127,569
(39,198)
(127,569)
39,198
88,371
(88,371)
121,862
(85,765)
(121,862)
85,765
36,097
(36,097)
102,329
(60,251)
42,078
55,441
(32,313)
23,128
691,971
(478,182)
(102,329)
60,251
(42,078)
(55,441)
32,313
(23,128)
(691,971)
478,182
213,789
(213,789)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
27,998
–
–
431,461
(27,998)
1,127,170
(695,709)
–
1,127,170
(695,709)
–
431,461
*
The numbers include Georgia Healthcare Group PLC, that was previously classified as disposal group held for sale as at 31 December 2017. Refer to Note 6.
• Determine current service cost for the remainder of the period after the plan amendment, curtailment or settlement, using the actuarial
assumptions used to remeasure the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after
that event.
• Determine net interest for the remainder of the period after the plan amendment, curtailment or settlement using: the net defined benefit
liability (asset) reflecting the benefits offered under the plan and the plan assets after that event; and the discount rate used to remeasure
that net defined benefit liability (asset).
The amendments also clarify that an entity first determines any past service cost, or a gain or loss on settlement, without considering the effect
of the asset ceiling. This amount is recognised in profit or loss. An entity then determines the effect of the asset ceiling after the plan amendment,
curtailment or settlement. Any change in that effect, excluding amounts included in the net interest, is recognised in other comprehensive income.
The amendments apply to plan amendments, curtailments, or settlements occurring on or after the beginning of the first annual reporting period
that begins on or after 1 January 2019, with early application permitted. These amendments will apply only to any future plan amendments,
curtailments or settlements of the Group.
Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures
The amendments clarify that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not
applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). This clarification is relevant
because it implies that the expected credit loss model in IFRS 9 applies to such long-term interests.
The amendments also clarified that, in applying IFRS 9, an entity does not take account of any losses of the associate or joint venture, or any
impairment losses on the net investment, recognised as adjustments to the net investment in the associate or joint venture that arise from
applying IAS 28 Investments in Associates and Joint Ventures.
The amendments should be applied retrospectively and are effective from 1 January 2019, with early application permitted. Since the Group
does not have such long-term interests in its associate and joint venture, the amendments will not have an impact on its Consolidated
Financial Statements.
Annual Improvements 2015-2017 Cycle (issued in December 2017)
These improvements include:
•
•
•
IFRS 3 Business Combinations
The amendments clarify that, when an entity obtains control of a business that is a joint operation, it applies the requirements for a business
combination achieved in stages, including remeasuring previously held interests in the assets and liabilities of the joint operation at fair value.
In doing so, the acquirer remeasures its entire previously held interest in the joint operation. An entity applies those amendments to business
combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January
2019, with early application permitted. These amendments will apply on future business combinations of the Group.
IFRS 11 Joint Arrangements
A party that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation in which the
activity of the joint operation constitutes a business as defined in IFRS 3. The amendments clarify that the previously held interests in that joint
operation are not remeasured. An entity applies those amendments to transactions in which it obtains joint control on or after the beginning of
the first annual reporting period beginning on or after 1 January 2019, with early application permitted. These amendments are currently not
applicable to the Group but may apply to future transactions.
IAS 12 Income Taxes
The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or events that generated
distributable profits than to distributions to owners. Therefore, an entity recognises the income tax consequences of dividends in profit or loss,
other comprehensive income or equity according to where the entity originally recognised those past transactions or events. An entity applies
those amendments for annual reporting periods beginning on or after 1 January 2019, with early application is permitted. When an entity first
applies those amendments, it applies them to the income tax consequences of dividends recognised on or after the beginning of the earliest
comparative period. Since the Group’s current practice is in line with these amendments, the Group does not expect any effect on its
Consolidated Financial Statements.
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203
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
4. Significant Accounting Judgements and Estimates
In the process of applying the Group’s accounting policies, the Management Board use their judgement and make estimates in determining the
amounts recognised in the Consolidated Financial Statements. The most significant judgements and estimates are as follows:
Measurement of Fair Value of Investment Properties and Property and Equipment
The fair value of investment properties is determined by independent professionally qualified appraisers. Fair value is determined using a
combination of the internal capitalisation method (also known as discounted future cash flow method) and the sales comparison method.
Infrastructure assets included in property and equipment are carried at fair value. For the years ended 31 December 2018 and 2017 the Group
performed the analysis based on discounted cash flow method to ensure that the carrying value of infrastructure assets does not differ materially
from their fair value.
The Group performs valuation of its investment properties and infrastructure assets included in property and equipment with a sufficient regularity
to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting
period. Results of this valuation are presented in Notes 13 and 14, while valuation inputs and techniques are presented in Note 31. The Group’s
properties are specialised in nature and spread across the different parts of the country. While the secondary market in Georgia provides adequate
market information for fair value measurements for small and medium-sized properties, valuation of large and unique properties involves application
of various observable and unobservable inputs to determine adjustments to the available comparable sale prices. These estimates and
assumptions are based on the best available information, however, actual results could be different.
Impairment of insurance Premiums Receivable, Accounts Receivable and Other Assets
The impairment provision for insurance premiums receivable, accounts receivable and other assets is based on the Group’s assessment of the
collectability of specific customer accounts. If there is a sign of deterioration in an individually significant customer’s creditworthiness, the
respective receivable is considered to be impaired. A key criterion for defining the signs of such deterioration is the customers’ debt services quality
measured by the numbers of days in arrears (i.e. the number of days for overdue payments). Based on the respective analysis of the current and
past debt services of the customers, the Group determines whether or not there is an objective evidence of impairment. If the Group determines
that objective evidence of impairment exists, the proper provision rate is applied. If the Group determines that no objective evidence of impairment
exists, whether significant or not, it includes the trade and other receivables in a group of financial assets with similar credit risk characteristics and
collectively assesses them for impairment. For collective assessment purposes the management judgement is that historical trends can serve as a
basis for predicting incurred losses and that this approach can be used to estimate the amount of recoverable debts as at the reporting period end.
Actual results may differ from the estimates.
The amount of allowance for impairment of the trade and other receivables as at 31 December 2018 was GEL 21,713 (31 December 2017:
GEL 4,003). Refer to Note 27.
The amount of allowance for impairment of insurance premiums receivable as at 31 December 2018 was GEL 8,285 (31 December 2017:
GEL 4,243). Refer to Note 27.
Claims Liability Arising From Insurance Contracts
For insurance contracts, estimates have to be made both for the expected ultimate cost of claims reported at the reporting date and for the
expected ultimate cost of claims incurred but not yet reported (IBNR) at the reporting date. It can take a significant period of time before the
ultimate claims cost can be established with certainty. Insurance claims provisions are not discounted for the time value of money. Refer to Note 18.
Ownership and Recognition of Infrastructure Assets
The Group’s property, plant and equipment includes certain specific items, such as like water supply and wastewater network pipelines, pump
stations and other infrastructure assets, that were historically used by the Group in supply of water and wastewater services and that have been
transferred to the Group as a result of the privatisation transaction.
Due to the lack of required documents and timing for registration, the Group was not able to obtain legal ownership title on certain fixed assets
including infrastructure assets as at the date of these Consolidated Financial Statements.
However, based on the provisions of privatisation agreement, management has applied judgement and considered that as infrastructure assets
include specific items that were historically used by the Group and could only be used by the Group (as a sole provider of water and water supply
services in Tbilisi, Rustavi and Mtskheta) there is high probability that the Group will continue operation of infrastructure assets in future and will
obtain legal title of ownership. Based on this judgement and to the extent that there was no litigation against the Group or disputes on ownership,
management recognised infrastructure assets as the Group’s property, plant and equipment.
4. Significant Accounting Judgements and Estimates continued
Impairment of Non-Financial Assets
The Group annually performs impairment testing for intangible assets with indefinite useful life, goodwill acquired in a business combination and
any assets for which impairment indicators have been identified. Impairment exists when the carrying value of an asset or cash-generating unit
exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal
calculation is based on available data from binding sales transactions, conducted at arm’s length, for similar assets or observable market prices
less incremental costs of disposing of the asset. The value in use calculation is based on a DCF model. The cash flows are derived from the budget
for the next four to five years and do not include restructuring activities that the Group is not yet committed to or significant future investments that
will enhance the performance of the assets of the CGU being tested. The recoverable amount is sensitive to the discount rate used for the DCF
model as well as the expected future cash-inflows and the growth rate used for extrapolation purposes. The key assumptions used to determine
the recoverable amount for the different CGUs, including a sensitivity analysis, are disclosed and further explained in the Note 15.
As at 31 December 2018, the Group performed impairment test for the assets of its beer business (cash-generating unit or CGU), which plans
to introduce several new beer brands in Georgia, commence local production of Heineken and rebrand existing lemonade production. The
recoverable amount of the CGU was determined as its value in use based on a DCF model. The values assigned to the key assumptions represent
management’s assessment of the Company’s future performance, competition analysis, macro-economic factors and trends in the beverages
industry. The calculations use cash flow projections based on approved financial budgets covering a four-year period. Cash flows beyond the
four-year period are extrapolated using the estimated terminal growth rate.
The following table sets out the key assumptions for the beer CGU impairment test:
Assumption
WACC
Terminal growth rate
Beer sales volume growth CAGR in four-year period
Value
15.4%
3.5%
17.8%
Based on the above assumptions, assets of beer business are not impaired for the year ended 31 December 2018. The recoverable amount of GEL
100,145 thousands almost equals the carrying amount of the CGU adjusted for working capital. Sensitivity analysis for changes in key assumptions
(lower forecast volumes, lower terminal period growth rates or higher discount rates) was performed. Any adverse movement in key estimates
might result in impairment of CGU.
5. Business Combinations
Acquisitions During The Year Ended 31 December 2018
Acquisition of Genuine Brewing Company
On 7 February 2018 the Group acquired 100% equity stake in a Georgian craft beer producer, Genuine Brewing Company LLC.
Net assets of Genuine Brewing Company LLC at acquisition date comprised GEL 5,609. Consideration comprised of GEL 7,835.
The fair values of aggregate identifiable assets and liabilities of Genuine Brewing Company LLC as at the date of acquisition were:
Cash and cash equivalents
Accounts receivable 1
Inventories
Property and equipment
Intangible assets
Other assets
Accounts payable
Other liabilities
Total identifiable net assets
Goodwill arising on business combination
Purchase consideration
Fair value
recognised on
acquisition
129
214
442
5,297
74
1
6,157
195
353
548
5,609
2,226
7,835
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205
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
5. Business Combinations continued
Acquisitions During The Year Ended 31 December 2018 continued
Acquisition of Genuine Brewing Company continued
The net cash outflow on acquisition was as follows:
Cash paid
Cash acquired with the subsidiary
Net cash outflow
31 December
2018
(7,835)
129
(7,706)
The Group decided to increase its presence in the beverage market by acquiring Genuine Brewing Company LLC. Management considers that
the purchase will have a positive impact on the value of the Group’s beverage business.
Since the acquisition, Genuine Brewing Company LLC has recorded GEL 1,967 and GEL 2,183 of revenue and loss, respectively. Group’s profit
and revenue would not have been materially different if the acquisition had taken place at the beginning of the year.
The primary factor that contributed to the cost of the business combination that resulted in the recognition of goodwill on acquisition is the
positive synergy that is expected to be brought into the Group’s operations.
1 The fair value of the receivables amounted to GEL 214. The gross amount of receivables is GEL 214.
Kindzmarauli Marani LLC
On 26 April 2018 Georgia Capital acquired 60.5% of Kindzmarauli Marani LLC (“Kindzmarauli”), a producer of high-quality Georgian wines and
spirits, which owns 350 hectares of vineyards in Georgia’s Kakheti region, from individual investors. The acquisition was carried out through
locally established special purpose vehicle (SPV). The control over Kindzmarauli is obtained without having direct equity interest, through loan and
management agreements signed with SPV, which provide Georgia Capital with the power, exposure to variability of returns and the ability to use
the power to affect the returns of Kindzmarauli.
The fair values of aggregate identifiable assets and liabilities of Kindzmarauli as at the date of acquisition were:
Cash and cash equivalents
Accounts receivable 1
Inventories
Property and equipment
Intangible assets
Prepayments
Borrowings
Accounts payable
Deferred income
Other liabilities
Total identifiable net assets
Non-controlling interests
Goodwill arising on business combination
Purchase consideration 2
Fair value
recognised on
acquisition
1,209
1,899
2,817
26,299
28
19
32,272
14,560
2,586
836
82
18,064
14,208
(472)
3,136
17,816
5. Business Combinations continued
Acquisitions During The Year Ended 31 December 2018 continued
Kindzmarauli Marani LLC continued
The Group decided to obtain ownership over 350 hectares of vineyards and wine production facilities in Georgia’s Kakheti region as a step
towards Georgia Capital’s goal of owning 1,000 hectares of vineyards through the acquisition of Kindzmarauli. Management considers that the
acquisition will have a positive impact on the value of the Group.
Since the acquisition, Kindzmarauli has recorded GEL 6,698 and GEL 1,207 of revenue and loss, respectively. Group’s profit and revenue would
not have been materially different if the acquisition had taken place at the beginning of the year.
The primary factor that contributed to the cost of the business combination that resulted in the recognition of goodwill on acquisition is the
positive synergy that is expected to be brought into the Group’s operations.
In August 2018 Group acquired additional 39.5% ownership interest in Kindzmarauli as a result of which Group became 100% shareholder of the
Company. Group paid GEL 5,667 (of which GEL 651 is holdback outstanding as at 31 December 2018) total consideration for the acquisition and
recorded GEL 7,022 unrealised loss from acquisition of non-controlling interest in existing subsidiary.
1 The fair value of the receivables amounted to GEL 1,899. The gross amount of receivables is GEL 1,899.
2 Purchase consideration comprises of GEL 6,143 cash payment for acquisition of equity stake in the company and GEL 11,673 paid to acquire a loan to the acquiree from its previous
controlling shareholder.
JSC Vabaco
On 27 September 2018 Group’s healthcare subsidiary JSC Georgia Healthcare Group acquired 67% of JSC Vabaco (“Vabaco”) shares from
individual investors. JSC Vabaco is a software service company in Georgia.
The fair values of identifiable assets and liabilities of Vabaco as at the date of acquisition were:
Cash and cash equivalents
Property and equipment
Intangible assets
Other assets
Accounts payable
Accruals for employee compensation
Other liabilities
Total identifiable net assets
Non-controlling interests
Goodwill arising on business combination
Purchase consideration 1
The net cash outflow on acquisition was as follows:
Cash paid
Cash acquired with the subsidiary
Net cash outflow
Fair value
recognised on
acquisition
22
20
1,992
20
2,054
157
201
132
490
1,564
516
–
1,048
31 December
2018
(1,048)
22
1,026
For the purposes of NCI calculation, net assets of Kindzmarauli are derived after deducting liability outstanding to Georgia Capital at acquisition
date fair value.
By acquiring Vabaco the Group’s healthcare subsidiary gets full access to software and the unique software specific values that the acquisition
creates to the Company. Management of GHG considers that the deal will have a positive impact on the value of the Company.
The net cash outflow on acquisition was as follows:
Cash paid
Cash acquired with the subsidiary
Net cash outflow
31 December
2018
(17,816)
1,209
(16,607)
Since acquisition, Vabaco has recorded GEL 61 and GEL 12 of revenue and profit, respectively. For the year ended 31 December 2018 revenue
and profit of the acquired entity were GEL 365 and GEL 42, respectively.
The Group has elected to measure the non-controlling interests in Vabaco at the non-controlling interests’ proportionate share of Vabaco’s
identifiable net assets.
1 Consideration comprised GEL 1,048, which has been fully paid as at reporting date.
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207
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
6. Discontinued Operations and Assets and Liabilities of Disposal Group Held for Sale
At 31 December 2017, given the expectation, in line with Georgia Capital’s strategy, Group intended reduction to Georgia Healthcare Group
(GHG) stake to below 50% by the end of the year 2018. In line with IFRS 5 requirements, Georgia Capital classified GHG as a disposal group held
for sale/discontinued operations in 2017 Consolidated Financial Statements. The Group classified GHG’s results of operations under
“discontinued operations” line as a single amount in the Consolidated Income Statement.
On 23 August 2018 Georgia Capital announced that it no longer expects to own less than 50% stake in GHG at the end of 2018. The Group
concluded that current share price of GHG significantly undervalues its performance and it would not be in the best interests of the Group’s
shareholders to reduce ownership interest in GHG to below 50% during 2018 and, consequently, Georgia Capital PLC shall continue to hold over
50% of GHG until such time as the Group considers it to be in the best interests of shareholders to do otherwise.
As the sell down of GHG shares to below 50% within one year from classification as held for sale is no longer probable (i.e. the Board withdrew
the plan to sell at current share price), investment in GHG stopped meeting IFRS 5 criteria for classification on 23 August, therefore Georgia
Capital ceases to classify GHG as a disposal group held for sale in 2018 annual Consolidated Financial Statements.
IFRS 5 requires that financial statements for the periods since classification as held for sale shall be amended accordingly if the disposal group or
non-current asset that ceases to be classified as held for sale is a subsidiary.
The results of operations and cash flows of GHG have been included in results from continuing operations for all periods presented. Comparative
Consolidated Income Statement and Consolidated Statement of Cash Flows for the year 2017 have been re-presented accordingly. Comparative
Consolidated Statement of Financial Position has not been represented; assets and liabilities of GHG continue to be presented separately as
assets and liabilities of a disposal group held for sale as at 31 December 2017.
6. Discontinued Operations and Assets and Liabilities of Disposal Group Held for Sale continued
Below are re-presented Income Statement line items of the Group attributable to GHG for the year ended 2017:
As previously
reported
Reclassification
As
Reclassified
Healthcare and pharma revenue
Cost of healthcare and pharma services
Gross healthcare and pharma profit
Utility and energy revenue
Cost of utility and energy
Gross utility and energy profit
Real estate revenue
Cost of real estate
Gross real estate profit
Net insurance premiums earned
Net insurance claims incurred
Gross insurance profit
Beverage revenue
Cost of beverage
Gross beverage profit
Other income
Gross profit
Salaries and other employee benefits
Administrative expenses
Other operating expenses
Expected credit loss/impairment charge on financial assets
Impairment charge on insurance premium receivables, other assets and provisions
EBITDA
Share in profit of associates
Depreciation and amortisation
Net foreign currency loss
Interest income
Interest expense
Net operating income before non-recurring items
Net non-recurring items
Profit before income tax expense from continuing operations
Income tax expense
Profit for the year from continuing operations
Profit from discontinued operations
Profit for the year
–
–
–
691,971
(478,182)
213,789
127,569
(39,198)
88,371
121,133
(85,765)
35,368
52,147
(25,098)
27,049
55,441
(32,313)
23,128
7,622
181,538
(31,783)
(35,578)
(1,892)
(2,475)
(942)
(72,670)
–
(28,237)
(830)
6,847
(33,397)
53,251
(551)
52,700
(5,749)
46,951
47,318
94,269
–
–
–
729
–
729
50,182
(35,153)
15,029
–
–
–
20,376
249,923
(75,429)
(50,121)
(10,945)
(3,696)
(479)
376
(25,794)
(5,907)
2,062
(27,506)
52,484
(4,779)
47,705
(387)
47,318
(47,318)
691,971
(478,182)
213,789
127,569
(39,198)
88,371
121,862
(85,765)
36,097
102,329
(60,251)
42,078
55,441
(32,313)
23,128
27,998
431,461
(107,212)
(85,699)
(12,837)
(6,171)
(1,421)
218,121
376
(54,031)
(6,737)
8,909
(60,903)
105,735
(5,330)
100,405
(6,136)
94,269
–
(140,670)
(213,340)
108,868
109,253
* The difference with profit from discontinued operations as previously reported is attributable to intra-Group eliminations in the net gain amount of GEL 1,468 for the year ended 31 December
2017.
–
94,269
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209
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
6. Discontinued Operations and Assets and Liabilities of Disposal Group Held for Sale continued
Assets and liabilities of disposal group held for sale as at 31 December 2017 are presented below:
Cash and cash equivalents
Amounts due from credit institutions
Investment securities
Accounts receivable
Insurance premiums receivable
Inventories
Prepayments
Income tax assets
Property and equipment
Goodwill
Intangible assets
Other assets
Total assets**
Accounts payable
Insurance contracts liabilities
Income tax liabilities
Borrowings
Debt securities issued
Other liabilities
Total liabilities**
Net assets disposed
31 December
2017
48,840
14,768
1,263
123,388
21,257
118,811
30,354
2,026
626,476
114,798
28,466
19,313
1,149,760
97,321
20,953
72
267,010
93,493
140,552
619,401
530,359
** The differences with assets and liabilities of disposal group held for sale presented in Consolidated Statement of Financial Position are attributable to intra-Group eliminations in amount of
GEL 1,176 and GEL 372, respectively.
7. Segment Information
At 31 December 2018 the Group changed the composition, measurement and presentation of its reportable segments. In line with IFRS 8
requirements, the change was applied retrospectively for comparable periods. The change primarily related to the presentation of segments
based on the industries instead of legal entities and measurement based on segments’ stand-alone performance prior to adjusting for intra-
Group transactions and balances instead of measurement after intra-Group adjustments.
The table below summarises the change in segment reporting:
Previously presented segment
New segment
GHG
m2
Aldagi
GGU
Teliani
• Healthcare
• Housing Development
• Hospitality and Commercial
• P&C Insurance
• Water Utility
• Renewable Energy
• Beverage
• Corporate Centre
The Group believes that the revised composition and presentation of its reportable segments provides more relevant information to the Financial
Statement users as it better aligns financial reporting with management’s views of operations within the Group and decision-making about
resource allocations.
For management purposes, the Group is organised into the following operating segments based on the industries as follows:
Healthcare
– Georgia Healthcare Group – principally providing wide-scale healthcare, health insurance and pharmaceutical
services to clients and insured individuals.
Housing Development
– Principally developing, constructing and selling residential apartments and providing land development
services to third parties.
Hospitality and Commercial
– Developing and leasing rent-earning commercial assets and developing hotels across Georgia.
Water Utility
– Principally supplying water and providing a wastewater service.
Renewable Energy
– Principally developing renewable energy power plants and supplying electricity.
P&C Insurance
– Principally providing wide-scale property and casualty insurance services to corporate and individual clients.
Beverage
Other
– Principally producing and distributing wine, beer and soft beverages.
– Comprises of early stage businesses and feasibility costs incurred on pipeline projects.
Corporate Centre
– Comprising of Georgia Capital PLC and JSC Georgia Capital.
Management monitors the operating results of its segments separately for the purposes of making decisions about resource allocation and
performance assessment. Segment performance, as explained in the table below, is measured in the same manner as profit or loss in the
Consolidated Financial Statements other than feasibility costs capitalised on pipeline projects, derecognition of interest accrued on loans issued
to subsidiaries and foreign currency translation gain/(loss) incurred on preferred stocks owned.
Transactions between segments are accounted for at actual transaction prices.
No revenue from transactions with a single external customer or counterparty amounted to 10% or more of the Group’s total revenue during year
ended 31 December 2018 and 2017.
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211
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
7. Segment Information continued
The following tables present income statement and certain asset and liability information regarding the Group’s operating segments as at and for
the year ended 31 December 2018:
Housing
Development
P&C Insurance
Renewable
Energy
Hospitality and
Commercial
Beverages
Other
Revenue
Cost of sales
Gross profit
Operating expenses and impairment
EBITDA
Profit from associates
Dividend income*
Depreciation and amortisation
Net foreign currency (loss)/gain
Interest income
Interest expense
Net operating income/(loss) before non-recurring items
Net non-recurring items
Profit/(Loss) before income tax
Income tax expense
Profit/(Loss) for the year
Revenue
Assets and liabilities
Cash and cash equivalents
Amounts due from credit institutions
Debt investment securities
Equity investments at fair value
Total assets
Borrowings
Debt securities issued
Total liabilities
Total equity attributable to shareholders of the Group
Healthcare
Water Utility
861,337
(574,866)
149,128
(36,920)
286,471
112,208
(154,448)
(29,427)
132,023
247
–
(33,883)
(4,175)
1,139
(39,314)
56,037
(2,186)
53,851
(616)
53,235
861,337
36,154
11,808
1,285
–
1,239,104
296,817
93,573
665,490
295,689
82,781
–
–
(25,392)
(4,970)
568
(14,321)
38,666
(6,121)
32,545
–
32,545
149,128
13,713
936
–
–
646,974
290,266
29,980
376,488
270,486
137,772
(117,311)
20,461
(11,583)
8,878
–
–
(867)
(487)
320
(1,401)
6,443
(6,224)
219
–
219
137,772
8,830
1,633
–
512
249,737
59,312
67,697
182,952
66,785
59,271
(25,748)
33,523
(15,453)
18,070
–
–
(1,023)
138
3,539
–
20,724
(652)
20,072
(2,990)
17,082
59,271
11,104
23,456
4,408
–
145,866
–
–
89,632
56,234
–
–
–
(789)
(789)
–
–
(352)
(401)
149
–
(1,393)
577
(816)
–
(816)
–
8,388
–
–
–
169,304
70,711
–
75,144
61,181
38,461
(4,085)
34,376
(2,841)
31,535
–
–
(105)
(1,084)
197
(2,815)
27,728
(1,333)
26,395
–
26,395
38,461
26,275
2,341
–
45
294,834
113,933
19,609
134,994
149,079
76,499
(46,980)
29,519
(35,734)
(6,215)
–
–
(11,820)
(1,864)
132
(7,263)
(27,030)
(1,886)
(28,916)
–
(28,916)
76,498
9,953
125
–
–
205,277
118,147
–
149,107
44,082
Inter-
Business
Eliminations/
Consolidations
Corporate
Centre
–
–
–
(39,602)
9,719
(29,883)
Group
Total
1,282,866
(796,191)
486,675
939
(268,984)
(18,253)
(18,253)
–
23,875
(84)
(22,897)
39,587
(44,711)
(22,483)
(23,449)
(45,932)
–
(28,944)
–
–
(629)
(1,894)
(22,356)
18,248
(35,575)
–
(35,575)
–
217,691
247
23,875
(74,155)
(37,546)
23,275
(91,619)
61,768
(41,251)
20,517
(3,606)
16,911
–
–
–
(1,395)
(1,395)
–
–
–
88
–
(42)
(1,349)
23
(1,326)
–
(1,326)
(45,932)
(35,575)
–
–
(39,601)
1,282,866
229
–
–
–
48,654
38,095
–
42,721
5,933
142,284
–
157,364
457,495
1,088,079
–
802,045
804,960
283,119
–
–
(91,233)
(557)
(365,983)
(222,926)
(96,503)
(330,462)
(30,773)
256,930
40,299
71,824
457,495
3,721,846
764,355
916,401
2,191,026
1,201,815
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213
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
7. Segment Information continued
The following tables present Income Statement and certain asset and liability information regarding the Group’s operating segments as at and for
the year ended 31 December 2017:
Healthcare
Water Utility
Housing
Development
P&C Insurance
Renewable
Energy
Hospitality and
Commercial
Beverages
Corporate
Centre
Revenue
Cost of sales
Gross profit
Operating expenses and impairment
EBITDA
Profit from associates
Net gains from disposal of investment businesses
Depreciation and amortisation
Net foreign currency (loss)/gain
Interest income
Interest expense
Net operating income/(Loss) before non-recurring items
Net non-recurring items
Profit/(Loss) before income tax
Income tax expense
Profit/(Loss) for the year
Revenue
Assets and liabilities
Cash and cash equivalents
Amounts due from credit institutions
Debt investment securities
Equity investments at fair value
Total assets
Borrowings
Debt securities issued
Total liabilities
Total equity attributable to shareholders of the Group
763,443
(514,337)
249,106
(141,332)
107,774
376
–
(25,795)
(5,907)
2,111
(27,543)
51,016
(4,779)
46,237
(387)
45,850
763,443
–
–
–
1,166,357
–
–
619,398
282,505
135,099
(39,198)
95,901
(23,849)
72,052
–
–
(20,116)
(482)
1,637
(13,483)
39,608
(1,136)
38,472
(934)
37,538
135,099
61,961
7,658
–
–
569,474
217,405
30,009
301,551
267,923
116,577
(85,208)
31,369
(7,661)
23,708
–
–
(490)
40
794
(364)
23,688
(126)
23,562
(1,508)
22,054
116,577
19,945
114
–
3,204
244,600
44,244
65,925
168,991
75,609
54,815
(25,098)
29,717
(12,760)
16,957
–
–
(855)
208
2,965
–
19,275
–
19,275
(2,975)
16,300
54,815
4,186
25,968
4,180
–
135,325
–
–
86,473
48,852
(26)
–
(26)
(329)
(355)
–
–
(216)
(966)
93
–
(1,444)
14
(1,430)
–
(1,430)
(26)
8,298
–
–
–
96,552
64,848
–
69,920
17,290
* Net gains from disposal of investment business of Corporate Centre comprises of gain from sale of GHG as accounted in JSC Georgia Capital’s separate Income Statement, related increase
in consolidated equity is presented as sale of interests in existing subsidiaries in Consolidated Statement of Changes in Equity.
4,732
(556)
4,176
(859)
3,317
–
–
(18)
–
24
(185)
3,138
(3)
3,135
(47)
3,088
4,732
14,998
–
–
124
130,440
39,000
–
41,880
78,142
55,687
(32,314)
23,373
(22,188)
1,185
–
–
(6,541)
(7,144)
189
(3,345)
(15,656)
700
(14,956)
(285)
(15,241)
55,687
17,454
4,401
–
–
167,974
71,430
–
92,813
57,509
Inter-
Business
Eliminations/
Consolidations
(3,157)
1,002
(2,155)
4,194
2,039
–
(90,275)
–
–
(283)
283
(88,236)
–
Group
Total
1,127,170
(695,709)
431,461
(213,340)
218,121
376
–
(54,031)
(6,737)
8,909
(60,903)
105,735
(5,330)
–
–
–
(8,556)
(8,556)
–
90,275
–
7,514
1,379
(16,266)
74,346
–
74,346
(88,236)
100,405
–
–
74,346
(88,236)
(6,136)
94,269
–
(3,157)
1,127,170
219,399
–
45,147
–
297,313
272,279
–
273,506
23,801
–
–
(17,420)
(2,175)
(91,687)
(58,472)
(18,099)
(80,412)
(6,968)
346,241
38,141
31,907
1,153
2,716,348
650,734
77,835
1,574,120
844,663
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215
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
8. Cash and Cash Equivalents
Cash on hand
Current accounts with financial institutions
Time deposits with financial institutions with maturities of up to 90 days
Cash and cash equivalents, gross
Allowance (Note 27)
Cash and cash equivalents, net
9. Amounts Due from Credit Institutions
Time deposits with maturities of more than 90 days
Deposits pledged as security for open commitments
Amounts due from credit institutions, gross
Allowance (Note 27)
Amounts due from credit institutions, net
10. Debt Securities Owned and Equity Investments at Fair Value
Internationally listed debt securities
Locally listed debt securities
Debt securities owned
Bank of Georgia Group PLC
Other
Equity investments at fair value
31 December
2018
31 December
2017
2,577
227,541
26,813
256,931
(1)
627
345,614
–
346,241
–
256,930
346,241
31 December
2018
31 December
2017
35,924
4,375
40,299
–
30,485
7,656
38,141
–
40,299
38,141
31 December
2018
31 December
2017
67,933
3,891
71,824
3,028
28,879
31,907
31 December
2018
31 December
2017
457,495
–
457,495
–
1,153
1,153
12. Inventories
Healthcare and pharma inventory
Real estate inventory
Other inventory
Inventory
31 December
2018
31 December
2017
146,164
99,364
33,087
278,615
–
58,830
21,280
80,110
The Group performed inventory net realisable value test and charged impairment in the amount of GEL 179 (2017: GEL 323, was charged to profit
or loss).
13. Investment Properties
At 1 January
Additions*
Disposals
Net gains from revaluation of investment property
Transfers from/(to) property and equipment and other assets**
Currency translation differences
At 31 December
31 December
2018
31 December
2017
159,989
27,626
(2,461)
6,895
(48,971)
8,154
151,232
134,990
17,199
(402)
24,685
(19,590)
3,107
159,989
* Non-cash additions comprised GEL 1,145 as at 31 December 2018 (2017: nil).
** Comprised of GEL 8,930 transfer to property and equipment (2017: transfers to property and equipment GEL 18,432), GEL 40,041 transfer to inventories (2017: transfer to other
assets – inventories GEL 1,158).
Investment properties are stated at fair value except for those investment properties under construction for which fair value is not reliably measurable
(with carrying value of GEL 43,676 as at 31 December 2018 (2017: GEL 35,000)). Fair value represents the price that would be received in exchange
for an asset in an arm’s length transaction between market participants at the measurement date. As at 31 December 2018 the fair values of the
properties are based on valuations performed by accredited independent valuers. Refer to Note 31 for details on fair value measurements of
investment properties.
The Group pledges some of its investment property as collateral for its borrowings. The carrying amount of investment property pledged as at
31 December 2018 was GEL 1,132 (2017: GEL 113,598).
Equity investments at fair value include equity instruments designated at fair value through OCI representing 19.9% interest of Bank of Georgia
Group PLC. This investment was irrevocably designated at fair value through OCI as the Group considers this investment to be strategic in nature,
in addition, the Group does not hold the shares for the purpose of short-term capital appreciation. In 2018 the Group recognised dividend income
in the amount of GEL 23,875 from this investment.
11. Accounts Receivable
Healthcare services
Water supply services
Sales of pharmaceuticals
Beverage sales
Connection services
Electric power sales
Installation of water meters
Other receivables
Accounts receivable, gross
Allowance (Note 27)
Accounts receivable, net
31 December
2018
31 December
2017
115,150
23,965
21,024
18,235
4,317
700
94
8,456
191,941
(21,713)
170,228
–
20,396
–
14,497
1,605
1,267
220
1,355
39,340
(4,003)
35,337
Accounts receivable balance includes contract assets from sales to customers GEL 2,586 (2017: GEL 1,008). For more details, please refer to
Note 25.
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Georgia Capital PLC Annual Report 2018
217
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
14. Property and Equipment
The movements in property and equipment during the year ended 31 December 2018 were as follows:
14. Property and Equipment continued
The movements in property and equipment during the year ended 31 December 2017 were as follows:
Office
buildings
Hotels
Hospitals
and clinics
Assets under
construction
Infrastructure
assets
Factory and
equipment
Computers and
equipment
Other
Total
Office
buildings
Hospitals
and Clinics
Assets under
construction
Infrastructure
Assets
Factory and
equipment
Computers and
equipment
Other
Total
136,784
10,213
–
2,991
–
22,209
142,801
274,458
275,669
12,206
91,023
5,726
13,949
62,174
41,614
20,659
701,840
410,636
6,639
(833)
19,107
–
–
–
–
–
(6,624)
–
(29)
(153,774)
–
(198)
142,218
15,303
(70)
(10,866)
5,632
(297)
(1,170)
4,042
(382)
11,109
31,616
(1,809)
–
8,572
19,837
–
(19,840)
disposal group held for sale
14,939
–
417,574
325
Currency translation
differences
9
1,532
–
4,601
–
–
–
–
–
–
–
–
8,569
198,315
37,297
668,450
63
300
6,505
At 31 December 2018
195,653
24,360
433,159
248,770
429,895
101,116
278,838
114,639 1,826,430
–
–
–
–
–
–
–
–
–
–
(4)
–
–
(4)
–
162
–
5,192
–
–
–
–
–
–
–
–
5,561
–
162
10,753
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
23
–
–
–
–
–
23
1
–
(8)
–
–
–
(7)
414
(15)
(8)
(4)
(271)
1
117
23,084
20,426
3,887
7,490
6,314
23,674
5,257
10,684
43,791
69,088
64
(5)
–
–
47
(613)
–
–
191
352
–
29
336
102
–
–
(90)
29,771
6,316
41,975
(73)
(6)
(178)
(29)
(470)
43,496
10,805
60,124
22,593
154,396
Cost or revalued amount
31 December 2017
Additions
Business combinations, Note
5
Disposals
Transfers
Transfers (to)/from investment
properties
Transfer from assets of
Accumulated impairment
31 December 2017
Reversal
Disposals
Transfer from assets of
390
(15)
–
disposal group held for sale
–
Transfers to investment
properties
Currency translation
differences
At 31 December 2018
Accumulated depreciation
31 December 2017
Depreciation charge
Currency translation
differences
Transfers
Transfers to investment
properties
Transfer from assets of
(271)
1
105
5,249
1,460
(229)
(70)
(90)
disposal group held for sale
327
Write off
Disposals
At 31 December 2018
Net book value:
31 December 2017
(184)
6,463
At 31 December 2018
189,085
24,198
422,410
248,770
386,399
90,311
218,691
92,053 1,671,917
131,145
–
–
142,801
252,585
87,136
7,612
36,356
657,635
Cost or revalued amount
31 December 2016
Additions
Business combinations
Disposals
Transfers
Transfers from/(to) investment properties
Transfers to other assets
Transfer to assets of disposal group held
for sale
Write off
Currency translation differences
31 December 2017
Accumulated impairment
31 December 2016
Currency translation differences
31 December 2017
Accumulated depreciation
31 December 2016
Depreciation charge
Currency translation differences
Transfer to assets of disposal group held
for sale
Disposals
31 December 2017
Net book value:
31 December 2016
31 December 2017
137,313
1,876
359
(542)
2,498
10,164
–
(14,939)
–
55
136,784
417
(27)
390
3,858
1,340
391
(327)
(13)
5,249
388,803
27,708
7,909
(440)
(456)
–
–
(423,524)
–
–
–
–
–
–
8,554
3,700
–
(11,970)
(284)
–
86,905
176,567
20,364
(4,038)
(141,903)
8,268
(9)
(325)
–
(3,028)
199,304
12,621
–
(1,976)
65,720
–
–
–
31,986
–
(18)
59,055
–
–
160,086
51,782
3,714
(173)
(1,515)
–
–
43,670 1,016,081
316,279
13,739
37,770
5,424
(7,844)
(657)
–
16,601
18,432
–
(9)
–
–
–
–
–
–
–
(198,774)
(1,321)
150
(37,298)
–
135
(674,860)
(1,321)
(2,688)
142,801
275,669
91,023
13,949
41,614
701,840
–
–
–
–
–
–
–
–
–
–
–
–
5,738
16,507
999
–
(160)
–
–
–
–
23
23
1
-
1
418
(4)
414
–
4,171
(284)
19,157
18,178
(1,071)
5,631
6,099
83
42,938
49,995
118
–
–
(29,771)
(179)
(6,316)
(240)
(48,384)
(876)
23,084
3,887
6,314
5,257
43,791
133,038
380,249
86,905
193,566
–
140,929
38,038
972,725
131,145
–
142,801
252,585
87,136
7,612
36,356
657,635
The Group assessed that carrying value of infrastructure assets approximates their fair value as at 31 December 2018 and 2017.
The Group pledges its property as collateral for its borrowings. The carrying amount of the pledged property as at 31 December 2018 was GEL
662,034 (31 December 2017: GEL 93,818, excluding that of disposal group held for sale).
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewFinancial Statements 218
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Georgia Capital PLC Annual Report 2018
219
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
15. Goodwill and Intangible Assets
Movements in goodwill during the years ended 31 December 2018 and 31 December 2017 were as follows:
16. Other Assets and Liabilities
Other assets comprise:
Cost
1 January
Business combinations
Transfer from/to assets of disposal group held for sale
At 31 December
Accumulated impairment
1 January
At 31 December
Net book value:
1 January
At 31 December
31 December
2018
31 December
2017
26,627
5,362
114,798
146,787
4,692
4,692
21,935
142,095
78,335
60,138
(111,846)
26,627
4,692
4,692
73,643
21,935
Loans issued*
Pension fund assets**
Reinsurance assets
Operating tax assets
Call option
Investments in associates
Operating lease receivable
Other derivative financial assets
Other
Other assets
31 December
2018
31 December
2017
150,300
18,796
18,240
38,028
16,969
3,124
742
661
4,602
251,462
101
18,536
20,671
29,769
–
–
–
–
793
69,870
* Loans issued mainly consist of a loan granted to the former parent JSC BGEO Group and a loan granted to m2 joint venture. For more details, please refer to Note 33.
Impairment Test for Goodwill
Goodwill acquired through business combinations have been allocated to five individual cash-generating units, for impairment testing: Property
and Casualty Insurance, Beverages, Pharmacy, Healthcare and Health Insurance.
The carrying amount of goodwill allocated to each of the cash-generating units (CGU) is as follows:
P&C Insurance
Beverages
Pharmacy
Healthcare
Health Insurance
Total
31 December
2018
31 December
2017
15,454
11,843
77,755
33,581
3,462
142,095
15,454
6,481
–
–
–
21,935
Other liabilities comprise:
Amounts payable for share acquisitions*
Accruals
Other taxes payable
Other insurance liabilities
Pension fund liabilities**
Finance lease liability
Dividends payable to non-controlling shareholders
Derivative financial liabilities
Provisions
Other
Other liabilities
The recoverable amount of the healthcare services operating segment exceeds its carrying amount by GEL 253,595 using the discount rate
of 12.7%. The discount rate that brings value in use of healthcare services segment equal to its carrying value is 15.21%.
2018 amount payable for share acquisitions comprise payables for healthcare and wine business acquisitions.
*
** Pension fund operated by Group’s insurance subsidiary is mostly for third-party customers and does not represent a defined benefit plan.
Key Assumptions Used in Value in Use Calculations
The recoverable amounts of the CGUs have been determined based on a value-in-use calculation, using cash flow projections based on financial
budgets approved by senior management covering from a one to three-year period. Discount rates were not adjusted for either a constant or a
declining growth rate beyond the three-year periods covered in financial budgets. For the purposes of the impairment test, a 3% permanent growth
rate has been assumed when assessing the future operating cash flows of the CGU.
The following rates were used by the Group for P&C Insurance, Beverage, Pharmacy, Healthcare and Health Insurance:
17. Taxation
The corporate income tax (expense) credit comprises:
Current income expense
Deferred income tax credit (expense)
Income tax (expense) credit
P&C Insurance
Beverage
Pharmacy
Healthcare
Health Insurance
2018, %
2017, %
2018, %
2017, %
2018, %
2017, %
2018, %
2017, %
2018, %
2017, %
Deferred income tax credit (expense) in other comprehensive income (loss)
31 December
2018
31 December
2017
92,126
55,623
22,859
19,707
18,932
8,746
991
715
525
15,547
413
17,133
11,058
11,008
18,536
–
–
–
3,103
1,955
235,771
63,206
2018
(3,924)
318
(3,606)
–
2017
(Represented)
(5,624)
(512)
(6,136)
165
Discount rate
15.6%
9.0%
15.3%
12.8%
14.4%
15.2%
12.7%
15.1%
14.3%
16.1%
Discount Rates
Discount rates reflect management’s estimate of return required in each business. This is the benchmark used by management to assess
operating performance and to evaluate future investment proposals. Discount rates are calculated by using pre-tax weighted average cost of
capital (WACC).
For the Healthcare CGU, the following additional assumptions were made over the first three-year period of the business plan:
• Further synergies from healthcare businesses will increase cost efficiency and further improve operating leverage.
• Growth of other healthcare business lines through an increased market demand and economic growth.
Management believes that reasonable possible changes to key assumptions used to determine the recoverable amount for each CGU will not
result in an impairment of goodwill. The excess of value in use over carrying value is determined by reference to the net book value as at
31 December 2018. Possible change was taken as +/-1% in discount rate and growth rate.
Increase in intangible assets during 2018 is mostly attributable to reclassifications from assets held for sale (Note 6) and acquisitions of intangible
assets presented in the consolidated statement of cash flows.
Deferred tax related to items charged or credited to other comprehensive income during the years ended 31 December 2018 and 2017 was as
follows:
Currency translation differences
Income tax credit (expense) in other comprehensive income
2018
–
–
2017
(Represented)
165
165
The income tax rate applicable to most of the Group’s income is the income tax rate applicable to subsidiaries’ income which varies from 15% to
19% for 2018 (2017: 15%).
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Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
221
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
17. Taxation continued
In May 2016, the Parliament of Georgia approved a change in the current corporate taxation model, with changes applicable from 1 January 2017
for all entities apart from certain financial institutions, including banks and insurance businesses (changes are applicable to financial institutions,
including banks and insurance businesses from 1 January 2023). Under the new taxation regime, corporate income tax is paid on distributed,
rather than earned profits. As the result, no deferred tax is recognised for the Group’s entities operating under the new taxation regime as the
applicable rate for undistributed profit is nil. The Group has calculated the portion of deferred taxes that it expects to utilise before 1 January 2023
for financial businesses and has fully released the un-utilisable portion of deferred tax assets and liabilities. During the transitional period, between
1 January 2017 and 1 January 2023, no tax is payable on distributed profits from financial to non-financial businesses.
The effective income tax rate differs from the statutory income tax rates. As at 31 December 2018 and 31 December 2017 a reconciliation of the
income tax expense based on statutory rates with the actual expense is as follows:
Profit before income tax expense
Average tax rate
Theoretical income tax expense at average tax rate
Non-taxable income
Correction of prior year declarations
Non-deductible expenses
Tax at the domestic rates applicable to profits in each country
Unrecognised deferred tax asset
Income tax (expense) benefit
2018
20,517
15%
(3,078)
1,756
(20)
(2,183)
587
(668)
(3,606)
2017
(Represented)
100,405
15%
(15,061)
9,817
–
(84)
(808)
–
(6,136)
Applicable taxes in Georgia include corporate income tax (profit tax), individuals’ withholding taxes, property tax and value added tax, among
others. Management believes that the Group is in substantial compliance with the tax laws affecting its operations. However, the risk remains that
relevant authorities could take differing positions with regard to interpretative issues.
As at 31 December 2018 and 31 December 2017 income tax assets and liabilities consist of the following:
Current income tax assets
Deferred income tax assets
Income tax assets
Current income tax liabilities
Income tax liabilities
Deferred tax assets and liabilities as at 31 December 2018 and 31 December 2017 are as follows:
Tax effect of deductible temporary differences:
Tax credits carried forward
Investment properties
Insurance premiums receivables
Other assets and liabilities
Deferred tax assets
Tax effect of taxable temporary differences:
Investments in subsidiaries
Other assets and liabilities
Deferred tax liabilities
Net deferred tax asset recognised in Consolidated Statement of Financial Position
31 December
2018
31 December
2017
1,078
1,327
2,405
1,119
1,119
365
1,009
1,374
860
860
31 December
2018
31 December
2017
21,048
–
688
639
22,375
21,048
–
21,048
1,327
–
3
487
556
1,046
–
37
37
1,009
18. Insurance Contract Liabilities and Reinsurance Assets
At 1 January
Premiums written during the year
Premiums earned during the year
Claims incurred during the year
Claims paid during the year
Transfer from/to assets and liabilities of disposal
group held for sale
At 31 December
19. Borrowings
Borrowings comprise:
Borrowings from local financial institutions
Borrowings from international financial institutions
Other borrowings*
Borrowings
Insurance
contract
liabilities
2018
Reinsurance
assets
2018
2018
46,403
135,595
(133,965)
65,728
(66,507)
20,953
68,207
(20,671)
(29,252)
27,235
(7,195)
11,643
–
(18,240)
Net
2018
25,732
106,343
(106,730)
58,533
(54,864)
20,953
49,967
Insurance
contract
liabilities
2017
Reinsurance
assets
2017
2017
67,871
124,628
(125,267)
75,806
(75,682)
(20,953)
46,403
(13,161)
(23,995)
22,938
(15,555)
9,102
–
(20,671)
Net
2017
54,710
100,633
(102,329)
60,251
(66,580)
(20,953)
25,732
31 December
2018
31 December
2017
306,340
451,984
6,031
42,512
335,943
272,279
764,355
650,734
* Other borrowings as at 31 December 2017 comprised of borrowing from JSC BGEO Group.
Some long-term borrowings from international credit institutions are received upon certain conditions (the “Lender Covenants”). At 31 December
2018 and 31 December 2017 the Group complied with all the Lender Covenants of the borrowings from international credit institutions.
As at 31 December 2018, borrowings from local financial institutions are denominated in GEL, EUR and US$ (2017: GEL, EUR, US$), carry
interest rates from 5% to 12% (2017: from 7% to 12.25%), with average remaining terms of maturity of four years (2017: five years).
As at 31 December 2018, borrowings from international financial institutions are denominated in GEL, EUR and US$ (2017: GEL, EUR, US$), carry
interest rates from 1.63% to 12.25% (2017: from 1.63% to 12.25%), with average remaining terms of maturity of eight years (2017: ten years).
As at 31 December 2018, other borrowings are denominated in GEL and EUR (2017: GEL and US$), carry interest rated from 12% to 13% (2017:
from 8% to 11.25%), with average remaining terms of maturity of three months (2017: six months).
During 2018 total amount of interest paid comprised GEL 96,312 (2017: GEL 71,036).
Material Non-Cash Transactions
In 2018 year the Group incurred borrowings costs with total amount GEL 27,201(2017: GEL 16,531) of which GEL 6,018 (2017: GEL 2,206) has
been capitalised as a part of investment property, GEL 5,538 (2017: GEL 6,723) was capitalised as a part of inventory property, GEL 15,450 was
capitalised as part of property and equipment (2017: 7,602) and GEL 195 was capitalised as part of intangible assets (2017: nil).
Changes in Liabilities Arising From Financing Activities
Carrying amount at 31 December 2017
Foreign currency translation
Cash proceeds
Cash repayments
Transfer from/to liabilities of disposal group held for sale
Acquisition of subsidiaries
Other
Carrying amount at 31 December 2018
Borrowings
Debt securities
650,734
(7,335)
247,574
(393,981)
267,010
14,560
(14,207)
764,355
77,835
63,497
747,184
(80,747)
93,493
–
15,139
916,401
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Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
223
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
20. Debt Securities Issued
Debt securities issued comprise:
US$-denominated Eurobonds issued by Georgia Capital
US$-denominated local bonds issued by m2
GEL-denominated local bonds issued by GHG
GEL-denominated local bonds issued by GGU
Debt securities issued
31 December
2018
31 December
2017
732,519
85,663
84,858
13,361
916,401
–
64,445
–
13,390
77,835
In March 2018 JSC Georgia Capital issued US$300 million (GEL 734 million) 6.125% notes due in March 2024 denominated in US dollars which
were admitted to the official list of the Irish Stock Exchange and to trading on the Global Exchange Market (the “Notes”). Notes were sold at the
price of 98.770% of par value at the initial offering.
21. Deferred Income
Advances received for connection services
Advances received for sale of apartments
Advances received for sale of pharmaceuticals
Other
Deferred income
22. Accounts Payable
Trade payables
Other payables
31 December
2018
31 December
2017
27,249
19,560
4,867
10,383
62,059
21,202
46,195
–
5,669
73,066
31 December
2018
31 December
2017
139,879
3,235
143,114
42,004
983
42,987
Most of trade payables represent amounts due to suppliers in healthcare, water utility, housing development, commercial and beverages
segments. Trade payables are usually short-term, denominated mostly in GEL and US$ and do not carry interest.
23. Commitments and Contingencies
Legal
In the ordinary course of business, the Group and its subsidiaries are subject to legal actions and complaints. Management believes that the
ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial condition or the results of
future operations of the Group.
As at 31 December 2018, Georgia Healthcare Group PLC, the Group’s subsidiary operating in healthcare segment, had litigation with Social
Service Agency (SSA) in relation to an aggregate amount of GEL 6,888 (31 December 2017: GEL 6,631). The litigation with SSA was mainly related
to procedural violations in medical documentation as well as the billing and invoicing process.
Commitments and contingencies
As at 31 December 2018 and 31 December 2017 the Group’s commitments and contingencies comprised the following:
Operating lease commitments
Not later than one year
Later than one year but not later than five years
Later than five years
Capital expenditure commitments
Total commitments
31 December
2018
31 December
2017
23,383
75,147
31,410
4,313
6,998
1,691
129,940
13,002
10,341
140,281
–
9,899
Capital expenditure commitments represent the commitment for purchase of property and capital repairs GEL 9,624 (2017: nil) and software and
other intangible assets GEL 717 (2017: nil).
24. Equity
Share Capital
As at 31 December 2018 issued share capital comprised 39,384,712 authorised common shares (31 December 2017: 10,000,000), of which
39,384,712 were fully paid (2017: 10,000,000). Each share has a nominal value of one British penny (2017: one Georgian Lari). Shares issued and
outstanding as at 31 December 2018 are described below:
31 December 2016
Issue of share capital*
31 December 2017
Issue of share capital
Transfer of JSC Georgia Capital shares to new Parent Company
Incorporation of New Parent Company (Georgia Capital PLC)
Capital reduction (change in nominal value)
31 December 2018
Number
of shares
Ordinary
8,481,719
1,518,281
10,000,000
1,526,000
(11,526,000)
39,384,712
–
Amount
8,482
1,518
10,000
1,526
(11,526)
1,644,011
(1,642,718)
39,384,712
1,293
Incorporation of New Parent Company
On 29 May 2018, Georgia Capital PLC issued and listed 39,384,712 ordinary shares on London stock exchange, premium listing segment.
11,526,000 shares of JSC Georgia Capital were transferred to new Parent Company (Georgia Capital PLC) as part of Demerger process of BGEO
Group PLC (Note 1).
Nominal Value of shares issued by Georgia Capital PLC were GBP 12.7. The incorporation of the new Parent Company did not result in changes
in the Group’s net assets.
Capital Reduction
On 12 June 2018 the Georgia Capital PLC undertook a planned reduction of capital to create distributable reserves for the Company. Following
the reduction of capital, the nominal value of the Company’s shares was reduced to GBP 0.01. Reduction of the capital created a new reserve on
the Statement of Financial Position (comprising the reduction of the original nominal value of ordinary shares from GBP 12.70 to GBP 0.01 per
share), which became distributable to the shareholders and was fully reclassified to retained earnings.
Buyback Programme
On 14 June 2018 the Group announced commencement of a share buyback programme of up to US$45 million (GEL 110.3 million) (the
“Programme”). The Company has entered into an agreement with its brokers Numis Securities Limited (“Numis”) and Investec Bank PLC
(“Investec”) to enable Numis and Investec to use the maximum consideration of US$45 million to purchase the Group’s shares (“shares”) in
accordance with the terms of the general authority to make market purchases of up to 3,938,471 of its shares. All repurchased shares will be
held in the Group’s treasury.
Treasury Shares
The number of treasury shares held by the Company as at 31 December 2018 was 3,567,765 (31 December 2017: nil). From which 1,251,829
shares were bought back within the Buyback Programme announced on 14 June 2018. The rest of the shares are kept by the Company for the
purposes of its future employee share-based compensations.
Dividends
Shareholders are entitled to dividends in Georgian Lari.
In April 2017, JSC Insurance Company Aldagi declared interim dividends. Payment of the total GEL 7,000 interim dividend was received by
shareholders of the Group on 4 April 2017. Dividend distribution by JSC Insurance Company Aldagi was treated as a distribution of the Group.
Nature and Purpose of Other Reserves
Unrealised Gains (Losses) from Dilution or Sale/Acquisition of Shares in Existing Subsidiaries
This reserve records unrealised gains (losses) from dilution or sale/acquisition of shares in existing subsidiaries.
Unrealised Gains (Losses) on Debt and Equity Investments at Fair Value
This reserve records fair value changes on debt and equity investments at fair value through other comprehensive income.
Foreign Currency Translation Reserve
The foreign currency translation reserve is used to record exchange differences arising from the translation of the Financial Statements of
subsidiaries with functional currency other than GEL.
Movements in other reserves during the year ended 31 December 2018 and 31 December 2017 are presented in the Statements of Other
Comprehensive Income.
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Georgia Capital PLC Annual Report 2018
225
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
24. Equity continued
Nature and Purpose of Other Reserves continued
On 16 February 2018, 19.9% stakes in JSC Bank of Georgia and JSC Bank of Georgia Financial Group were transferred to Georgia Capital as an
equity contribution from JSC BGEO Group in exchange for 1,516,000 (GEL 1,516) shares issued. In line with IFRS 9 requirements, Georgia Capital
initially recognised financial asset (investment in equity instruments) at fair value of GEL 706,000 with corresponding increase in equity. On 29 May
2018, as a part of BGEO Group’s demerger, 19.9% interest in banking business was exchanged for 19.9% stake in Bank of Georgia Group PLC at
fair value of GEL 599,406 (calculated using LSE share price).
25. Gross Profit continued
Gross Healthcare and Pharma Profit
Revenue from Government programmes
Revenue from free flow (non-insured retail individuals)
Revenue from insurance companies
Transaction costs directly attributable to the contribution of 19.9% stake in the amount of GEL 2,298 were deducted from the equity.
Upon initial recognition, management irrevocably designated 19.9% equity interest in Banking Business and Bank of Georgia Group PLC at fair value
through other comprehensive income (FVOCI). As a result, the difference between initially recorded fair value of GEL 706,000 and fair value of 19.9%
stake at 31 December 2018 (GEL 457,495) in the amount of GEL 248,505 has been recognised in other comprehensive income. Subsequently, all
changes in fair value of 19.9% equity stake will be recorded through other comprehensive income (OCI) and never reclassified to PL, not even upon
disposal of the stake.
Non-Controlling Interest
Georgia Healthcare Group PLC (GHG) is the only significant subsidiary of the Group that has a material non-controlling interest of 43% as of
31 December 2018 (31 December 2017: 43%). The following table summarises key information before intra-Group eliminations relevant to Georgia
Healthcare Group PLC.
Total assets
Total liabilities
Non-controlling interest
Revenue
Profit for the year
Total comprehensive income for the year
Net decrease in cash and cash equivalents
Profit attributable to non-controlling interest
Earnings Per Share
Basic and diluted (loss)/earnings per share
(Loss)/Profit for the year attributable to ordinary shareholders of the Parent
Weighted average number of ordinary shares outstanding during the year*
(Loss)/Earnings per share
2018
2017
1,222,503
665,487
287,016
861,337
53,237
53,237
12,687
33,142
1,149,760
619,401
270,830
763,443
45,817
45,817
25,602
27,955
2018
2017
(9,496)
36,925,304
(0.2572)
70,125
29,996,344
2.3378
* Weighted average number of shares includes subsequent incorporation of Georgia Capital PLC and use of its number of shares with a retrospective approach. Refer to Note 1.
25. Gross Profit
Healthcare revenue
Pharma revenue
Utility and energy revenue
Real estate revenue
Net insurance premiums earned
Beverage revenue
Other income
Revenue
Cost of utility and energy
Cost of real estate
Net insurance claims incurred
Cost of healthcare
Cost of pharma services
Cost of beverage
Cost of sales
Gross profit
2018
2017
291,069
501,090
139,290
142,018
106,730
76,358
26,311
253,612
438,359
127,569
121,862
102,329
55,441
27,998
1,282,866
1,127,170
(36,274)
(113,900)
(58,533)
(154,452)
(386,153)
(46,879)
(39,198)
(85,765)
(60,251)
(138,723)
(339,459)
(32,313)
(796,191)
(695,709)
486,675
431,461
Healthcare revenue
Retail
Wholesale
Pharma revenue
Healthcare and pharma revenue
Direct salary expenses
Healthcare direct materials
Expenses on medical service providers
Other direct expenses
Cost of healthcare
Retail
Wholesale
Cost of pharma services
Cost of healthcare and pharma services
Gross healthcare and pharma profit
Gross Utility and Energy Profit
Revenue from water supply
Revenue from electric power sales
Utility and energy revenue
Cost of water supply
Cost of electric power sales
Cost of utility and energy
Gross utility and energy profit
Gross Real Estate Profit
Revenue from apartment sale
Revaluation of m2 investment property
Income from operating leases
Revenue from hospitality services
Revenue from construction services
Real estate revenue
Cost of apartments sold
Cost of operating leases
Cost of hospitality services
Cost of construction services
Cost of real estate
Gross real estate profit
2018
2017
200,652
78,500
11,917
176,908
64,748
11,956
291,069
253,612
378,398
122,692
329,733
108,626
501,090
438,359
792,159
691,971
(105,440)
(34,012)
(3,226)
(11,774)
(92,744)
(34,015)
(1,854)
(10,110)
(154,452)
(138,723)
(275,887)
(110,266)
(246,310)
(93,149)
(386,153)
(339,459)
(540,605)
(478,182)
251,554
213,789
2018
2017
130,238
9,052
117,814
9,755
139,290
127,569
(33,663)
(2,611)
(36,274)
103,016
(36,886)
(2,312)
(39,198)
88,371
2018
2017
95,923
6,626
6,454
5,151
27,864
94,179
24,033
3,650
–
–
142,018
121,862
(86,269)
(879)
(3,115)
(23,637)
(113,900)
28,118
(85,208)
(557)
–
–
(85,765)
36,097
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Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
227
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
25. Gross Profit continued
Gross Insurance Profit
Gross health insurance premiums earned
Gross P&C Insurance premiums earned
Total gross premiums earned on insurance contracts
Reinsurers’ share of gross earned premiums on health insurance contracts
Reinsurers’ share of gross earned premiums on P&C Insurance contracts
Reinsurers’ share of gross earned premiums on insurance contracts
Net insurance premiums earned
Gross health insurance claims incurred
Gross P&C Insurance claims incurred
Gross insurance claims incurred
Reinsurers’ share of gross health insurance claims incurred
Reinsurers’ share of gross P&C insurance claims incurred
Reinsurers’ share of gross insurance claims incurred
Net insurance claims incurred
Gross insurance profit
Gross Beverages Profit
Revenue from wine sales
Revenue from beer sales
Revenue from distribution of imported goods
Change in net realisable value of agricultural produce after harvest
Other beverage revenue
Beverages revenue
Cost of wine
Cost of beer
Cost of distribution
Cost of other beverage revenue
Cost of Beverages
Gross Beverages profit
2018
2017
54,040
79,925
133,965
(3,020)
(24,215)
50,182
75,085
125,267
–
(22,938)
(27,235)
(22,938)
106,730
102,329
(37,096)
(28,632)
(65,728)
4,311
2,884
7,195
(58,533)
48,197
(35,153)
(40,653)
(75,806)
–
15,555
15,555
(60,251)
42,078
2018
2017
27,020
27,395
14,065
2,875
5,003
76,358
(15,188)
(17,848)
(10,625)
(3,218)
(46,879)
29,479
22,156
16,406
12,910
253
3,716
55,441
(10,557)
(8,676)
(10,814)
(2,266)
(32,313)
23,128
25. Gross Profit continued
Salary and employee benefit expenses included in cost of sales comprised GEL 124,333 (2017: GEL 105,709). Inventory recognised as an expense
during the period comprised GEL 185,512 (2017: GEL 153,100).
Contract Assets and Liabilities
The Group has recognised the following revenue-related contract assets and liabilities:
Deferred income
Accounts receivable*
Contract assets**
31 December
2018
31 December
2017
47,330
134,815
2,586
71,322
116,669
1,008
Includes GEL 82,169 as at 31 December 2017 presented in disposal group held for sale.
*
** Contract assets relate to our conditional right to consideration for our completed performance under the contract. Contract assets are included within Accounts receivable line in
Consolidated Statement of Financial Position.
Accounts receivable are recognised when the right to consideration becomes unconditional. Deferred revenue is recognised as revenue as the
Group performs under the contract.
Decrease in deferred revenue is mainly attributable to housing development segment, two residential projects which accounted for the large
portion of deferred income as at 31 December 2017, were almost completed as at 31 December 2018, thus such contract liabilities were
recognised in revenue in the current reporting period.
The Group does not adjust the promised amount of consideration for the effects of a significant financing component if the Group expects, at
contract inception, that the period between when the Group transfers a promised good or service to a customer and when the customer pays
for that good or service will be one year or less.
The Group recognised GEL 54,935 revenue in the current reporting period (2017: GEL 51,273) that relates to carried-forward contract liabilities
and is included in the deferred income.
Transaction Price Allocated to the Remaining Performance Obligations
The following table includes revenue expected to be recognised in the future related to performance obligations that are unsatisfied at the
reporting date:
Revenue expected to be recognised on active
contracts with customers
32,452
6,622
4,457
6,121
6,325
55,977
In the year
ending
31 December
2019
In the year
ending
31 December
2020
In the year
ending
31 December
2021
In 3 to
5 years
In 5 to
10 years
Total
Total revenue above includes the following revenue streams that are not in scope of IFRS 15 Revenue from Contracts with customers:
The Group applies the practical expedient in paragraph 121 of IFRS 15 and does not disclose information about remaining performance
obligations that have original expected durations of one year or less.
Real estate revenue:
Revaluation of m2 investment property
Income from operating leases
Beverage revenue:
Change in net realisable value of agricultural produce after harvest
Net insurance premiums earned
Other income
Gain from call option
Payables derecognised
Litigation reserve reversal
Loss from sale of PPE and IP
Net gains (losses) from revaluation of investment property
Gain from lease derecognition
Gain from rent liability derecognition
Revenue from realised stationery
2018
2017
6,626
6,454
13,080
2,875
2,875
24,033
3,650
27,683
253
253
106,730
102,329
6,863
3,881
817
262
269
–
–
–
10,106
–
–
–
652
2,702
514
301
134,777
144,540
Operating Lease Commitments – Group as a Lessor
The Group’s future minimum lease payments receivable under non-cancellable operating leases amounted to:
Not later than one year
Later than one year but not later than five years
Later than five years
Total
31 December
2018
31 December
2017
5,243
11,531
9,090
25,864
4,616
11,088
9,663
25,367
Most of the Company’s leases are prices in US$ and have lease term varying from three months to ten years (average term: four years).
26. Salaries and Other Employee Benefits, and General and Administrative Expenses
Salaries and bonuses
Equity compensation plan costs
Pension costs
Salaries and other employee benefits
2018
2017
(Represented)
(121,537)
(14,618)
(913)
(95,435)
(10,751)
(1,026)
(137,068)
(107,212)
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewFinancial Statements 228
Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
229
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
26. Salaries and Other Employee Benefits, and General and Administrative Expenses continued
General and Administrative Expenses
Occupancy and rent
Marketing and advertising
Legal and other professional services
Operating taxes
Office supplies
Repair and maintenance
Utility expenses
Communication
Banking services
Corporate hospitality and entertainment
Travel expenses
Personnel training and recruitment
Customer service fee
Security
Other
General and administrative expenses
Auditor’s remuneration
Auditors’ remuneration is included within legal and other professional services expenses above and comprises:
Auditor’s remuneration
Fees payable for the audit of the Company’s current year Annual Report
Fees payable for other services:
Audit of the Company’s subsidiaries
Total audit fees
Audit-related assurance services
Review of the Company’s and subsidiaries’ interim accounts
Other assurance services
Total audit-related fees
Non-audit services
Tax compliance services
Tax advisory services
Corporate finance services
Other non-audit services
Total other services fees
Total fees
2018
(23,160)
(17,278)
(14,227)
(10,275)
(7,800)
(4,974)
(3,824)
(2,866)
(2,843)
(2,576)
(2,430)
(1,829)
(1,710)
(1,348)
(10,386)
2017
(Represented)
(22,186)
(16,970)
(8,638)
(7,649)
(6,063)
(4,408)
(2,337)
(2,429)
(2,430)
(2,308)
(1,830)
(557)
(1,735)
(1,164)
(4,995)
(107,526)
(85,699)
2018
371
2,238
2,609
675
15
690
–
–
2,048
36
2,084
5,383
The figures shown in the above table relate to fees paid to Ernst & Young LLP and its associates. Fees paid to other auditors not associated with
EY in respect of the audit of the Parent and Group’s subsidiaries were nil and in respect of other services of the Group were GEL 142.
Fees related to corporate finance services are included in non-recurring expenses under demerger fees. Please refer to Note 28.
27. Impairment of Insurance Premiums Receivable, Accounts Receivable, Other Assets and Provisions
The movements in the allowance for insurance premiums receivables and other receivables are as follows:
At 1 January
Charge
Transfer from assets of disposal group held for sale
Recoveries
Reversal
Write-offs
Currency translation differences
At 31 December
Insurance
premiums
receivable
2018
4,243
1,898
1,787
242
–
8
107
8,285
Other assets
2018
Provisions
2018
22
464
–
–
–
(72)
–
414
3,103
231
–
(1,302)
(1,353)
(154)
–
525
Total
2018
7,368
2,593
1,787
(1,060)
(1,353)
(218)
107
9,224
27. Impairment of Insurance Premiums Receivable, Accounts Receivable, Other Assets and Provisions continued
The movements in the allowance for financial assets according to IFRS 9 are as follows:
At 31 December
IFRS 9 Effect
At 1 January
(Reversal)/Charge
Write-offs
Transfer from assets of disposal group held for sale
Currency translation difference
At 31 December
Cash and cash
equivalents
2018
Amounts due
from credit
institutions
2018
Debt securities
owned
2018
Accounts
receivable
2018
–
2
2
(1)
–
–
–
1
–
–
–
–
–
–
–
–
–
192
192
117
–
–
–
309
4,003
13,830
17,833
10,080
(9,479)
3,415
(136)
21,713
Total
2018
4,003
14,024
18,027
10,196
(9,479)
3,415
(136)
22,023
For contract assets and accounts receivable, the Group has applied the standard’s simplified approach and has calculated ECLs based on
lifetime expected credit losses. For other debt financial assets, the ECL is based on the 12-month ECL since there has not been a significant
increase in credit risk since origination.
The movements in the allowance for insurance premiums receivables and accounts receivables other receivables for the year ended
31 December 2017 are as follows:
At 1 January
Charge
Transfer to assets of disposal group held for sale
Utilised
Write-offs
Currency translation differences
At 31 December
Insurance
premiums
receivable
2017
8,762
1,110
(1,787)
–
(3,227)
(615)
4,243
Accounts
receivable
2017
2,292
6,171
(3,415)
–
(1,211)
166
4,003
Other assets
2017
Provisions
2017
–
311
–
–
–
(289)
22
706
2,686
–
(289)
–
–
3,103
Total
2017
11,760
10,278
(5,202)
(289)
(4,438)
(738)
11,371
Increase in impairment charge in 2018 is mainly attributable to the increased gross balance of receivables of the healthcare and water utility
businesses.
28. Net Non-Recurring Items
Net non-recurring expense for the year ended 31 December 2018 comprised:
Share-based payment acceleration effect
Demerger fees
Reorganisation costs
College construction
Loan prepayment fee and derecognition losses
Charity expenses
Other
Net non-recurring items
Net non-recurring expense for the year ended 31 December 2017 comprised:
Loss from one-off dismissal compensations to employees
Loss from loan write-off
Other
2018
(20,303)
(12,845)
(2,070)
(2,422)
(1,325)
(783)
(1,503)
(41,251)
2017
(Represented)
(1,577)
(1,940)
(1,813)
(5,330)
Portion of the demerger transaction expenses, GEL 15,143, was allocated to Georgia Capital. Majority of such fees are recognised by Georgia
Capital as non-recurring expenses, while 15% of fees is recorded as reduction to equity since they are directly attributable to contribution of
19.9% Bank of Georgia Group PLC equity stake in Georgia Capital. Refer to Note 24.
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231
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
28. Net Non-Recurring Items continued
For executive managers who continued employment in Georgia Capital, service contracts with Bank of Georgia or BGEO were terminated and
new contracts were entered into with Georgia Capital after demerger. All outstanding unvested share awards under old service agreements were
converted into one Georgia Capital PLC share vesting according to original schedule and one BOG PLC share vesting immediately per each
BGEO share. The related share-based payment expense that has not been recognised in Income Statement as of the termination date (that
otherwise would have been recognised for services received over the remainder of the vesting period) was accelerated and immediately
expensed.
29. Share-Based Payments
Executives’ Equity Compensation Plan
Prior to demerger, senior executives of BGEO Group, providing services to Georgia Capital, were compensated with shares of BGEO. Upon
demerger, old service contracts with BGEO were terminated and new contracts were signed with Georgia Capital. Any share-based payment
expense related to BGEO’s share plan was accelerated and recognised in the Income Statement as of the termination date of service agreements
as non-recurring expense. For more details refer to Note 28.
In 2018, Georgia Capital introduced Group’s Executives’ Equity Compensation Plan (EECP). Under the EECP, shares of the Parent are granted to
senior executives of the Parent and subsidiaries. In July 2018, the executives signed new five-year fixed contingent share-based compensation
agreements with a total of 1,750,000 ordinary shares of Georgia Capital. The total amount of shares fixed to each executive will be awarded in five
equal instalments during the five consecutive years starting January 2019, of which each award will be subject to a six-year vesting period subject
to continued employment within the Group during such vesting period. The fair value of the shares is determined at the grant date using available
market quotations.
In 2018 the Group set up Executive Equity Compensation Trustee – Sanne Fiduciary Services Limited (the “Trustee”) which acts as the trustee
of the Group’s Executives’ Equity Compensation Plan (EECP). In 2018 the Trustee has repurchased 1,191,127 shares.
There were no cancellations or modifications to the awards in 2018 or 2017 except for BGEO share awards described above.
In addition to Executives’ Equity Compensation Plan, the Group grants shares of the Parent to the employees of the Group.
The following table illustrates the number and weighted average prices of, and movements in, shares awards during the year:
Shares outstanding at 1 January
Granted during the year
Forfeited during the year
Vested during the year
Shares outstanding at 31 December
2018
2017
–
2,394,556
–
–
2,394,556
–
–
–
–
–
The weighted average remaining contractual life for the share awards outstanding as at 31 December 2018 was 5.4 years. The weighted average
fair value of shares granted during the year was GEL 33.4.
GHG’s Senior Executive Plan
In 2015, the executives signed five-year fixed contingent share-based compensation agreements with a total of 1,670,000 ordinary shares of GHG.
The total amount of shares fixed to each executive will be awarded in five equal instalments during the five consecutive years starting January 2017,
of which each award will be subject to a four-year vesting period subject to continued employment within the Group during such vesting period.
In addition to the above award, executives are awarded discretionary number of GHG shares with a three-year vesting period, with continuous
employment being the only vesting condition.
The following table illustrates the number and weighted average prices of, and movements in, shares awards during the year:
Shares outstanding at 1 January
Granted during the year
Forfeited during the year
Vested during the year
Shares outstanding at 31 December
2018
2017
1,427,175
826,529
(14,213)
(579,215)
1,660,276
988,968
816,641
(26,901)
(351,534)
1,427,175
The weighted average remaining contractual life for the share awards outstanding as at 31 December 2018 was 1.89 years. The weighted average
fair value of shares granted during the year was GEL 12.54.
29. Share-Based Payments continued
Executives’ Equity Compensation Plan continued
Expense Recognition:
The expense recognised for employee services received during the year and the respective increase in equity arising from equity-settled
share-based payments is shown in the following table:
Increase in equity arising from equity-settled share-based payments
Expense arising from equity-settled transactions
2018
38,621
34,921
2017
12,697
10,751
Expense arising from equity-settled transactions in the amount of GEL 20,303 was recognised in net non-recurring expenses related to demerger
of the Group.
30. Risk Management
Introduction
Risk is inherent in the Group’s activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk
limits and other controls. This process of risk management is critical to the Group’s continuing profitability and each individual within the Group is
accountable for the risk exposures relating to his or her responsibilities. The Group is exposed to investment risk, credit risk, liquidity risk and
market risk. It is also subject to operational risks and insurance risk.
The independent risk control process does not include business risks such as changes in the environment, technology and industry. They are
monitored through the Group’s strategic planning process.
Risk Management Structure
Audit Committee
The Audit Committee of Georgia Capital PLC assists the Management Board of the Group in relation to the oversight of the Group’s financial and
reporting processes. It monitors the integrity of the Financial Statements and is responsible for governance around both the Internal Audit
function and external auditor, reporting back to the Board. It reviews the effectiveness of the policies, procedures and systems in place related to,
among other operational risks, compliance, IT and IS (including cyber-security) and assessed the effectiveness of the risk management and
internal control framework.
Investment Committee
The Investment Committee ensures a centralised process-led approach to investment; and the overriding priority is to protect the Group’s
long-term viability and reputation and produce sustainable, medium to long-term cash-to-cash returns. It oversights each step of the investment
lifecycle, approves all investment, divestment and material portfolio decisions and ensures that investments are in line with Group’s investment
policy and risk appetite.
Management Board
The Management Board of Georgia Capital has overall responsibility for the Group’s asset, liability and risk management activities, policies and
procedures. In order to effectively implement the risk management system, the Board of Directors delegate individual risk management functions
to each of the various decision-making and execution bodies within the Group.
Internal Audit
The Internal Audit department of Georgia Capital PLC is responsible for the annual audit of the Group’s risk management, internal control and
corporate governance processes, with the aim of reducing the levels of operational and other risks, auditing the Group’s internal control systems
and detecting any infringements or errors on the part of the Group’s departments and divisions. It examines both the adequacy of and the Group’s
compliance with those procedures. The Group’s Internal Audit department discusses the results of all assessments with management, and reports
its findings and recommendations to the Audit Committee.
Risk Measurement and Reporting Systems
The Group’s risks are measured using a method which reflects both the expected loss likely to arise in normal circumstances and unexpected
losses, which are an estimate of the ultimate actual loss based on different forecasting models. The models make use of probabilities derived
from historical experience, adjusted to reflect the economic environment.
Monitoring and controlling risks is primarily performed based on limits established by the Group. These limits reflect the business strategy and
market environment of the Group as well as the level of risk that the Group is willing to accept, with additional emphasis on selected industries
and countries. In addition, the Group monitors and measures the overall risk-bearing capacity in relation to the aggregate risk exposure across
all risks types and activities.
Information compiled from all the businesses is examined and processed in order to analyse, control and identify early risks. This information is
presented and explained to the Management Board.
Risk Mitigation
As part of its overall risk management, the Group uses derivatives and other instruments to manage exposures resulting from changes in interest
rates, foreign currencies, equity risks, credit risks and exposures arising from forecast transactions.
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233
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
30. Risk Management continued
Credit Risk
Credit risk is the risk that the Group will incur a loss because its customers, clients or counterparties fail to discharge their contractual obligations.
The Group manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and by
monitoring exposures in relation to such limits. Also the Group establishes and regularly monitors credit terms by types of debtors, which is a
proactive tool for managing the credit risk.
Trade Receivables and Contract Assets
Customer credit risk is managed by each business unit subject to the Group’s established policy, procedures and control relating to customer
credit risk management. The Group has established a credit quality review process to provide early identification of possible changes in the
creditworthiness of counterparties, including regular analysis of debt service and ageing of receivables. Counterparty limits are established by the
use of a credit terms. The credit quality review process allows the Group to assess the potential loss as a result of the risks to which it is exposed
and take corrective actions.
30. Risk Management continued
Credit Risk continued
Credit Quality Per Class of Financial Assets continued
The Group does not have a grading system to evaluate credit quality of neither past due nor impaired assets. Maximum exposure to credit risk
is limited to carrying value of respective financial assets.
Liquidity Risk
Liquidity risk is the risk that the Group will be unable to meet its payment obligations when they fall due under normal and stress circumstances.
To limit this risk, management has arranged diversified funding sources in addition to its capital, manages assets with liquidity in mind, and
monitors future cash flows and liquidity on a regular basis. This incorporates daily monitoring of expected cash flows and liquidity needs.
In addition, Group at all times holds US$50 million liquid asset buffer at Georgian Parent Company-level, where liquid assets are defined as
marketable debt securities, cash at bank and short-term and long-term deposits with financial institutions.
An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are
based on days past due for groupings of various customer segments with similar loss patterns (i.e., by geographical region, product type,
customer type, etc.). The calculation reflects reasonable and supportable information that is available at the reporting date about past events,
current conditions and forecasts of future economic conditions. Generally, trade receivables are written off if past due for more than one year and
are not subject to enforcement activity. The Group does not hold collateral as security. The Group evaluates the concentration of risk with respect
to trade receivables and contract assets as low, as its customers are located in different geographical areas and industries.
The Group manages the maturities of its assets and liabilities for better matching, which helps the Group additionally mitigate the liquidity risk.
The major liquidity risks confronting the Group are the daily calls on its available cash resources in respect of supplier contracts, claims arising
from insurance contracts and the maturity of borrowings.
The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted repayment obligations.
Repayments, which are subject to notice, are treated as if notice were to be given immediately.
Liquid Financial Instruments
Credit risk from balances with banks and financial institutions is managed by the Group’s treasury department in accordance with the Group’s
policy. Investments of surplus funds are made only with approved counterparties and within credit limits assigned to each counterparty. The limits
are set to minimise the concentration of risks and therefore mitigate financial loss through a counterparty’s potential failure to make payments.
The Group invests only on quoted debt securities with low credit risk. The Group’s debt instruments at fair value through OCI comprised solely
of quoted bonds. The Group recognised provision for expected credit losses on its debt instruments at fair value through OCI in the amount of
GEL 117 in 2018.
The table below demonstrates the Group’s financial assets credit risk profile by external rating grades:
Cash and cash equivalents
Amounts due from credit institutions
Debt securities owned
Total
*
Excluding GHG.
31 December 2018
31 December 2017*
BB+ to BB-
B+ to B-
Not graded
BB+ to BB-
B+ to B-
Not graded
229,842
24,776
70,668
325,286
23,940
15,354
1,156
40,450
3,148
169
–
3,317
321,814
35,159
31,556
388,529
23,863
2,982
351
27,196
564
–
–
564
Credit Quality Per Class of Financial Assets
The credit quality of financial assets is managed by the Group based on the number of overdue days. The table below shows the credit quality by
class of asset in the Statement of Financial Position.
31 December 2018
Amounts due from credit institutions
Accounts receivable
Insurance premiums receivable
Debt securities
Total
31 December 2017
Amounts due from credit institutions
Accounts receivable
Insurance premiums receivable
Debt investment securities available-for-sale
Total
Notes
Neither past due
nor impaired
Past due or
impaired
9
11
10
40,299
127,682
56,955
71,824
296,760
–
42,546
846
–
43,392
Notes
Neither past due
nor impaired
Past due or
impaired
9
11
10
38,141
27,501
28,947
31,907
126,496
–
7,836
1,908
–
9,744
Total
40,299
170,228
57,801
71,824
340,152
Total
38,141
35,337
30,855
31,907
136,040
Included in past due but not impaired category are the receivables and financial assets that are overdue for not more than 30 days or are overdue
more than 30 days but have not been impaired due to objective reasons. Otherwise those receivables and financial assets that are overdue for
more than 30 days are considered as impaired.
Financial liabilities
As at 31 December 2018
Borrowings
Debt securities issued
Accounts payable
Other financial liabilities
Total undiscounted financial liabilities
Financial liabilities*
As at 31 December 2017
Borrowings
Debt securities issued
Accounts payable
Other financial liabilities
Total undiscounted financial liabilities
* Excluding GHG.
Less than 3
months
54,945
5,358
129,028
66,788
256,119
Less than 3
months
276,941
400
27,425
1,577
306,343
3 to 12
months
149,118
122,556
3,734
17,756
293,164
3 to 12
months
47,331
6,034
–
13,464
66,829
1 to 5
years
519,690
333,500
10,351
94,384
Over
5 years
274,900
757,335
–
–
Total
998,653
1,218,749
143,113
178,928
957,925
1,032,235
2,539,443
1 to 5
years
225,361
87,898
15,562
21,041
349,862
Over
5 years
242,372
–
–
–
242,372
Total
792,005
94,332
42,987
36,082
965,406
Market Risk
Market risk is the risk that the value of financial instruments will fluctuate due to changes in market variables such as interest rates and foreign
exchange rates. The Group has exposure to market risks. The Group structures the levels of market risk it accepts through a Group market risk
policy that determines what constitutes market risk for the Group.
Currency Risk
The Group is exposed to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows.
The Group’s principal transactions are carried out in Georgian Lari and its exposure to foreign exchange risk arises primarily with respect to
the US dollar.
The tables below indicate the currencies to which the Group had significant exposure at 31 December 2018 on its monetary assets and liabilities.
The analysis calculates the effect of a reasonably possible movement of the currency rate against the Georgian Lari, with all other variables
held constant on the Income Statement (due to the fair value of currency sensitive non-trading monetary assets and liabilities). The reasonably
possible movement of the currency rate against the Georgian Lari is calculated as a standard deviation of daily changes in exchange rates over
the 12 months. A negative amount in the table reflects a potential net reduction in the Income Statement or equity, while a positive amount
reflects a net potential increase.
Currency
EUR
GBP
US$
2018
2017
Change in
currency
rate in %
9.9%
10.8%
7.1%
Effect on profit
before tax
(23,283)
151
(23,409)
Change in
currency
rate in %
12.0%
12.6%
8.9%
Effect on profit
before tax
(15,569)
94
4,996
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Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
235
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
30. Risk Management continued
Operational Risk
Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to perform, operational
risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Group cannot expect to eliminate all
operational risks, but through a control framework and by monitoring and responding to potential risks, the Group is able to manage the risks.
Controls include effective segregation of duties, access, authorisation and reconciliation procedures, staff education and assessment processes,
including the use of Internal Audit.
30. Risk Management continued
Capital Management continued
Some operations of the Group are subject to local regulatory requirements within the jurisdiction where it operates, currently Georgia only. Such
regulations prescribe approval and monitoring of certain activities. They also impose certain restrictive provisions for the insurance arm, such as
insurance capital adequacy and the minimal insurance liquidity requirement, to minimise the risk of default and insolvency and to meet unforeseen
liabilities as they arise. During the year ended 31 December 2018 the Group complied with all of regulatory requirements as well as insurance
capital and insurance liquidity regulations, in full.
Operating Environment
Most of the Group’s business is concentrated in Georgia. As an emerging market, Georgia does not possess a well-developed business and
regulatory infrastructure that would generally exist in a more mature market economy. Operations in Georgia may involve risks that are not
typically associated with those in developed markets (including the risk that the Georgian Lari is not freely convertible outside the country, and
undeveloped debt and equity markets). However, over the last few years the Georgian Government has made a number of developments that
positively affect the overall investment climate of the country, specifically implementing the reforms necessary to create banking, judicial, taxation
and regulatory systems. This includes the adoption of a new body of legislation (including new Tax Code and procedural laws). In the view of the
Board, these steps contribute to mitigate the risks of doing business in Georgia.
The existing tendency aimed at the overall improvement of the business environment is expected to persist. The future stability of the Georgian
economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures
undertaken by the Government. However, the Georgian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world.
Insurance Risk
The risk under an insurance contract is the risk that an insured event will occur including the uncertainty of the amount and timing of any resulting
claim. The principal risk the Group faces under such contracts is that actual claims and benefit payments exceed the carrying amount of
insurance liabilities. This is influenced by the frequency of claims, severity of claims, actual benefits paid that are greater than originally estimated
and subsequent development of long-term claims.
The variability of risks is improved by diversification of risk of loss to a large portfolio of insurance contracts as a more diversified portfolio is less
likely to be affected across the board by change in any subset of the portfolio, as well as unexpected outcomes. The variability of risks is also
improved by careful selection and implementation of underwriting strategy and guidelines as well as the use of reinsurance arrangements.
The Group establishes underwriting guidelines and limits, which stipulate who may accept what risks and the applicable limits. These limits
are continuously monitored.
The Group primarily uses its loss ratio and its combined ratio to monitor its insurance risk. Loss ratio is defined as net insurance claims divided by
net insurance revenue. Combined ratio is sum of loss ratio and expense ratio. Expense ratio is defined as insurance-related operating expenses
excluding interest expense divided by net insurance revenue. The Group’s loss ratios and combined ratios were as follows:
Loss ratio
Combined ratio
P&C Insurance
Health Insurance
2018, %
2017, %
2018, %
38%
75%
40%
75%
77%
94%
2017, %
84%
103%
The Group’s concentration of general technical provisions by type of contract as of 31 December 2018 is as follows: healthcare GEL 19,154,
motor GEL 17,417 (2017: GEL 16,616), property GEL 5,830 (2017: GEL 2,754), liability GEL 2,625 (2017: GEL 2,549), cargo GEL 1,142 (2017: GEL
804), life GEL 1,625 (2017: GEL 1,231) and other GEL 2,174 (2017: GEL 1,778). 2017 comparative figures are excluding GHG.
Capital Management
Management monitors the Group’s capital on a regular basis based on the Statement of Net Asset Value (NAV) prepared under the adjusted IFRS
methodologies. The NAV Statement, which breaks down NAV into its components, including management estimated fair values for the private
businesses and follows changes therein, providing management with a snapshot of the Group’s financial position at any given time. The NAV
Statement provides a value of Georgia Capital that management uses as a tool for measuring its investment performance. Management closely
monitors NAV in connection with capital allocation decisions.
The capital management objectives are as follows:
•
•
•
•
to maintain the required level of stability of the Group thereby providing a degree of security to the shareholders;
to manage capital needs such that Group does not depend on potentially premature liquidation of its listed investments;
to allocate capital efficiently and support the development of business by ensuring that returns on capital employed meet the requirements
of its capital providers and of its shareholders; and
to maintain financial strength to support new business growth and to satisfy the shareholders requirements.
The Group manages its capital structure and makes adjustments in light of changes in economic conditions and the requirements of the financial
covenants, if any. To maintain or adjust the capital structure, the Group may adjust the amount of outstanding equity.
31. Fair Value Measurements
Fair Value Hierarchy
For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and
risks of the asset or liability. The following tables show analysis of assets and liabilities measured at fair value or for which fair values are disclosed
by level of the fair value hierarchy:
31 December 2018
Assets measured at fair value
Total investment properties
Land
Residential properties
Non-residential properties
Debt securities owned
Equity investments at fair value
Total revalued property
Infrastructure assets
Other assets
Loans issued
Other derivative financial assets
Call option
Assets for which fair values are disclosed
Cash and cash equivalents
Amounts due from credit institutions
Accounts receivable
Other assets
Loans issued
Liabilities measured at fair value
Other liabilities
Derivative financial liabilities
Liabilities for which fair values are disclosed
Borrowings
Debt securities issued
31 December 2017
Assets measured at fair value
Total investment properties
Land
Residential properties
Non-residential properties
Debt securities owned
Equity investments at fair value
Total revalued property
Infrastructure assets
Assets for which fair values are disclosed
Cash and cash equivalents
Amounts due from credit institutions
Accounts receivable
Other assets
Loans issued
Liabilities for which fair values are disclosed
Borrowings
Debt securities issued
Level 1
Level 2
Level 3
Total
–
–
–
–
27,010
457,495
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
44,814
–
–
–
–
–
–
–
256,930
40,299
–
–
–
151,232
49,128
14,196
87,908
–
–
386,399
386,399
18,668
1,038
661
16,969
–
–
170,228
162,862
162,862
151,232
49,128
14,196
87,908
71,824
457,495
386,399
386,399
18,668
1,038
661
16,969
256,930
40,299
170,228
162,862
162,862
–
–
715
715
715
715
506,711
678,973
254,056
184,551
760,767
863,524
Level 1
Level 2
Level 3
Total
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
31,907
–
–
–
346,241
38,141
–
–
–
77,972
–
159,989
84,016
2,168
73,805
–
1,153
252,585
252,585
–
–
35,337
101
101
572,762
81,312
159,989
84,016
2,168
73,805
31,907
1,153
252,585
252,585
346,241
38,141
35,337
101
101
650,734
81,312
Carrying value of assets and liabilities carried at amortised cost approximate their fair value due to their short-term nature. Carrying value of
loans issued and derivative financial instruments mandatorily measured at fair value through profit or loss was GEL 167,215 and GEL 101 as of
31 December 2018 and 2017 (with gains recognised in Income Statement in the amount of GEL 5,205 and GEL 5,548, which was fully unrealised).
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewFinancial Statements 236
Georgia Capital PLC Annual Report 2018
Georgia Capital PLC Annual Report 2018
237
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
31. Fair Value Measurements continued
Fair Value Hierarchy continued
The following is a description of the determination of fair value for financial instruments which are recorded at fair value using valuation
techniques. These incorporate the Group’s estimate of assumptions that a market participant would make when valuing the instruments.
Derivative Financial Instruments
Derivative financial instruments valued using a valuation technique with market observable inputs are mainly interest rate swaps, currency swaps
and forward foreign exchange contracts. The most frequently applied valuation techniques include forward pricing and swap models, using present
value calculations. The models incorporate various inputs including the credit quality of counterparties, foreign exchange spot and forward rates
and interest rate curves. The Group applies the binomial model for option valuation.
Derivative financial instruments include call option representing an option on acquisition of remaining 33% equity interest in JSC GEPHA from
non-controlling interests in 2022 based on pre-determined EBITDA multiple (6.0 times EBITDA) of JSC Gepha. The Group has applied binomial
model for option valuation. Major unobservable input for call option valuation represents volatility of price of the underlying 33% minority share
of equity, which was estimated based on actual volatility of the Parent Company’s market capitalisation from 1 January 2013 till 31 December 2017
period, which equalled 34.7%. If the volatility was 10% higher, fair value of call option would increase by GEL 2,533 (2017: GEL 1,989) if volatility
was 10% lower call option value would decrease by GEL 2,770 (2017: GEL 1,940). The Group recognised GEL 6,863 (2017: GEL 10,106) unrealised
gains on the call option during the year ended 31 December 2018 within other income, included in revenue in Consolidated Income Statement.
Investment Securities
Fair value of quoted debt and equity investments measured at fair value through other comprehensive income is derived from quoted market
prices in active markets at the reporting date. The fair value of unquoted instruments is estimated by discounting future cash flows using rates
currently available for debt with similar terms, credit risk and remaining maturities.
Movements in Level 3 Financial Instruments Measured at Fair Value
The following tables show a reconciliation of the opening and closing amounts of Level 3 financial assets which are recorded at fair value:
1 January 2017
Purchase of
securities
At 31 December
2017
Reclassification
of securities
Transfer from
AHS
Gain on
revaluation
At 31 December
2018
Level 3 financial assets
Equity securities at FVOCI
(2017: available-for-sale)
Call option
1,145
–
8
–
1,153
–
(1,153)
–
–
10,106
–
6,863
–
16,969
All investment properties and revalued properties of property and equipment are Level 3. Reconciliations of their opening and closing amounts
are provided in Notes 13 and 14 respectively.
Impact on Fair Value of Level 3 Financial Instruments Measured at Fair Value of Changes to Key Assumptions
The following table shows the impact on the fair value of Level 3 instruments of using reasonably possible alternative assumptions:
Level 3 financial assets
Equity securities at FVOCI (2017: available-for-sale)
Other derivative, call option
2018
2017
Carrying
Amount
Effect of reasonably
possible alternative
assumptions
Carrying
Amount
Effect of
reasonably
possible
alternative
assumptions
–
+/ – 0
16,969 +2,533/ – 2,770
1,153
–
+/ – 213
–
In order to determine reasonably possible alternative assumptions the Group adjusted key unobservable model inputs as follows:
For equities, the Group adjusted the price-over-book-value multiple by increasing and decreasing the ratio by 10%, which is considered by the
Group to be within a range of reasonably possible alternatives based on the price-over-book-value multiples used across peers within the same
geographic area of the same industry.
31. Fair Value Measurements continued
Fair Value Hierarchy continued
Description of Significant Unobservable Inputs to Valuations of Non-Financial Assets
The following tables show descriptions of significant unobservable inputs to Level 3 valuations of investment properties and revalued properties
and equipment:
2018
Valuation technique
Significant unobservable inputs
Range (weighted average)*
Investment property
151,232
Land
Residential properties
Non-residential properties
49,128
14,196
87,908
32,461
55,447
Market approach
Market approach
Price per square metre
14-3,127 (1,162)
Price per square metre
1,496-6,077 (4,413)
Market approach
Income approach
Price per square metre
165-27,883 (5,089)
Capitalisation rate
Occupancy rate
8-10% (9%)
80-90% (85%)
Investment property
159,989
2017
Valuation technique
Significant unobservable inputs
Range (weighted average)*
Land
Residential properties
Non-residential properties
84,016
70,513
13,503
2,168
73,805
52,260
21,545
Market approach
Price per square metre
Cost approach
Price per square metre
12-2,705 (465)
56-83(56)
Market approach
Price per square metre
1,892-3,194 (2,623)
Market approach
Income approach
Price per square metre
Capitalisation rate
Occupancy rate
12-8,756 (4,618)
8-10% (9%)
80-90% (85%)
All other parameters held constant, increase (decrease) in the rent rate per square meter, price per square meter and occupancy rate or decrease
(increase) in the capitalisation rate would result in increase (decrease) in fair value.
Set out below is a comparison by class of the carrying amounts and fair values of the Group’s financial instruments that are carried in the
consolidated historical financial information. The table does not include the fair values of non-financial assets and non-financial liabilities, or fair
values of other smaller financials assets and financial liabilities, fair values of which are materially close to their carrying values.
Financial assets
Cash and cash equivalents
Amounts due from credit institutions
Loans Issued
Financial liabilities
Borrowings
Debt securities issued
Total unrecognised change in
unrealised fair value
Carrying
value 2018
Fair value
2018
Unrecognised
gain (loss)
2018
Carrying
value 2017
Fair value
2017
Unrecognised
gain (loss)
2017
256,930
40,299
150,300
256,930
40,299
163,900
764,355
916,401
760,767
863,524
346,241
38,141
101
346,241
38,141
101
650,734
77,835
650,734
81,312
–
–
13,600
3,588
52,877
70,065
–
–
–
–
(3,477)
(3,477)
The following describes the methodologies and assumptions used to determine fair values for those financial instruments which are not already
recorded at fair value in the consolidated historical financial information.
Assets for Which Fair Value Approximates Carrying Value
For financial assets and financial liabilities that are liquid or have a short-term maturity (less than three months), it is assumed that the carrying
amounts approximate to their fair value. This assumption is also applied to demand deposits, savings accounts without a specific maturity and
variable rate financial instruments.
Fixed Rate Financial Instruments
The fair value of fixed rate financial assets and liabilities carried at amortised cost are estimated by comparing market interest rates when they
were first recognised with current market rates offered for similar financial instruments. The estimated fair value of fixed interest-bearing deposits
is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and maturity.
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239
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
32. Maturity Analysis
The table below shows an analysis of assets and liabilities analysed according to when they are expected to be recovered or settled:
31 December 2018
Less than
1 year
More than
1 year
Total
Cash and cash equivalents
Amounts due from credit institutions
Debt securities owned*
Equity investments at fair value*
Accounts receivable
Insurance premiums receivable
Inventories
Investment properties
Prepayments
Income tax assets
Property and equipment
Goodwill
Intangible assets
Other assets
Total assets
Accounts payable
Insurance contracts liabilities
Income tax liabilities
Deferred income
Borrowings
Debt securities issued
Other liabilities
Total liabilities
Net
* Internationally listed debt and equity investments are allocated to “less than one year” rather than based on contractual maturity.
Cash and cash equivalents
Amounts due from credit institutions
Debt securities owned
Equity investments at fair value
Accounts receivable
Insurance premiums receivable
Inventories
Investment properties
Prepayments
Income tax assets
Property and equipment
Goodwill
Intangible assets
Other assets
Assets of disposal group held for sale
Total assets
Accounts payable
Insurance contracts liabilities
Income tax liabilities
Deferred income
Borrowings
Debt securities issued
Other liabilities
Liabilities of disposal group held for sale
Total liabilities
Net
256,930
29,884
71,824
457,495
153,106
57,801
214,253
–
62,424
1,021
–
10,415
–
–
17,122
–
64,362
151,232
55,485
1,384
256,930
40,299
71,824
457,495
170,228
57,801
278,615
151,232
117,909
2,405
– 1,671,917 1,671,917
142,095
–
51,634
–
251,462
80,507
142,095
51,634
170,955
1,385,245 2,336,601 3,721,846
135,826
60,555
1,119
34,877
157,629
86,089
128,635
7,288
7,652
–
27,182
606,726
830,312
107,136
143,114
68,207
1,119
62,059
764,355
916,401
235,771
604,730 1,586,296 2,191,026
780,515
750,305 1,530,820
31 December 2017
Less than
1 year
More than
1 year
Total
346,241
36,382
1,619
–
35,203
30,818
72,074
–
79,246
186
–
–
–
44,716
1,148,584
–
1,759
30,288
1,153
134
37
8,036
159,989
8,514
1,188
657,635
21,935
5,457
25,154
346,241
38,141
31,907
1,153
35,337
30,855
80,110
159,989
87,760
1,374
657,635
21,935
5,457
69,870
– 1,148,584
1,795,069
921,279 2,716,348
32,231
39,443
860
49,863
299,762
1,350
44,065
619,029
10,756
6,960
–
23,203
350,972
76,485
19,141
–
42,987
46,403
860
73,066
650,734
77,835
63,206
619,029
1,086,603
487,517
1,574,120
708,466
433,762
1,142,228
33. Related Party Disclosures
In accordance with IAS 24 “Related Party Disclosures”, parties are considered to be related if one party has the ability to control the other party or
exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship,
attention is directed to the substance of the relationship, not merely the legal form.
Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on
the same terms, conditions and amounts as transactions between unrelated parties. All transactions with related parties disclosed below have
been conducted on an arm’s length basis.
The volumes of related party transactions, outstanding balances at period/year end, and related expenses and income for the period are as follows:
Assets
Cash and cash equivalents
Amounts due from credit institutions
Debt securities owned
Insurance premiums receivable
Prepayments
Loans issued*
Other assets
Liabilities
Derivative financial liabilities
Borrowings
Debt securities issued
Deferred income
Other liabilities
Income and expenses
Gross profit****
Salaries and other employee benefits
Administrative expenses
Net foreign currency (loss)
Interest income
Interest expense
31 December 2018
31 December 2017
Management***
Entities under
common
control**
Management***
Entities under
common control**
–
–
–
–
–
–
–
–
–
–
2,596
–
–
2,596
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
389
1,740
–
2,129
308,645
18,450
31,721
281
32
–
12,435
371,564
1,091
50,970
53,209
–
74
105,344
2018
2017 (Represented)
Management***
Entities under
common
control**
Management***
Entities under
common control**
–
–
–
–
–
–
–
1,998
(428)
(527)
(675)
4,482
(5,038)
(188)
1,924
–
–
–
–
–
1,924
4,082
(943)
(598)
(6,954)
5,005
(9,215)
(8,623)
* During the year ended 31 December 2018 and prior to demerger, JSC Georgia Capital issued a loan to the former parent JSC BGEO Group in the amount of GEL 133,830, presented in
other assets in the Consolidated Statement of Financial Position. Since as at 31 December 2018 (post-demerger) JSC BGEO Group does not represent a related party, this loan is not
disclosed in the above table. As at 31 December 2018, one of the Group’s subsidiaries, JSC m2 Real Estate has a loan issued to a joint venture JSC Isani Park in the amount of GEL 1,038.
Interest income on loan issued to JSC Isani Park is GEL 73 as of 31 December 2018.
** Entities under common control comprise of BGEO Group PLC’s Banking Business subsidiaries.
*** Management of Georgia Capital PLC consist of five executives and six members of Board of Directors.
**** The amount represent gross real estate profit received from key management personnel as a result of sale of apartments.
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241
Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(THOUSANDS OF GEORGIAN LARI)
33. Related Party Disclosures continued
Compensation of key management personnel comprised the following:
Salaries and other benefits
Share-based payments compensation
Long-term benefits
Total key management compensation
2018
2,605
18,131
–
20,736
2017
(Represented)
1,812
12,450
2,243
16,505
Key management personnel do not receive cash-settled compensation, except for fixed salaries. The major part of the total compensation is
share-based (Note 29). The number of key management personnel at 31 December 2018 was 11 (31 December 2017: 16).
34. Events after the Reporting Period
Development of Hospitality and Commercial Business
On 6 February 2019 Group’s Hospitality & Commercial Business, owned through m2 Real Estate (m2), acquired remaining 40% equity stake in
Kass 1 LLC. Following its initial acquisition in December 2017, m2 held a 60% stake in the Company owning an under-construction hotel located
in Tbilisi. The total consideration for the buyout was US$5.2 million (GEL 13.9 million), where US$0.3 million (GEL 0.8 million) was paid in cash and
US$4.9 million (GEL 13.1 million) was settled through bonds issued by the Commercial Real Estate Business.
Acquisition of Georgian beverages brand
On 25 March 2019 Group’s Beverages business, owned though Teliani Valley acquired the brand name and commercial assets of Georgian beer
and lemonade producer Kazbegi. Total cash consideration for the acquisition amounted to US$3.65 million (GEL 9.77 million) excluding VAT.
Additional Information
ABBREVIATIONS AND REFERENCES
ADR
AFS
AGM
APM
Average Daily Rate
Available-for-sale
Annual General Meeting
Alternative Performance Measure
BoG or BoGG
Bank of Georgia Group PLC
Compounded annual growth rate
GHG
HPP
IAS
IASB
IFC
IMF
Georgia Healthcare Group
Hydro Power Plant
International Accounting Standards
International Accounting Standards Board
International Finance Corporation
International Monetary Fund
Deep and Comprehensive Free Trade Agreement
IPO
Initial Public Offering
Deutsche Investitions- und
Entwicklungsgesellschaft – German
Investment and Development Corporation
Development Financial Institutions
Earnings before interest, taxes, non-recurring
items, FX gain/losses and depreciation
and amortisation
Executives’ Equity Compensation Plan
European Fund for Southeast Europe
European Free Trade Association
European Investment Bank
Earnings per share
Environmental and Social Risk
Management Procedures
Euro
Enterprise Value
Ernst & Young
Free Cash Flow
Foreign direct investment
Financierings-Maatschappij voor
Ontwikkelingslanden: The Netherlands
Development Bank
Financial Reporting Council
Free Trade Agreement
IRR
JSC
KfW
KPIs
LSE
LTIP
LTM
MOIC
MoU
MTPL
MW
NAV
NBG
NGO
NIM
NMF
NOI
NPLs
NSA
OECD
Internal Rate of Return
Joint stock company
Kreditanstalt für Wiederaufbau
Key performance indicators
London Stock Exchange
Long-term Incentive Plan
Last 12 months
Multiple of Invested Capital
Memorandum of Understanding
Mandatory Third-party Liability Insurance
Megawatt
Net Asset Value
National Bank of Georgia
Non-governmental organisation
Net Interest Margin
Not meaningful to present
Net Operating Income
Non-performing loans
Net Sellable Area
Organisation for Economic Co-operation
and Development
Great British Pound, national currency of the UK
P&C
Property and Casualty
Gross domestic product
Georgian Lari or Lari, national currency
of Georgia
Georgian Global Utilities
PLC
PPA
RAB
Public limited company
Power Purchase Agreement
Regulatory Asset Base
CAGR
DCFTA
DEG
DFI
EBITDA
EECP
EFSE
EFTA
EIB
EPS
ESMS
EUR
EV
EY
FCF
FDI
FMO
FRC
FTA
GBP
GDP
GEL
GGU
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243
GLOSSARY
Alternative
performance
measures
(APMs)
In this Annual Report management uses
various APMs, which they believe provide
additional useful information for understanding
the financial performance of the Group. These
APMs are not defined by International Financial
Reporting Standards, and also may not be
directly comparable with other companies who
use similar measures. Management believes
that these APMs provide the best representation
of our financial performance as these measures
are used by management to evaluate our
operating performance and make day-to-day
operating decisions.
Combined Ratio
Equals sum of the loss ratio and the
expense ratio.
Demerger
EBITDA
Georgia Capital PLC emerged as a separately
listed company after demerger from its former
Parent Company BGEO Group on 29 May, 2018
(the “Demerger”).
ROAE
Earnings before interest, taxes, non-recurring
items, FX gain/losses and depreciation and
amortisation; the Group has presented these
figures in this document because management
uses EBITDA as a tool to measure the Group’s
operational performance and the profitability of
its operations. The Company considers EBITDA
to be an important indicator of its representative
recurring operations.
ROI
Expense Ratio
Equals sum of acquisition costs and operating
expenses divided by net earned premiums.
IRR
IRR for listed investments is calculated based on:
a) historical contributions to the listed investment;
b) dividends received; and c) market value of the
investment as at 31 December 2018.
ROIC
Loss Ratio
Equals net insurance claims expense divided
by net earned premiums.
NAV
Net Asset Value, represents the net value of
an entity and is calculated as the total value
of the entity’s assets minus the total value of
its liabilities.
Net investment
Gross investments less capital returns.
ROAC
An annualised return on allocated capital as
of 31 December 2018 and calculated at each
private investment level. Inputs into the ROAC
calculation are as follows: (i) the numerator
is the annualised attributable income of the
private portfolio company, less allocated GCAP
interest expense; and (ii) the denominator is
the management estimated fair value, as
included in the NAV statement, less allocated
gross debt of GCAP.
Return on average total equity equals profit for
the period attributable to shareholders of the
P&C insurance business divided by monthly
average equity attributable to shareholders of
P&C for the same period for BoGG and
P&C insurance.
For private investments ROI is an annualised
return on net investment (gross investments less
capital returns) calculated at each investment
level. Inputs into the ROI calculation are as
follows: (i) the numerator is the annualised
attributable income of the private portfolio
company less allocated GCAP interest expense;
and (ii) the denominator is the net investment less
allocated gross debt of GCAP.
Return on invested capital is calculated as
EBITDA less depreciation, divided by aggregate
amount of total equity and borrowed funds.
ABBREVIATIONS AND REFERENCES CONTINUED
REIT
ROAA
ROAC
ROAE
ROI
ROIC
SMEs
TBD
TPL
TSR
UK
US$
Real Estate Investment Trust
Return on Average Assets
Return on Allocated Capital
Return on average total equity
Return on Net Investment
Return on Invested Capital
Small and medium-size enterprises
To be determined
Third-party Liability Insurance
Total Shareholder Return
United Kingdom
Dollar, national currency of the United States
WACC
Weighted Average Cost of Capital
REFERENCES
Georgia Capital
and “the Group”
Georgia Capital PLC and its portfolio companies
as a whole
GCAP
The aggregation of stand-alone Georgia Capital
PLC and stand-alone JSC Georgia Capital
accounts
BGEO Group PLC Former parent company of Georgia Capital PLC
prior to demerger
The Board
The Board of Directors of Georgia Capital PLC
The Code
The UK Corporate Governance Code published
in 2016
The Directors
Members of Georgia Capital PLC Board of
Directors
We / Our / Us
References to “we”, “our” or “us” are primarily
references to the Group throughout this Report.
However, the Group comprises of and operates
through its subsidiaries which are legal entities
with their own relevant management and
governance structure (as set out in relevant parts
of this Report).
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Georgia Capital PLC Annual Report 2018
SHAREHOLDER INFORMATION
Our Website
All shareholders and potential shareholders can gain access to the
Annual Report, presentations to investors, key financial information,
regulatory news, share and dividend data, AGM documentation and
other significant information about Georgia Capital at: https://
georgiacapital.ge/.
Our Registered Address
Georgia Capital PLC
84 Brook Street
London W1K 5EH
United Kingdom
Annual General Meeting
The Annual General Meeting of Georgia Capital PLC (the “AGM”) will be
held at 11:00 am (London time) on 22 May 2019 at the offices of Baker
& McKenzie LLP, 100 New Bridge Street, London EC4V 6JA. Details of
the date, time and business to be conducted at the AGM is contained
in the Notice of AGM, which will be mailed to shareholders who have
elected to receive hard copies of shareholder information and will be
available on the Company’s website: https://georgiacapital.ge/.
Shareholder Enquiries
Georgia Capital PLC’s share register is maintained by Computershare
Investor Services PLC.
Any queries about the administration of holdings of ordinary shares,
such as change of address or change of ownership, should be directed
to the address or telephone number immediately below. Holders of
ordinary shares may also check details of their shareholding, subject
to passing an identity check, by visiting the Registrar’s website:
www.investorcentre.co.uk or by calling the Shareholder Helpline on:
+44 (0)370 702 0176.
Computershare Investor Services PLC
The Pavilions, Bridgwater Road
Bristol BS13 8AE
United Kingdom
+44 (0370) 702 0176
Forward-Looking Statements
Certain statements in this Annual Report and Accounts contain
forward-looking statements, including, but not limited to, statements
concerning expectations, projections, objectives, targets, goals,
strategies, future events, future revenues or performance, capital
expenditures, financing needs, plans or intentions relating to
acquisitions, competitive strengths and weaknesses, plans or goals
relating to financial position and future operations and development.
Although Georgia Capital PLC believes that the expectations and
opinions reflected in such forward-looking statements are reasonable,
no assurance can be given that such expectations and opinions will
prove to have been correct. By their nature, these forward-looking
statements are subject to a number of known and unknown risks,
uncertainties and contingencies, and actual results and events could
differ materially from those currently being anticipated as reflected in
such statements. Important factors that could cause actual results to
differ materially from those expressed or implied in forward-looking
statements, certain of which are beyond our control, include, among
other things, those described in “Principal Risks and Uncertainties”
included in this Annual Report and Accounts, see pages 70 to 72.
No part of this document constitutes, or shall be taken to constitute, an
invitation or inducement to invest in Georgia Capital PLC or any other
entity, and must not be relied upon in any way in connection with any
investment decision. Georgia Capital PLC and other entities undertake
no obligation to update any forward-looking statements, whether as a
result of new information, future events or otherwise, except to the
extent legally required. Nothing in this document should be construed
as a profit forecast.
Additional Information G
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