Georgia Capital PLC Annual Report 2019
1
YOUR GROUND
FLOOR INVESTMENT
OPPORTUNITY IN
GEORGIA
Georgia Capital PLC (“Georgia Capital” or
“the Group” or “GCAP” – LSE: CGEO LN)
is a platform for buying, building, developing
and selling businesses in Georgia.
The Group’s primary business is to develop or buy
businesses, help them institutionalise their management
and grow them into mature businesses that can further
develop largely on their own, either with continued oversight
or independently. The Group’s focus is typically on smaller
or early stage businesses in sectors capable of rapid
development and consolidation, while also considering
more developed sectors, where a strong market position
can be achieved through an acquisition or larger greenfield
project. Georgia Capital manages its portfolio companies
individually and does not focus on achieving intergroup
synergies. Georgia Capital will normally seek to monetise
its investment over a 5-10 year period from initial investment.
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.
CHAIRMAN AND CEO STATEMENT
Read our Chairman and CEO Statement on page 14
STRATEGY
Read about Georgia Capital Strategy on page 18
PORTFOLIO
Read about our Portfolio Companies on page 36
For more information on Georgia Capital visit:
georgiacapital.ge
STRATEGIC REVIEW
Overview
2 Performance Highlights
4
Value Creation
6 Georgia Capital At a Glance
12 Executive Management
14 Chairman and CEO Statement
Our Business
18 Georgia Capital Strategy (Three Pillars)
20 Georgia Capital Strategy – Market and Industry Overview
27 Capital Allocation and Managing Portfolio Companies
36 Portfolio Companies
68 S172 Statement
70 Risk Management
75 Risk overview
80 Resources and Responsibilities
Discussion of Results
90 Alternative Performance Measures
93 Reconciliation of Adjusted IFRS Measures to IFRS Figures
95 Valuation Methodology
97 Financial Review
GOVERNANCE
124 Directors’ Governance Statement
126 Board of Directors
128 Corporate Governance Framework
138 Investment Committee Report
140 Audit and Valuation Committee Report
145 Directors’ Remuneration Report
161 Nomination Committee Report
164 Statement of Directors’ Responsibilities
165 Directors’ Report
FINANCIAL STATEMENTS
169 Independent Auditor’s Report
179 Consolidated Statement of Financial Position
180 Consolidated Income Statement
181 Consolidated Statement of Comprehensive Income
182 Consolidated Statement of Changes in Equity
184 Consolidated Statement of Cash Flows
185 Separate Statement of Financial Position
186 Separate Statement of Changes in Equity
187 Separate Statement of Cash Flows
188 Notes to the Consolidated Financial Statements
ADDITIONAL INFORMATION
253 Abbreviations and References
255 Glossary
256 Shareholder Information
Photo Evening view
of Tbilisi, Georgia.
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Georgia Capital PLC Annual Report 2019
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PERFORMANCE HIGHLIGHTS
GEORGIA CAPITAL PERFORMANCE (MANAGEMENT ACCOUNTS)
GEORGIA CAPITAL NAV OVERVIEW
Dividend income3 (GEL millions)
122.2 +68.8%
NAV per share (GEL)
46.84 +5.7%
NAV per share (GBP)
12.46 -4.5%
Net Asset Value (NAV) (GEL billions)
1.8 +3.9%
Total portfolio value (GEL billions)
Liquid assets and loans issued (GEL millions)
Net debt (GEL millions)
2.3 +19.6%
363.8 -39.9%
493.6 NMF
Total portfolio value creation (GEL millions)
of which, listed business (GEL millions)
134.4 NMF
Investments (GEL millions)
357.6 NMF
Net income
71.6 NMF
(33.9) -94.7%
of which, private businesses (GEL millions)
Share buybacks (GEL millions)
168.3 NMF
124.8 +42.7%
Management fee expense ratio1
1.8% +0.8ppt
PERFORMANCE HIGHLIGHTS (IFRS)
Group consolidated operating cash flow2
(GEL millions)
Group consolidated revenue
(GEL millions)
228.5 +39.8%
1,473.4 +14.8%
Group consolidated gross profit
(GEL millions)
590.4 +19.7%
1 LTM GCAP management fee expenses expressed as a percentage of average market capitalisation during the last twelve months. Total LTM operating expenses including fund
type expenses at 2.4% in FY19. FY18 expense ratio is not comparable due to incomplete year of operations for GCAP since its demerger on 29-May-18.
2 Consolidated IFRS cash flow from operating activities adjusted to exclude IFRS 16 impact.
3 Dividend income from portfolio companies.
PORTFOLIO VALUE (GEL MILLIONS)
Private Early Stage
19.5%
Pipeline
4.2%
Listed
45.6%
Total portfolio value (GEL)
2.3bn
Private Late Stage
30.7%
Listed
Georgia Healthcare Group
Bank of Georgia Group
Private
Private Late Stage
Water Utility
Housing Development
P&C Insurance
Private Early Stage
Renewable Energy
Hospitality and Commercial Real Estate
Beverages
Pipeline
Education
Auto Service
Digital Services
Other
1,027.8
430.1
597.7
1,225.3
692.7
484.0
43.9
164.9
439.5
106.8
245.6
87.1
93.0
56.4
25.8
8.8
2.1
Read more on our results in our Financial Review on page 97
Certain financial measures presented in the 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 90, and the differences from, and the reconciliation
to, the IFRS Audited financial statements are detailed on pages 93 to 94.
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Georgia Capital PLC Annual Report 2019
Georgia Capital PLC Annual Report 2019
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VALUE CREATION
PORTFOLIO VALUE
VALUE CREATION
IN 2019
MULTIPLE OF
INVESTED CAPITAL
(MOIC) UNREALISED
OWNERSHIP
VALUATION METHODOLOGY
EXIT STRATEGY
LISTED
INVESTMENTS
GEL millions
1,028 +5.1%
GEL millions
(34)
PRIVATE
LATE STAGE
GEL millions
693 +10.3%
GEL millions
157
PRIVATE
EARLY STAGE
GEL millions
439 +62.0%
GEL millions
(5)
PIPELINE
GEL millions
93 NMF
GEL millions
16
4.2x
3.0x
1.0x
1.2x
GHG
BoG
70.6%
Public markets
19.9%
Water Utility
100%
8.8x LTM EV/EBITDA
Trade sale, IPO, Promote
Housing Development
100%
DCF
P&C Insurance
100%
9.0x LTM P/E
Fund, Trade sale
Trade sale
Renewable Energy
100%1
At acquisition price
Hospitality and Commercial Real Estate 100%
NAV
Beverages
87%
10.0x LTM EV/EBITDA (wine)
Trade sale, IPO, Fund
Fund, Trade sale
Trade sale, Promote
2.2x LTM EV/Sales (beer)
1
Following the buyout of the 34.4% minority shareholder in GRPC on 25 February 2020, Renewable Energy consists of wholly-owned hydro and wind power plants with 91MW
installed capacity in aggregate. In addition, the business has a pipeline of 350MW renewable energy projects in the medium term.
Education
Auto Service
70-90%2
At acquisition price
80-100%3
10.4x EV/EBITDA (PTI)
At acquisition price (Amboli)
Trade sale, IPO
Trade sale
Digital Services
60%
At acquisition price
Trade sale
2 Different ownership stakes across premium, mid-level and affordable school segments.
3 Auto Service – 80% ownership in Amboli and 100% in Periodic Technical Inspection business.
Photo Jvari Monastery is a 6th century
Georgian orthodox monastery near Mtskheta,
former capital of Georgia. Jvari Monastery is
listed as a World Heritage Site by UNESCO.
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GEORGIA CAPITAL AT A GLANCE
PLATFORM FOR BUYING,
BUILDING, DEVELOPING AND
SELLING BUSINESSES IN GEORGIA
Georgia Capital capitalises with its robust corporate governance on the
fast-growing Georgian economy across the last decade, having access
to capital and strong 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. Once Georgia Capital
has successfully developed a business, the
Group acts as an advisor for the management
of mature companies and actively manages its
portfolio to determine each company’s optimal
owner. Georgia Capital will normally seek to
monetise its investment either through trade
sale, initial public offering, fund structure or
promoting interest over a 5–10 year period from
initial investment.
Georgia Capital currently manages nine 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;
(vi) a Beverages business; (vii) an Education
business; (viii) an Auto Service business;
and (ix) a Digital Services business; and two
public investments (London Stock Exchange
premium-listed Georgian companies):
(i) Georgia Healthcare Group PLC (GHG),
(70.6% 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.
Georgia Capital announced two new strategic
priorities on its investor day on 27 June 2019:
1) To become a third-party money manager,
targeting to raise c.US$ 200 million through
upcoming funds; and 2) to reshape its balance
sheet over the next five years and decrease
share of listed assets to 20% in its portfolio
(46% as of 31 December 2019).
MANAGEMENT
PLATFORM
LISTED PORTFOLIO
GEL 1,028M
PRIVATE PORTFOLIO GEL 1,225M
LATE STAGE GEL 693M
PIPELINE GEL 93M1
GEORGIA HEALTHCARE GROUP
WATER UTILITY
HOUSING DEVELOPMENT
P&C INSURANCE
EDUCATION
THIRD-PARTY
MANAGED CAPITAL
UPCOMING FUNDS
Georgia Healthcare Group
70.6%
GEL 430m2
Valued: LSE
Managed by GGU
100%
GEL 484m
Valued: 8.8x LTM EV/EBITDA
Managed by m2*
100%
GEL 44m
Valued: DCF
Managed by Aldagi
100%
GEL 165m
Valued: 9.0 LTM P/E
BANK OF GEORGIA
RENEWABLE ENERGY
HOSPITALITY AND COMMERCIAL REAL ESTATE
BEVERAGES
EARLY STAGE GEL 439M
Bank of Georgia
19.9%3
GEL 598m2
Valued: LSE
Managed by GGU
100%4
GEL 107m2
Valued: At acquisition price
Managed by m2*
100%
GEL 246m
Valued: NAV
Managed by Georgia Beverages
87%
GEL 87m2
Valued: LTM EV/EBITDA – 10.0x (wine);
LTM EV/Sales – 2.2x (beer)
GEL 9m
GEORGIA CAPITAL ASPIRES TO DELIVER TOTAL SHAREHOLDER
RETURNS OF 10 TIMES OVER 10 YEARS 10X=10Y
1 Total pipeline portfolio includes other pipeline projects with GEL 2 million value.
2 GCAP share as of 31 December 2019.
3 As long as Georgia Capital’s stake is greater than 9.9%, it will exercise its voting rights
in accordance with the votes cast by all other shareholders on all shareholder votes at
any general meeting.
4 Following the buyout of the 34.4% minority shareholder in GRPC on 25 February
2020, Renewable Energy consists of wholly-owned hydro and wind power plants with
91MW installed capacity in aggregate.
* m2 was renamed as Georgia Real Estate in 2019, we use m2 and Georgia Real Estate
interchangeably throughout the report.
Valued: At acquisition price
GEL 56m
AUTO SERVICE
Valued: 10.4x EV/EBITDA (PTI);
At acquisition price (Amboli)
GEL 26m
DIGITAL SERVICES
Valued: At acquisition price
Targeting to
raise c.US$ 200m
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Georgia Capital PLC Annual Report 2019
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GEORGIA CAPITAL AT A GLANCE CONTINUED
Listed Portfolio
Private Early Stage 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 market value
of GEL 3.8 billion. GHG is comprised of five
business lines: hospitals, clinics, pharmacy and
distribution, medical insurance and diagnostics.
GHG’s shares are listed on the London Stock
Exchange. GHG’s Annual Report 2019 is
available at: http://ghg.com.ge/ (1)
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 and investment banking and
wealth management operations; and c) banking
operations in Belarus (BNB). The Group intends
to benefit from superior growth of the Georgian
economy through both its retail banking and
corporate and investment banking services and
aims to deliver on its strategy, which is based
on at least 20% Return on Average Equity
(ROAE) and c.15% growth of its loan book.
BoG’s Annual Report 2019 is available
at: https://bankofgeorgiagroup.com/ (1)
Private Late Stage Portfolio
Water Utility
Water Utility is a regulated 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.36,000 legal
entities. Water Utility also operates hydro power
plants with total installed capacity of 149MW.
On average, half of generated power is used
by the business for water supply purposes
at regulated electricity tariff, while the excess
amount is sold to third parties.
Housing Development
Housing Development is a leading real estate
developer on the US$ 1.6 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. The business
also started to develop a distressed asset
management arm in 2019.
P&C Insurance
Property and Casualty Insurance (P&C
Insurance) is a leading player in the local
property and casualty insurance market with a
29% market share based on earned premiums,
gross as of 30 September 2019. 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.
1 Provided for informational purposes only.
Renewable Energy
Renewable Energy is a platform for
development of hydro power plants and wind
power plants across Georgia. Following the
buyout of the 34.4% minority shareholder in
GRPC on 25 February 2020, Georgia Capital’s
renewable energy business consists of its
wholly-owned subsidiary GRPC (with 50MW
Mestiachala HPPs) and wholly-owned Hydrolea
HPPs and Qartli wind farm (with 41MW installed
capacity in aggregate). In addition, the business
has a pipeline of c.350MW renewable energy
projects in the medium term.
Hospitality and Commercial Real Estate
Our hospitality and commercial real estate
business is comprised of: a) rent-earning
commercial assets with targeted 10% yield;
and b) a hotel development business across
Georgia with targeted more than 1,000 rooms.
The hotel development business has confirmed
1,222 rooms, of which 273 are operational
and 949 are in the pipeline. The targeted
hotel portfolio comprises c.630 internationally
branded hotel rooms and c.592 hotels rooms
under the business’s own brands developed
by Amber Group.
Beverages
Beverages combines three business lines:
a wine business, a beer business and a
distribution business. Our wine business
produces and sells wine locally and exports
to 17 countries. Our beer business produces
and sells beer and lemonade mainly locally and
owns a 10-year exclusive license to produce
and sell Heineken brands in Georgia.
Pipeline
Education
We see attractive opportunities in what is
currently a very fragmented, private high
school education market and expect to build a
diversified business model combining premium,
mid-level and affordable school segments. Our
education business now combines three high
quality school partnerships across premium,
mid-level and affordable education segments
that provide a clear pathway to approximately
11,180 learners, more than one-third of our
targeted 30,000 learners by 2025.
Auto Service
Georgia Capital sees strong value creation
opportunity in the auto services industry, which
is currently a very fragmented market with
approximately GEL 2.8 billion annual revenues.
The Group aims to build a diversified business
model with a digital platform combining
different auto-related services: car services
and parts, secondary car trading, car insurance
and periodic technical inspection (PTI).
Digital Services
Georgia Capital has entered the high growth
digital sector by acquiring a 60% equity stake in
Redberry, a leading Georgian digital marketing
agency. The acquisition of the attractive
service business complements our existing
portfolio as well as provides an opportunity to
enhance digital capabilities across our portfolio
businesses. The acquisition of Redberry
enables us to have a platform for investments
in the digital business.
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Georgia Capital PLC Annual Report 2019
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GEORGIA CAPITAL AT A GLANCE CONTINUED
Key portfolio highlights
One of the Group’s key objectives is to buy
assets at affordable prices and to have two
potential liquidity events for each of its
assets. Cash generation at both GCAP and
portfolio company level is a key success
factor for potential double exit routes, further
discussed on page 27. Georgia Capital
measures achievable money multiples with all
acquisitions and analyses them in combination
with the expected IRR during the investment
process. As of 31 December 2019, net cash
investment in listed and private late stage
companies was GEL (129) million against
the fair value of GEL 1.7 billion, putting
Georgia Capital in a strong position on both
cost multiples and IRR metrics, and, more
importantly, creating optionality for ultimate
exits given the existing cash generation in
these businesses.
GROSS CASH INVESTED OF GEL 1.2 BILLION
NET CASH INVESTED OF GEL 398 MILLION
PORTFOLIO FAIR VALUE OF GEL 2.3 BILLION
LSE LISTED
PRIVATE LATE STAGE
PRIVATE EARLY STAGE
PIPELINE
ORIGINAL
INVESTMENT
252
129
214
92
10
99
194
62
96
56
10
9
MOIC
GEL millions
7.9
598
2.2
430
2.6
2.1
19.7
1.1
1.3
1.2
0.2
NMF
2.6
NMF
484
116
132
165
44
(59)
(26)
246
194
99
107
62
72
96
15
56
56
10
26
9
9
(292)
Bank of
Georgia
Georgia
Healthcare
Group
Fair value
LSE market value at 31 December 2019
Net cash investment
Water
Utility
Housing
Development
P&C
Insurance
Renewable
Energy
Hospitality
and
Commercial
Real Estate
Wine
Beer
Education
Auto Service
Digital
Services
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Georgia Capital PLC Annual Report 2019
Georgia Capital PLC Annual Report 2019
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EXECUTIVE MANAGEMENT
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Irakli Gilauri, Chairman and CEO
Irakli 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. Prior, he was an EBRD (European Bank for Reconstruction and Development)
banker. Mr Gilauri has up to 20 years of experience in banking, investment and finance. Over the last decade,
Irakli’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 wine. Holds an MS in banking from CASS
Business School.
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Avto Namicheishvili, Deputy CEO
From 28 January 2019, Mr Namicheishvili assumes 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. Avto also serves as a chairman of the
Group’s beverages business. 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 an 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. Holds a BBA from the European School of
Management in Georgia. US Certified Public Accountant.
Ia Gabuania, Chief Exit Strategy Officer
Formerly Investment Director at Georgia Capital. Joined BGEO Group as an Investment Director in 2017. Ia has
over 10 years of experience in banking and investment management. Prior to joining BGEO, Ia served as Head of
Corporate Banking at Bank Republic, Societe Generale Group. Previously she held numerous executive positions
in leading Georgian companies, among which are Investment Executive at Liberty Capital (the holding company
of Liberty Bank) and Head of Investor Relations at Galt & Taggart Asset Management. Holds a BSc degree from
the London School of Economics and Political Science, UK.
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.
Archil Gachechiladze, CEO, Bank of Georgia
Previously CEO at GGU, the Group’s water utility and renewable energy businesses. Prior to that Archil was a
Deputy CEO in charge of corporate banking at Bank of Georgia. He launched the Bank’s industry and macro research,
brokerage, and advisory businesses, as well as 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 an MBA with distinction from Cornell University and is a CFA
charterholder.
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Avto Namicheishvili, Interim CEO, GGU
From 28 January 2019, Mr Namicheishvili assumes 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. Avto also serves as a chairman of the
Group’s beverages business. 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 an international business law from Central European University, Hungary.
Irakli Burdiladze, Co-CEO, Georgia Real Estate*
Joined as a CFO at the Bank of Georgia in 2006. Before taking leadership of the Group’s 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.
* m2 was renamed as Georgia Real Estate in 2019.
Shota Berekashvili, Co-CEO, Georgia Real Estate*
Joined JSC m² Real Estate in 2017. Before joining m², from 2009 to 2017, Shota was the founder and the CEO of BK
Capital construction company. From 2003 to 2009, he worked in Moscow as CFO of BK Capital. From 1999 to 2003,
he worked in investment banking sector in NY and London. In 1999, Shota graduated from Columbia University NY
with a Bachelor’s degree in Science and in 2002, Shota graduated from Cass Business School London with a
Master’s Degree in Corporate Finance and Risk Management.
* m2 was renamed as Georgia Real Estate in 2019.
Giorgi Baratashvili, CEO, P&C Insurance
Joined as the Head of the Corporate Clients division of Aldagi in 2004. Before taking 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 a Master Diploma in International Law.
Temur Jankarashvili, CEO, Wine Business
CEO of the Group’s wine business since November 2019, in addition to his CFO role at the beer business.
Formerly CFO at Rustavi Azot JSC. He has extensive experience in finance. Previously, had worked for BGEO Group
for 11 years, served as a VIP Director at Bank of Georgia, successfully leading the commercial lending team, covering
structured financing, M&As, LBOs and project financing. Holds a BBA degree in Banking and Finance from Tbilisi
State University.
Tornike Nikolaishvili, CEO, Beer Business
CEO of the Group’s 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 at Cartu-Universal. Overall, he has 15 years’ experience in the
FMCG sector. Holds a BBA degree from the European School of Management.
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Georgia Capital PLC Annual Report 2019
Georgia Capital PLC Annual Report 2019
15
CHAIRMAN AND CEO STATEMENT
2019 WAS A SIGNIFICANT YEAR
OF CAPITAL ALLOCATIONS AND
PROGRESS FOR GEORGIA CAPITAL
Irakli Gilauri
Chairman and Chief
Executive Officer
Dear Fellow Shareholders,
In this my second letter to Georgia Capital
shareholders, in what have recently become
unprecedented times, it feels almost
inappropriate to focus on the performance of
our businesses by looking in the rear-view mirror.
To the extent that this is our 2019 Annual Report
I will do this in an abbreviated way, and then
I will focus on our response to the challenges
created by the potential economic impact of
the global Coronavirus pandemic. Challenges
that, as I write this letter, we know are likely to
be significant but are evolving so rapidly that
it is almost impossible right now to quantify
them definitively.
Firstly, let me highlight the key issues for the
Group in 2019.
2019 was a significant year of capital allocations
and progress for Georgia Capital. We successfully
converted active pipeline deals into 11 acquisitions,
while our total portfolio value increased to
GEL 2.3 billion. Our NAV per share increased
5.7% in 2019 on the back of strong value
creation across our private portfolio companies
and disciplined share buybacks. NAV per
share allocated to private businesses grew by
20.9%, while NAV per share allocated to listed
businesses decreased by 8.4%.
In terms of what we track as value creation,
our private portfolio businesses generated
GEL 168 million value (18.6% growth in value
during 2019), which was partially offset by a
GEL 34 million decrease in the market value
of our listed assets reflecting the lower
GHG share price. We increased our stake in
GHG from 57% to 70.6% on 18 December 2019
following the completion of a share exchange
facility, whereby GCAP issued 3.4 million new
shares in exchange for a 13.6% equity stake
in GHG. The number of outstanding GCAP
shares decreased by 1.7% in 2019, driven
by our share buyback programme and the
subsequent cancellation of 2.7 million shares.
During 2019, dividend inflows from our
portfolio businesses increased 69% y-o-y
to GEL 122 million, which was supported
by strong cash flow generation at late stage
portfolio companies. GCAP’s stand-alone FY19
cash inflow of GEL 113 million was supported
by GEL 40 million interest income, while
management expenses were managed below
our targeted 2% level. Our resources available for
deployment remained high at GEL 364 million
at 31 December 2019.
On an IFRS basis, revenue (at GEL 1.5 billion)
and gross profit (at GEL 590 million) were up
14.8% and 19.7%, respectively, in 2019, largely
as a result of strong operating performances
across our businesses, the launch of greenfield
projects and a number of acquisitions.
Consolidated EBITDA was up 21.4% y-o-y
to GEL 272 million. Consolidated IFRS net
profit was GEL 604.3 million in 2019 (up from
GEL 26.2 million in 2018). Georgia Capital
recorded a gain of GEL 589 million from a
change in the accounting basis, which you can
read more about on pages 98-99 of this report.
Listed businesses
A significant increase in the Bank of Georgia
share price provided GEL 165 million value
creation to Georgia Capital during 2019 on the
back of more than 20% loan portfolio growth
supported by a 26% return on equity and
increased dividend payments. However, the
Georgia Healthcare share price decreased
by 40% during the year despite strong
underlying business fundamentals. Following
the completion of its three-year investment
programme in 2018, the continued double-digit
growth in EBITDA and operating cash flow
enabled GHG to generate significant amounts
of free cash flow totalling GEL 77 million in
2019, up from GEL 14 million in 2018.
Private businesses
Our private businesses delivered a healthy
GEL 168 million value creation in 2019 driven
by continued growth in operating performance,
the first-time valuation of greenfield projects
and enhancement of valuation multiples. I was
delighted that the value creation, excluding
multiple changes, was GEL 145 million across
our private portfolio companies. There is
significant information on the performance
and strategies on all of our businesses later
in this Annual Report.
Last year I identified three key principles for
the acquisition and new business side of our
business model: Who before what; Think
twice before buying; and Cash is, was and
always will be King. We made good progress
on each of these key principles during 2019.
Who before what
Our team of people continues to be the
main asset of Georgia Capital. Even in these
difficult times our number one goal is not to
do mass lay-offs and maintain the talent pool
we have. Attracting and developing talent is
not an easy task and obviously we want to
continue to maintain our existing talent. We
feel that all of our businesses are headed by
great management teams and we believe that
across the portfolio companies the depth of
the management bench is solid. In addition, we
came up with innovative partnership structures
with local entreprenuers with good track
records, where talented entrepreneurs are our
minority partners in certain ventures and they
continue to manage the company. At the same
time they have our support in institutionalising
the companies by introducing financial
discipline, risk management and improved
governance. This is obviously important in
areas where companies are expected to
grow rapidly. We are using these partnership
structures in the education business. Where
we bought majority equity interests in three
schools, the former majority owners have
remained our minority partners and continue
to manage their respective businesses. At the
same time, we are reinvesting together in the
growth of the schools. These partnerships
are extremely efficient as we do not need to
maintain back office support for the education
business as the schools have remained
independently managed by our minority
partners.
We have continued to develop talent internally
and, at the Georgia Capital level, we have
promoted Ia Gabunia to a newly created role
of Chief Exit Strategy Officer. Ia became a key
member of the top management team and
will oversee the establishment of structured
exit processes from our portfolio companies,
as we are now starting to engage in the active
price discovery of portfolio assets held. In
addition, we have continued to support and
develop talent internally and ensured that new
portfolio acquisitions came with high quality
management teams.
During 2019, we continued to make substantial
investments in growing the business both
operationally and via acquisitions, and this was
supported by GEL 122 million of dividend income
from a combination of our listed investments
and our private portfolio companies. In a post-
Coronavirus environment, we expect these
dividend flows to reduce, and cash preservation
will be our key priority in the near future, a theme
I will discuss further later. At the end of 2019,
the Group held GEL 364 million in cash, liquid
funds and loans, which is a comfortable buffer
in these turbulent times.
Think twice before buying
Our main goal remains to buy companies at
affordable prices, with key investment criteria
being MOICs combined with IRRs together with
ROIC to ensure appropriate expected returns
on the total invested capital in each portfolio
company. During 2019, we particularly focused
on acquisitions in the private school education
market, and we were extremely successful in
acquiring three high quality schools – British
Georgian Academy; Buckswood International
and Green School – at prices ranging between
5.6x - 6.4x 2020 EV/EBITDA. We also made
significant progress in buying assets in the
promising energy sector.
Cash is, was and always will be King
A key focus at the portfolio company level is the
ability to grow operating cash, and generating
and preserving cash is even more important
during the global Coronavirus pandemic.
Capital allocations
We invested GEL 358 million in existing and
new portfolio businesses in 2019, of which:
GEL 113 million was for the non-cash acquisition
of the 13.6% stake in GHG, GEL 68 million
was used for pipeline and new business area
acquisitions and was invested across our new
education, auto service and digital services
businesses. In addition, GEL 57 million was
allocated for the development of pipeline hotels,
and pipeline or bolt-on acquisitions in renewable
energy projects and the beer business;
GEL 49 million for commercial real estate
properties valued at c.10% yield (in US$ terms)
was allocated to the commercial real estate
business, and GEL 2 million was allocated to
the evaluation of new investment opportunities.
Since 31 December 2019 we allocated a further
GEL 38.7 million (US$ 13.8 million) capital for
the buyout of the 34.4% minority shareholder in
Renewable Energy. The buyout allows us
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17
Outlook
Over the last two years we have laid strong
foundations for significant value creation across
all our private businesses, which together with
continued strong cash flow generation across
our late stage businesses, have driven good
NAV per share growth. I expect the Georgian
economy to remain resilient to the economic
challenges ahead, and I know our portfolio
businesses are doing everything in their power
to husband their resources to manage efficiently
and effectively to ensure they remain very well
positioned to withstand the challenges ahead.
This Strategic Report as set out on
pages 2 to 123 was approved by the
Board of Directors on 7 April 2020
and signed on behalf by Irakli Gilauri,
Chairman and Chief Executive Officer.
Irakli Gilauri
Chairman and CEO
7 April 2020
CHAIRMAN AND CEO STATEMENT CONTINUED
to become a 100% owner of the existing and
pipeline high quality wind and hydro assets
with strong dollar-linked cash flows.
In line with our 360-degree investment analysis,
we spent GEL 125 million on share buybacks
in 2019. Following the completion of the
US$ 45 million share buyback programme,
we cancelled 2.7 million shares and transferred
0.7 million shares to the management trust.
Additionally, the management trust also
spent US$ 17 million on its share purchase
programme during 2019.
currently reviewing all of our planned capital
investment programmes in all of our portfolio
companies. Each business is reviewing its
cost profile and we will expect to deliver cost
management efficiencies throughout the
Group. Both of our listed investments, Bank
of Georgia and Georgia Healthcare, have
announced the deferment of any dividend
decision until the full economic impact of the
COVID-19 pandemic is better understood.
These are extremely sensible decisions that,
as investors in the businesses, we fully support.
Perhaps the most significant of our new pipeline
business investments was the GEL 49 million
invested in high quality revenue, large and growing,
but fragmented private school education market,
where we secured three high quality partnerships
with excellent management teams across
premium, mid-level and affordable private
schools. Through these carefully selected
partnerships, we now have a clear pathway
to approximately 11,000 learners and to more
than 50% of our targeted GEL 70 million
EBITDA by 2025.
Impact of the Coronavirus COVID-19
global pandemic
The full extent of the impact from the
Coronavirus pandemic is currently difficult to
assess and is unlikely to be fully understood
for some time – at least until the severity and
duration of the outbreak both in Georgia
and worldwide become much clearer. The
Georgian Government has initially responded
rapidly and effectively, both in terms of
managing the spread of the virus within
Georgia, and in announcing a series of support
measures designed to mitigate the potential
economic impact in Georgia of the global
spread of the virus.
Within our businesses we have implemented
a series of contingency measures to ensure
the protection of both our employees and
our customers. This has been our immediate
priority. Cash remains king, and we are
now focusing on cash accumulation and
preservation. I am writing this letter in the early
stages of the Coronavirus impact, and we are
In short, we are “battening down the hatches”
until we better understand the short and
medium-term economic impact, and we will
accumulate cash, reduce our investment
programme and rigorously review our cost
base. I am sure investment opportunities will
arise but, at this stage, that is for another day.
Macroeconomic environment
During 2019, the Georgian economy remained
robust. GDP growth was 5.1% in 2019, up from
4.8% in 2018. As net exports continued to
improve, the current account (CA) deficit shrank
significantly to 5.1% of GDP in 2019, a major
improvement compared to the 2016 highs
of 12.5%. Tourism inflows showed resilience
despite the air travel ban imposed by Russia,
as we had 5.4% growth in 4Q19, while 2019
tourism revenues were up by 1.4% y-o-y.
Average inflation was 4.9%, above the targeted
level in 2019, leading the NBG to tighten its
monetary policy by 250 bps to 9.0%. Georgia’s
strong progress was acknowledged by rating
agencies as both Fitch and S&P upgraded
ratings of Georgian sovereign bonds from BB-
to BB with stable outlooks in 2019. Clearly this
progress will now be significantly challenged
for the remainder of 2020, as the country, and
the world, come to terms with the full economic
effect of the global pandemic. As I write this
note, any clear picture as to exactly what that
impact will be remains elusive, but we will
monitor macroeconomic developments carefully,
particularly given Georgia’s reliance on tourism
and tourism-related activities, and adapt our
businesses appropriately.
Photo Breathtaking panoramic
view of old Tbilisi – home to diverse
cultural heritage of the city.
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19
GEORGIA CAPITAL STRATEGY
GEORGIA CAPITAL –
YOUR GROUND FLOOR
INVESTMENT OPPORTUNITY
IN GEORGIA
GEORGIA CAPITAL STRATEGY IS BASED ON THREE PILLARS
• Investing in and developing business in Georgia for over 15 years.
• Aspiring to deliver total shareholder return of 10 times over 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
• Seventh in “Ease of Doing Business” (2020).
• Top eight in Europe region by Economic Freedom Index
(Heritage Foundation, 2020) and #12 internationally.
• Low corruption and bribery risk (Transparency International,
2019 and Trace International, 2019).
Investment-led GDP growth – 5.1% growth in 2019
• Fast-growing 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 the National Bank of Georgia
#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 trade sale, IPO,
fund structure or promoting interest in five to ten years.
• Disciplined when investing by buying at reasonable prices.
• 360-degree analysis to be performed when evaluating capital
returns, new investment opportunities or divestments.
• 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.
• Exit options are set prior to making an investment decision.
Managing portfolio companies
• 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.
THREE FUNDAMENTAL ENABLERS
Superior access to capital1
• 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:
– 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.).
• Targeting to raise third-party managed capital over the next
five years.
Access to good management
• Reputation among talented managers as the “best group
to work for”.
• Attracted talents have demonstrated solid track record of
successful delivery.
• Proven DNA in turning around companies and growing
them efficiently.
• Platform for entrepreneurs to build institutions
(entrepreneurship culture):
– If we do not have the right people then we do not invest,
no matter the attractiveness of the opportunity.
Commitment to the highest level of corporate governance
• Strong Board comprised mainly of independent directors with
extensive international experience.
• Outstanding track record in institutionalising businesses,
creating independently run/managed institutions.
• Approximately 35 employees at the holding company level.
• Highly experienced management team in each portfolio
company with a strong measure of independence.
• Aligned shareholders’ and management’s interests by
share compensation.
• High level of transparent reporting.
1 Figures and statements in this section include the track record of our
predecessor company BGEO, prior to the 2018 demerger.
Photo Kazbegi mountains in early winter
in the North of the country.
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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 growing and trade integration has strengthened.
These, coupled with a business-friendly environment and policies aimed at further diversifying the economy,
support investments and boosting growth.
IN 2020, WORLD BANK
RANKED GEORGIA:
2ndin “Starting a Business”
5thin “Registering Property”
7thin “Protecting Minority Investors”
7thin “Ease of Doing Business”
Up from 16th to 9th in 2017 and from 9th to 7th
in 2019, ahead of Norway, Sweden, Ireland and
Germany
Source: World Bank, Doing Business
Georgia is favourably placed among peers
Country
Armenia
Azerbaijan
Belarus
Czech Republic
Georgia
Kazakhstan
Turkey
Ukraine
Country rating
Fitch rating outlook
B+
BB+
B
AA-
BB
BBB
BB-
B
Positive
Stable
Stable
Stable
Stable
Stable
Negative
Positive
Reform-driven success
Georgia has carried out genuine economic and
structural improvements. As a result, corruption
has decreased, productivity has been enhanced
and the economy has been diversified –
enabling the country to withstand the global
financial crisis and recent external shocks.
The key sovereign ratings have improved during
2019: in February 2019, Fitch upgraded the
sovereign credit rating of Georgia from “BB-”
to “BB” and maintained a stable outlook; in
September 2019, Moody’s reaffirmed the “Ba2”
rating and stable outlook; and in October 2019,
Standard & Poor’s upgraded the rating 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 upgrades.
Georgia is consistently ranked as a top
performer in governance and doing business
indicators. Georgia, with a ranking of seventh
in “Ease of Doing Business”, has implemented
a total of 47 reforms in the past 15 years and
is characterised as a top-performing economy
in the region in which to start a business.
Furthermore, Georgia is ranked 12th out of 180
countries by the Index of Economic Freedom,
measured by the Heritage Foundation in
2020, and 27th out of 200 countries in Trace
International’s 2019 Matrix of Business Bribery
Risk. Georgia is on par with the European
Union (EU) member states and ranked top in
the Eastern Europe and Central Asia Region
Corruption Perception Index by Transparency
International in 2019.
The Economic Liberty Act, effective since
January 2014, ensures the continuation of a
credible fiscal and monetary framework for
Georgia, by capping the fiscal deficit at 3%
of Gross Domestic Product (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 only applicable
to distributed profits; undistributed profits,
which are reinvested or retained, are exempted.
Georgia has one of the friendliest tax regimes
according to World Bank’s Doing Business
2020 publication, having slashed the number
of taxes from 21 in 2004 to just six currently.
2nd
Georgia is ranked the second easiest country
in the world to start a business in
The EU-Georgia Association Agreement, that
came into force in July 2016, and related Deep
and Comprehensive Free Trade Agreement
(DCFTA), effective since September 2014,
laid 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.
Closer economic ties with the EU and trust
in prudent policy making are also expected to
attract foreign investments to Georgia. Visa-free
travel to the EU, granted to Georgian passport
IN 2020, ECONOMIC
FREEDOM INDEX RANKED
GEORGIA:
12th
Up from 16th in 2019, ahead of Iceland,
Netherlands and United States
Source: Heritage Foundation
Read more on Our Strategy on page 18
holders in March 2017, is another major success
of the Georgian foreign policy.
The FTA with China, effective from January
2018, and the FTA with Hong Kong, effective
from February 2019, increase opportunities
to further accelerate exporting markets and
attract investors by offering a business-friendly
environment, high governance and access to a
market of 2.8 billion customers. In 2019, 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, while cumulative
investment in the corridor could reach
US$ 1 trillion over the next ten years, according
to the International Monetary Fund (IMF).
While remaining committed to EU integration,
Georgia has also managed to stabilise relations
with Russia, as the latter lifted its embargo on
Georgian products in 2013. However, Russia
temporarily banned direct flights to Georgia
from 8 July 2019 amid rising political tensions
after a Russian MP chaired an assembly in the
Parliament of Georgia. The flight ban slowed
down, but did not reverse, the booming trend
of the tourism industry in Georgia, supported by
a 20% growth in tourism revenues from the EU.
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 the 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
(2019–2021) 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
raising 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, advancing
privatisation schemes and increasing capital
expenditure efficiency. Within the responsible
lending framework, the National Bank of
Georgia (NBG) took macroprudential measures
in order to decrease household indebtedness
and enhance financial stability, as well as
strengthening regulation supporting the financial
system resilience to currency fluctuations and
FX-induced credit risks.
Potential to become a regional hub
A business-friendly environment, recognised
as having the best governance in the region;
well-developed infrastructure; stable energy
supply; flexible labour legislation; a 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 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). Most recently,
in November 2019, the Georgian PM, alongside
the Turkish and Azerbaijani presidents, opened
the Trans-Anatolian Pipeline (TANAP), allowing
natural gas from Azerbaijan to be exported to
Europe through Georgia.
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.
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. In 2019, according
to preliminary data, total FDI amounted to
US$ 1.3 billion, up 0.2% year-on-year (y-o-y).
The slower FDI growth was compensated by
a substantial increase in portfolio investments,
totalling US$ 726 million in 2019, 3.5 times
higher y-o-y. Major sectors attracting FDI in
2019 were finance (20.6% of the total), energy
(15.3%) and hotels and restaurants (12.4%).
Importantly, the share of reinvestment by foreign
companies in total FDI increased to 48.3% in
2019, compared to 34.6% in 2018. 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 FTAs and a business friendly
environment will further support FDI inflows.
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GEORGIA CAPITAL STRATEGY – MARKET AND INDUSTRY OVERVIEW CONTINUED
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 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, as well as an agreement
with Israel, imminently offers significant upside
potential for Georgia’s exports.
5.1% growth rate
Georgian economy growth is expected
to be robust in the medium term
7.7 million international visitors
Up 7.3% y-o-y in 2019
2.8bn
Access to a market population of 2.8 billion
without customs duties
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. The number of international travellers to
Georgia increased on average 15% from 2012
to 2019. Despite the tensions and economic
slowdown in our major trading countries,
number of international visitors increased
significantly to 7.7 million and brought in nearly
US$ 3.3 billion in 2019. The outlook for the
sector in 2020 is not attractive due to the novel
coronavirus outbreak, travel restrictions and
countries’ lockdowns. But after the COVID-19
related healthcare crisis is addressed and
travel restrictions ease, we believe that tourism
revenue will start to recover from its low base.
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 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 reopened its borders
to Georgian products. Since 2013, Georgia’s
Inflation vs Inflation Target
7.0
5.0
3.0
1.0
-1.0
-3.0
One of the fastest growing economies
in the region
Georgia continued to deliver positive results
in 2019. It is ranked second in “Starting a
Business” and seventh in “Ease of Doing
Business”, according to the latest World
Bank Doing Business publication. Based on
preliminary data from the National Statistics
Office of Georgia (Geostat), the economy grew
by 5.1% in 2019, with net exports playing a
crucial role in strong performance which was
also supported by domestic demand from both
the private and public sector. Merchandise
exports increased by more than 12% y-o-y in
2019, while imports were cut by 1%. Following
the second-ever positive current account
balance in 3Q19 (after 3Q18), the CA deficit
shrank to a historic low of 5.1% of GDP in 2019.
The consolidated budget overall balance is
expected to be around -2.5% in 2019, in line
with the fiscal rule. Government savings,
i.e. the consolidated budget operating balance,
remained almost unchanged in 2019 at
GEL 2.1 billion, while capital expenditures,
i.e. acquisition of non-financial assets, reached
a historic high of GEL 3.6 billion, a 32% growth.
With the revenue side taking a hit due to the
COVID-19 related slowdown, and a stimulus
package to be unveiled on the expenditure side,
the deficit is expected to be higher in 2020.
NBG sold further US$ 60 million in March 2020,
since the beginning of the COVID-19 shock,
in order to ease pressure on GEL in the short
run. In November 2019, Geostat introduced
the SNA 2008 methodology, which revised
the national accounts data. This reflected
both methodological changes and improved
sources, leading to an 8.6% increase in 2018
nominal GDP and an average 6.2% increase
in 2010–2018. According to new data, the
contribution of services in real GDP growth
is even higher, making it by far the largest
component. Average inflation in 2019 was
4.9%, above the 3% target. This was mainly
caused by inflationary expectations due to
sustained nominal effective exchange rate
(NEER) depreciation that fed into inflation
through the exchange rate channel, following a
one-off increase in the excise tax rate that also
contributed to higher inflation. NBG responded
by hiking the monetary policy rate by 250 basis
points to 9% in September–December, and
declared that the policy stance will continue
to be tightened until inflationary expectations
are alleviated. As the COVID-19 shock hit the
economy, inflation in 2020 will be determined
by the relative strength of transmission from
the exchange rate and demand channels. We
expect NBG to further tighten the policy if the
depreciation trend persists, while the policy
can be loosened if demand side deflationary
pressures are stronger. NEER was down by
8% y-o-y and the real effective exchange rate
(REER) was down by 5% y-o-y at the end of
2019. Official reserve assets amounted to
US$ 3.5 billion at the end of December 2019,
up 6.6% y-o-y. August 2019 marked the first
Real GDP Growth
7.4%
6.4%
3.6%
4.4%
3.0%
2.9%
4.8%
4.8%
5.1%
20
16
12
8
4
0
For a discussion of risks faced by the Georgian
Economy, including those relating to the
coronavirus pandemic, see Principal risks and
uncertainties on page 75.
Read more on Principal risks and uncertainties
on page 75
16%
12%
8%
4%
0%
-4%
2011
2012
2013
2014
2015
2016
2017
2018
2019
Nominal GDP, US$ billions
Real GDP Growth rate, y-o-y
5
1
g
u
A
5
1
c
e
D
6
1
r
p
A
6
1
g
u
A
6
1
c
e
D
7
1
r
p
A
7
1
g
u
A
7
1
c
e
D
8
1
r
p
A
8
1
g
u
A
8
1
c
e
D
9
1
r
p
A
9
1
g
u
A
9
1
c
e
D
Current account balance (% of nominal GDP)
30
20
10
0
-10
-20
-30
-5.6%
-9.8%
-12.2%
-11.4%
-10.2%
-11.8%
-12.5%
-8.1%
-6.8%
-5.1%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Goods, net
Services, net
Investment income, net
Current transfers, net
Current account
FDI
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24
Georgia Capital PLC Annual Report 2019
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25
GEORGIA CAPITAL STRATEGY – MARKET AND INDUSTRY OVERVIEW CONTINUED
BUSINESS BRIBERY
RISK IN 2019
27th
Source: Trace International
OPEN BUDGET INDEX
IN 2017
5thUp from 16th in 2015
Source: International Budget Partnership
time since 2016 when NBG sold US dollars on
FX auctions, followed by two other occasions
in September and November, with a total
value of US$ 92.8 million to curb depreciation
expectations driven by the travel ban.
Growth in 2020 will be hit by the coronavirus
related shock, with both external and domestic
demand shrinking significantly. We expect
fiscal expansion coupled with accommodative
monetary policy stance as long as inflationary
pressures from the exchange rate do not
turn prevalent, also aided by macroprudential
measures.
The outlook for the different sectors reviewed
below reflect the state of affairs before the
coronavirus outbreak. For a discussion of the
risks to the economy and anticipated effects
in certain of these sectors, see principal risks
and uncertainties on page 75.
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%
(10-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 75% of total assets at the end of
2019. 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
19.5% (regulatory capital to risk-weighted assets,
Basel III), non-performing loans (NPL) stood at
1.9%, the Liquidity Coverage Ratio was 133.3%
and the sector’s profitability remained robust
at 20.3% return on equity at the end of 2019.
Within the responsible lending framework,
NBG tightened regulations for loans issued to
individuals. Since September 2018, effective
interest rate on loans have been capped at
50%. Since January 2019, loan-to-value (LTV)
and payment-to-income (PTI) ratios have
been subject to maximum norms. In line with
de-dollarisation mechanisms, mortgage loans
below GEL 200,000 are only allowed in national
currency (the cap was previously GEL 100,000).
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 the
private sector. The Georgian healthcare market
has shown solid growth in recent years. Value
added of the health and social work sector
increased by 15.2% y-o-y to GEL 1.9 billion
(System on National Accounts (SNA) 2008),
with over 71,000 people employed and average
salary growing 13.1% in 2019. 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 help domestic consumption to
increase. Growth of overnight visitors, in line
with significant improvement in healthcare
service quality, support Georgia to become
a medical tourism hub in the Caucasus region
and to further boost the service export growth.
On 5 November, 2019, the Georgian Government
introduced changes to the UHC reimbursement
mechanism, effective from 21 November 2019.
The changes mainly cover the Tbilisi and Kutaisi
regions, which have recently developed an
oversupply of beds as a result of the addition
of a number of small hospitals in recent years.
According to the new initiative, the Government
has reduced certain tariffs on intensive care
and cardiac services to equate them with tariffs
set for the rest of the regions.
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 put up in measured doses
is a significant source of income. Imports of
medicaments was the fourth largest commodity
group, amounting to US$ 355 million (3.9% of
total imports), while re-export of medicaments
was the fifth largest export commodity group,
amounting to US$ 172 million (4.6% of total
exports) in 2019.
Energy
Georgia has a developed, stable and
competitively-priced energy sector. The
country has overcome 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. The energy
sector was the second highest contributor to
FDI in 2019, with a share of 15.3% (12.7% in
2007–2019).
Water Supply and Sanitation (WSS)
Georgia is a country rich in hydro resources,
however, approximately 34% of the country’s
population still has no proper access to
centralised WSS services. The Georgian
Government is 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 fair 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 incentivises companies to invest
in the sector. In 2019, the sector value added
was GEL 327 million, up by 11.6% y-o-y, just
under 1% of GDP (SNA 2008). 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), the 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 the
establishment of a free electricity market. In
2014, 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. In the next
phase of deregulation, effective from May 2019,
big industrial customers with monthly electricity
consumption of at least 5GWh were required
to register as direct customers, increasing the
deregulated market share of total electricity
demand from c.6% to c.20%. On the back of
gradual market deregulation, 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 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
being taken towards diversification of electricity
supply mix, with the emphasis on development
of wind and solar photovoltaic systems (PV).
Property and Casualty Insurance (P&C)
The Georgian property and casualty
insurance sector has more than doubled in
size between 2009 and 2018. According to
the Insurance State Supervision Service of
Georgia, the total value of attracted premiums
on non-life insurance increased by 15% y-o-y
to GEL 579 million in 2019. Net profits were
GEL 25.2 million, down 40% y-o-y. Health
insurance remained the largest sector, with
a premium of GEL 234 million, up 8% y-o-y.
The Georgian insurance industry has significant
potential for further growth. Low rates of insurance
penetration compared to peer countries,
supportive Government policies (expected
introduction of compulsory local third-party
liability motor vehicle insurance) 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
2019, real estate activities accounted for 11.5%
of GDP, amounting to GEL 5 billion, up 12.9%
y-o-y (SNA 2008).
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
the mortgage market. In 2019, following new
lending regulations that led to bringing demand
forward last year, the number of new mortgage
contracts was approximately 34,300, down
12.5% y-o-y. The value of these mortgages
was GEL 2.4 billion, down 26% y-o-y. Higher
housing size, Georgian’s attitude towards home
ownership, ongoing urbanisation and increasing
disposable income support this sector to
continue solid growth in the coming years.
Commercial Property
Trade has the highest share in the country’s
GDP (14.4%). The gross value added of the
wholesale and retail trade sector increased
by 15.5% y-o-y to GEL 6.2 billion in 2019 (SNA
2008). According to Galt & Taggart, office real
estate is almost entirely concentrated in Tbilisi,
with around one million sq.m. in 2019, and is
almost equally distributed between owner-
occupied and leasable offices. Leasable space
further combines traditional (28%) and modern
office stock (22%). Modern office stock GLA
was estimated at 215,000 sq.m. in 2019. As a
result of lack of modern office stock, Tbilisi has
one of the highest prime office rents among
the CEE cities. Prime yield in Tbilisi stands at
11.7% vs a 7.1% average in peer cities.
Hotels
The number of overnight visitors was 5.1
million, up 6.8% y-o-y, with tourism revenues
totalling US$ 3.3 billion, up 1.4% y-o-y, in 2019.
The accommodation and food service sector
contributed to GDP with GEL 2.1 billion in
2019, up over 15% y-o-y (SNA 2008). Tbilisi
is the most popular destination for tourists in
Georgia. Based on Galt & Taggart’s research,
accommodation in Tbilisi has almost doubled
during 2015-9M19, reaching over 10,000 rooms.
The hotel market is dominated by international
chains, accounting for 24% of the capital’s room
stock, with international upscale and midscale
chains enjoying similar occupancy rates and
prices to Western European cities. Average daily
rate (ADR) was US$ 153 in international upscale
brands in 2019, with occupancy reaching 62%.
As for international midscale brands, ADR
was US$ 108 and occupancy totalled 65%.
Meanwhile, our hospitality business is targeting
to tap into unpenetrated markets in Georgian
regions. The coronavirus significantly challenges
the 2020 outlook, but we believe sector will
continue to grow in the medium term.
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26
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27
GEORGIA CAPITAL STRATEGY – MARKET AND INDUSTRY OVERVIEW CONTINUED
CAPITAL ALLOCATION AND MANAGING PORTFOLIO COMPANIES
years. Georgia lags behind developed countries
by number of private passenger cars per capita
(only 279 on a per 1,000 capita basis), showing
room for further growth. With environmental,
safety issues and auto park renewal in mind,
the Georgian Government carried out various
initiatives in 2017 and 2018, including increasing
excise taxes on cars and fuel in 2017, and rolling
out a mandatory vehicle inspection programme.
Outlook for the industry is positive, due to rising
household income and mandatory technical
inspection gradually forcing drivers to move
to newer cars while simultaneously raising
demand for auto parts and repair services.
Data referenced in this section was collated
from the following sources:
1 Source: Geostat, Insurance State
Supervision Service of Georgia
2 Source: Galt & Taggart Auto business
overview research
3 Source: Geostat
4 Source: MIA
Beverages
Wine Production and Distribution
The oldest wine was found in 8,000 historic
jars in Georgia, defining the country as the first
wine producer in the world. Registered wine
producers focus mostly on export. In 2019,
up to 93 million bottles of wine (0.75 litres)
were exported into 53 countries, up 9% y-o-y,
with export bottles sold reaching a 14-year
high. In terms of value, wine exports totalled
US$ 238 million, up 17% y-o-y. Wine exports
increased in markets of strategic importance:
Poland (17%), USA (48%) and UK (60%). After
the Russian embargo in 2006, Georgia started to
diversify its export markets. 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 growth.
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 2019, the size of Georgia’s beer market
was over 107.5 million litres, up 11% y-o-y.
Based on 2018 population data, per capita
beer consumption was 29 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 and new export
market opportunities in the medium term.
Education
Education is a key sector for boosting long-
term potential output. In order to decrease
skills mismatch and boost labour productivity,
the Georgian Government plans to reform
general, higher and vocational education
and is committed to adopt a 6% of GDP floor
on education spending effective from 2022.
Currently, the Government’s share in the sector
is high and only c.10% of primary schools are
private. Even though Government spending has
been increasing y-o-y for more than 10 years,
it is still low compared to developed countries.
Georgia has a 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 that the quality of
education in the country is low. Sector outlook
is positive, as there is room for consolidation
and for increasing education quality through
higher private sector participation, utilising
economies of scale.
Auto Service
The auto service industry is a significant part
of Georgian economy that posted impressive
growth of 14.8% CAGR over 2010–2018,
reaching around GEL 2.9 billion in 2018. The
industry covers the following sub-sectors:
vehicle sales – sale of local secondary,
imported secondary and imported new
vehicles; automobile consumables and spare
parts; automobile servicing and repair; periodic
technical inspection services; and auto
insurance. Sale of automobiles is the largest
sub-sector by turnover, accounting for 61% of
the total market in 2018, followed by auto parts
(30%), auto insurance (4%), auto servicing (3%)
and periodic technical inspection (2%). Cars are
the second largest export and import product
in Georgia.
Imports have been growing on average by 5%
(CAGR for 2010-2018)2. The US is the largest
shopping market for Georgia (67% in terms
of quantity of 63,000 units in 2018 and 47%
of total US$ 597 million). The average price
of imported cars almost doubled in 2018 to
US$ 9.5 thousands from US$ 5.4 thousands
in 2016. It is a highly fragmented market, car
importers being represented by two large
companies, many small companies, as well
as individuals, (54% market share by quantity).
Local car trade of secondary vehicles is a
completely unorganised p2p market.
The auto parts and service industry is also a
highly fragmented market, where the leading
player controls approximately 28% of the
market. The rest of the market is dominated by
small, owner-operated lower-end service shops
on bazaar that conduct a large proportion of
informal activity, distorting official business
sector statistics. Both consumable & spare
parts and maintenance & repair markets are
feeders of each other and have common
drivers of disposable income and number
of vehicles. Average spending per vehicle has
been growing at 11% CAGR, reaching around
GEL 1,000 per capita in 20183.
As part of the Georgia-EU Association
Agreement, Georgia has implemented a
mandatory technical inspection programme in
several phases starting from 2018. Prices are
set at GEL 60 and GEL 100 for light and heavy
vehicles respectively and the market is closed
for the next 10 years. There are 41 players on the
market servicing vehicles all around the country.
Georgia’s auto park continues to grow steadily,
reaching 1.4 million vehicles in 2019, up 4.1%
y-o-y on the back of increased passenger cars4.
However, the fleet is very outdated, with more
than 81% of the total vehicles older than 12
OUR CAPITAL ALLOCATION PRINCIPLES
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 aspires to deliver total shareholder
returns of 10-times over 10 years since the
demerger from BGEO Group on 29 May 2018.
Highly-disciplined entry approach
The Georgian economy entered into a period
of significant development and growth
approximately 15 years ago and different
sectors and businesses are therefore at an
early stage of formation. Access to capital and
management personnel is limited 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. The Group believes that in
the long-run Georgia will become the service
hub of the region.
Georgia Capital is under no time pressure to
invest and as such, it takes a selective and
opportunistic approach to new acquisitions.
Georgia Capital remains disciplined for its
capital allocation decisions. The Group’s key
principle is to buy assets at affordable prices
and to remain very disciplined in this regard.
To evaluate new acquisition opportunities
Georgia Capital has developed a 360-degree
analysis framework, discussed in further detail
below. Another core principle of the Group’s
investment philosophy is to be very mindful
about the size of the potential investments in
new industries. Georgia Capital typically starts
with a small ticket size and tests and develops
a management track record before stepping
up the investment size.
The ROIC, MOIC and IRR combination is
the key decision-making matrix used in the
investment decision making process.
• MOIC and IRR are determined at GCAP
level, as the Group evaluates achievable
money multiples with all acquisitions and
analyses them in combination with the
expected IRR.
• ROIC is evaluated for financing projects
and reinvestment at each portfolio company
level. Different yields are appropriate for
different industries.
Exit options are set prior to making an
investment decision. A low investment entry
point becomes even more important in a small
frontier economy, with limited exit opportunities.
The Group targets to have two potential liquidity
events for each of its assets.
1st exit: cash out. When entering a new
industry Georgia Capital intends to develop and
grow portfolio companies. The Group’s key focus
areas at the portfolio company level are the ability
to grow operating cash and to make efficient
capex investments by targeting an appropriate
level of ROIC. Once the business reaches its
late stage of development, the Group expects
to pursue its first exit route with leverage, which
ensures dividend flows for GCAP.
2nd exit. As businesses mature, Georgia
Capital will normally seek to monetise its
investment either through initial public offering,
trade sale, fund, promote structure or other
appropriate exit option, typically within five
to 10 years from initial investment.
2ND EXIT
10x = 10y
Cash generation at both GCAP
and portfolio company level is a
key success factor for Georgia
Capital
1ST EXIT:
CASH-OUT
Trade sale, IPO, fund structure or
promoting interest
Cash inflows through leveraging up and/or
dividend payouts
Using scale to access debt capital markets
ENTRY
POINT
Low acquisition multiples
360-degree analysis
Exit options set prior to making investment
Entering a new industry with a small ticket size
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28
Georgia Capital PLC Annual Report 2019
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29
CAPITAL ALLOCATION AND MANAGING PORTFOLIO COMPANIES CONTINUED
CLEAR EXIT PATHS
A highly-disciplined approach to unlock value through investments.
360-DEGREE ANALYSIS – A STRONG FOUNDATION FOR VALUE CREATION
Water Utility
P&C Insurance
Housing Development
Renewable Energy
Hospitality and Commercial Real Estate
Beverages
Education
Auto Service
Digital Services
Fund
Promote
X
X
X
X
X
IPO
X
X
X
Trade sale
X
X
X
X
X
X
X
X
X
Exit options set prior to making an investment decision
The table summarises potential exit options for the second exit routes, described on page 27 in this report.
TWO NEW STRATEGIC PRIORITIES
OVER TIME GEORGIA CAPITAL WILL:
1. Decrease share of listed assets to 20%
2. Manage third-party money
Targeting to buy assets at a higher discount to their
listed peers than GCAP’s fair value discount
Discounts at 31 December 2019
i e s
n i t
P fair valu e
k opport u
A
C
G
c
a
b
y
u
B
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g
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360°
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Georgia
Capital
26%
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360-degree analysis when evaluating
capital returns, new acquisitions
opportunities or divestments. 360-degree
analysis is a framework to estimate the optimal
price for any target acquisition. Before investing,
Georgia Capital assesses the following
discounts: a) the level of discount GCAP buys
an asset/company in relation to listed peers;
b) the level of discount GCAP is trading to
its NAV; and c) the level of discount GCAP’s
listed portfolio companies are trading to their
fair value. The Group intends to buy assets/
companies at a higher discount to their listed
peers than GCAP’s fair value discount.
Buybacks are actively considered as an
investment opportunity subject to rigorous
analyses. The US$ 45 million share buyback
programme, commenced in June 2018, was
completed in August 2019. 3,336,843 shares
were bought back, of which 2,650,375 shares
were cancelled and 686,468 shares were
transferred to the management trust. In addition,
in August 2019, Georgia Capital initiated a
US$ 20 million share purchase programme
for the management trust. 1,550,084 shares
were repurchased under the management
trust programme as at 7 April 2020.
Georgia Capital allocates capital such that
it does not depend on premature sales of
listed investments.
Georgia Capital’s buyback programme highlights as of 7 April 2020
Georgia Capital share buyback value
Number of Georgia Capital shares bought back
US$ 81.9m
US$ 45.0m
Of which programme
Of which management trust
US$ 36.9m
6.1m
3.3m
Of which programme
Of which management trust
2.8m
Number of Georgia Capital shares cancelled
2.7 million
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30
Georgia Capital PLC Annual Report 2019
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31
CAPITAL ALLOCATION AND MANAGING PORTFOLIO COMPANIES CONTINUED
MANAGING PORTFOLIO COMPANIES
DEVELOPMENT STAGES AND MANAGEMENT OF 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 applies a
hands-on management approach to the private
portfolio companies at early stages of their
development and acts as an advisor for the
management of the more mature companies.
INVESTMENT STAGE
SECTOR
PIPELINE
DISCOVERY
ACQUISITION/
ENTRANCE
EARLY
YOUNG PORTFOLIO
COMPANIES
LATE
LISTED
LARGE PORTFOLIO
COMPANIES
TARGET
TO EXIT
MATURE PORTFOLIO
COMPANIES
POSSIBLE
COMPLETION
OF EXIT
INVESTMENT STAGE
SECTOR
Digital
Services
Education
Auto
Service
Renewable
Energy
Hospitality and
Commercial
Real Estate
Beverages
Housing
Development
P&C
Insurance
Water
Utility
Georgia
Healthcare Group
Bank of
Georgia Group
PORTFOLIO COMPANY
DEVELOPMENT FOCUS
Discovery stage
Hands-on management approach
Strategic guidance/advisory approach
Rapid growth organically
and through M&A
Active investment stage
Focus on efficiency improvements
Diversification of revenue streams
Introduction of dividend discipline
Sustainable shareholder
value creation and
dividend distributions
PORTFOLIO COMPANY
DEVELOPMENT FOCUS
INSTITUTIONALISATION/
INDEPENDENCE
INSTITUTIONALISATION/
INDEPENDENCE
LOW
HIGH
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewStrategic Review Our Business 32
Georgia Capital PLC Annual Report 2019
Georgia Capital PLC Annual Report 2019
33
CAPITAL ALLOCATION AND MANAGING PORTFOLIO COMPANIES CONTINUED
INVESTMENT ACTIVITIES IN 2019 (VALUE-CREATING ACTIVITIES)
FEBRUARY 2019
KEMPINSKI HOTEL
Buyout of the remaining 40% equity
stake
Located on Mtatsminda hill –
a neighbourhood with spectacular
panoramic views of Tbilisi
Adding c.100 hotel rooms
Total consideration of
US$ 5.2 million
MARCH 2019
KAZBEGI BRAND
ACQUISITION
Georgia’s oldest beer brand –
Kazbegi, brewed since 1881
In the top five Georgian beer brands,
with more than 7% market share
Total cash consideration of
US$ 3.65 million
JUNE 2019
BRITISH-GEORGIAN ACADEMY
The leading school in the premium segment
Purchase of 70% equity stake
Valued at 6.4x EV/EBITDA 2020
Aiming to increase the capacity from current
800 learners to approximately 3,200 learners
by 2021-2022
Total capital allocation from GCAP of
GEL 75 million1
JULY 2019
BUCKSWOOD
INTERNATIONAL
The leading school in the
mid-level segment
Purchase of 80% equity stake
Valued at 6.4x EV/EBITDA 2020
Aiming to increase the capacity from
current 760 learners to approximately
3,000 learners by 2022
Total capital allocation from GCAP
of GEL 24 million1
OCTOBER 2019
HYDROLEA
Purchase of 100% equity stake
Three operating HPPs with 21MW installed capacity
Greenfield HPP project with 19MW targeted capacity
All Hydrolea HPPs have high gross capacity factors –
averaging 58% – making the investment per annual
GWh generation an attractive alternative
to a construction option
Approximately US$ 1 million to US$ 1.5 million
annual dividends expected from the three operational
HPPs from 2021 onwards
DECEMBER 2019
FOUR FAMOUS GEORGIAN
RESTAURANTS
The Group’s hospitality business partnered
(50% ownership) with the Georgian chef
and celebrity, Tekuna Gachechiladze,
owner of four top Georgian restaurants
The hospitality business focuses
on unique Georgian culinary in its
upcoming in-house branded hotels
Total cash consideration of
GEL 1.3 million
FEBRUARY
MARCH
APRIL
MAY
JUNE
JULY
AUGUST
OCTOBER
NOVEMBER
DECEMBER
APRIL 2019
AMBOLI
Second largest player in
Georgian auto service industry
GEL 3.4 million cash
consideration to acquire
80% equity stake
Valued at 0.7x EV/Sales 2018
Additional equity capital
injection of GEL 1.6 million
MAY 2019
REDBERRY
The leading Georgian digital marketing agency
US$ 0.4 million cash consideration to acquire 60% equity stake
US$ 2.8 million new capital injected for digital start-up development
AUGUST 2019
ALAVERDI WINERY
Purchase of 100% equity stake
Alaverdi owns 244 hectares of vineyards
and 135 hectares of free land in the
Kakheti region
The acquisition tripled the Wine
Business’s annual production
capacity to 28.4 million wine bottles
per annum
JULY 2019
GREEN SCHOOL
The leading player in the affordable
segment
Purchase of 80-90%2 equity stake
Valued at 5.6x EV/EBITDA3
Aiming to increase the capacity from
current 1,250 learners to approximately
5,000 learners by 2024
Total capital allocation from GCAP of
GEL 21 million1
NOVEMBER 2019
QARTLI WIND FARM
Purchase of 100% equity stake
Valued at 7.2x EV/EBITDA 2020
21MW installed capacity
US$ 4 million EBITDA in 2018
US$ 14.4 million cash consideration
US$ 17.4 million gross debt
Qartli wind farm deal was closed
in December 2019.
Includes actual and projected future capital allocations.
1
2 80% equity stake in the current campus and 90% equity stake in three new schools that will be developed under the Green School brand.
3 An additional earn-out may apply subject to EBITDA target within the next three academic years. The cumulative EV paid will not exceed 5.6x EV/EBITDA of the respective year
(including performance-related deferred consideration).
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewStrategic Review Our Business
34
Georgia Capital PLC Annual Report 2019
Georgia Capital PLC Annual Report 2019
35
CAPITAL ALLOCATION AND MANAGING PORTFOLIO COMPANIES CONTINUED
STRONG BALANCE SHEET & CASH MANAGEMENT AT GEORGIA CAPITAL
LIQUIDITY MANAGEMENT AT GEORGIA CAPITAL
Georgia Capital issued inaugural US$ 300 million international corporate bonds in March 2018
Net debt overview 31-Dec-2019
GEL millions
857
212
152
493
Net debt 31-Dec-2019 (GEL million)
493 million
Gross debt
Cash and liquid funds
Loans issued
Net debt
Portfolio over net debt
Listed assets over net debt
LTV Ratio below its 30% target
4.6x
2.1x
28%1
Liquid assets and Loans issued 31-Dec-2019
GEL millions
Cumulative maturity gap
GEL millions
105
364
Liquid assets and Loans (GEL million)
364 million
47
212
152
212
Cash and liquid funds
Loans Issued
Cash and liquid
funds at 31-Dec-19
Up to 6 months
Up to 1 year
Total liquidity
1 Net debt divided by portfolio value. Loans to portfolio companies are included in portfolio value instead of net debt.
Photo Mesmerizing view
of Ushba Mountain, known
as the “Matterhorn of the
Caucasus”. Ushba is one of
the most notable and thrilling
peaks of the Caucasus
Mountains, located in
Svaneti Region of Georgia.
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewStrategic Review Our Business 36
Georgia Capital PLC Annual Report 2019
Georgia Capital PLC Annual Report 2019
37
PORTFOLIO COMPANIES
PUBLIC PORTFOLIO COMPANIES
The following snapshots of our portfolio companies include forward looking statements that have
not been revised to take account of our companies’ rapidly evolving responses to the coronavirus
outbreak and its effects on their prospects. They should be read in conjunction with the discussion
of the outbreak’s possible consequences included in Principal risks and uncertainties on page 75.
HEALTHCARE
SERVICES (GHG)
Overview
Georgia Healthcare Group PLC is the UK incorporated holding company
of the largest and the only fully integrated healthcare services provider
in the fast-growing, predominantly privately-owned Georgian healthcare
ecosystem with an aggregate annual market value of c.GEL 3.8 billion.
GHG comprises five business lines: hospitals, clinics, pharmacy and
distribution, medical insurance and diagnostics. Each business line has
its own chief operating officer reporting to the Group CEO, pursuing value
creation through revenue growth, EPS growth and asset productivity
(ROIC). GHG targets the population of the entire country and beyond
through its vertically integrated network of 18 referral hospitals, 34 clinics,
296 pharmacies and the largest diagnostics laboratory in Georgia, as
at 31 December 2019. GHG is the market leader in the country on each
operating segment as at 31 December 2019: the largest healthcare
services provider accounting for more than 23% of total hospital bed
capacity; the largest pharmaceuticals retailer and wholesaler in terms
of both, revenue (c.32% market share) and number of bills issued (28.8
million); the largest medical insurer with a 32% market share based on
3Q19 net insurance premiums and with c.236,000 insured individuals.
Following the completion of a significant three-year investment programme
in 2018, GHG is now focusing on improving cash flow generation and
return on invested capital through operating performance improvement
across the Group. In 2019, GHG Board adopted a dividend policy with
20%-30% payout ratio, 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 distributed its first ever dividend, GEL 7.0 million (a payout
of 20% of 2018 earnings), to shareholders on 12 July 2019. Until the
full economic impact of the COVID-19 pandemic is better understood,
at the 2020 AGM the GHG Board decided not to recommend any
dividends to shareholders for 2019 year.
GHG will continue to focus 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
the main advantage of GHG’s business model, managing customers
on an 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. In addition to
providing greater access to affordable high-quality healthcare, the Group
is pursuing attractive new growth opportunities. It is building markets
in areas such as medical tourism, outpatient services, the provision of
dental services, aesthetics and laboratory diagnostics. When combined
with the organic growth in its existing businesses, the higher utilisation of
the hospitals and polyclinic network, and the expansion of its pharmacy
and distribution business, GHG is targeting a double-digit compound
annual growth rate in revenues over the next few years.
HOSPITALS
CLINICS
PHARMACY AND DISTRIBUTION
MEDICAL INSURANCE
PERFORMANCE TRACK RECORD
Capex evolution
Declared three-year investment programme
at IPO in 2015
Stock price performance
GBP
111
9
102
71
7
64
Three-year
investment
programme
2016-2018
90
10
80
64
11
53
42
13
29
2015
2016
2017
2018
2019
Development capex
Maintenance capex
EBITDA and Operating cash flow
GEL millions
EBITDA to cash conversion ratio
81%
54%
54%
75%
81%
8 . 9 %
2
3
1
E B I T D A C A G R 2
8
0
1
0
0
1
4
5
1
5
2
1
6
5
5
4
8
7
2
4
8
5
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
o v-1
N
GBP 1.70
IPO price
GBP 1.23
as of 31 December 2019
5
J a n -1
6
M
a r-1
6
M
6
a y-1
n -1
6
S
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6
N
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6
J a n -1 7
M
a r-1 7
M
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e p -1 7
N
S
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J a n -1
8
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8
M
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M
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9
M
9
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9
S
J u
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9
N
9
o v-1
Revenue
GEL millions
R 4
G
A
C
0 . 7 %
8
4
7
3
6
9
0
5
8
6
2
4
6
4
2
ROIC
15%
12%
9%
6%
9.0%
7.9%
12.8%
13.9%
10.8%
11.0%
14.9%
12.7%
2016
2017
2018
2019
ROIC adjusted1
ROIC
1 Adjusted to exclude newly launched hospitals and
polyclinics that are in roll-out phase.
Medium to long
term strategic
targets by
segment
• Double digit
revenue CAGR
• Double digit revenue
• Double digit
CAGR – 20%+
revenue CAGR
• 9%+ EBITDA margin
•
Increase contribution
to the Group segments
• Combined ratio <97%
2015
2016
2017
2018
2019*
0 2015 2016 2017 2018 2019
EBITDA
Operating cash flow (*Excluding IFRS 16)
• Gradually improving to
28-30% EBITDA margin
• Gradually improving to
25%+ EBITDA margin
GHG MEDIUM TO LONG TERM TARGETS
Double digit revenue CAGR next 5 years
Mid-teen EBITDA CAGR next 5 years
Gradually approaching ROIC c.15-17%
INVESTMENT RATIONALE
VALUE CREATION POTENTIAL
Very low base: healthcare services spending per capita only US$ 308
(EU average is US$ 3,2111).
Growing market: healthcare spending growth estimated at 8% CAGR
2020-2021.
OWNERSHIP
Georgia Capital owns 70.6% of GHG at 31 December 2019
(31 December 2018: 57.0%).
Our holdings of GHG equity shares increased from 57% to 70.6% on
18 December 2019 following the completion of share exchange facility,
whereby GCAP exchanged one share in GHG for 0.192 shares in GCAP.
Further details of the transaction are available at the following link:
https://georgiacapital.ge/ir/ghg-shares.
1 Source: World Bank, 2016 data.
2 Provided for informational purposes only.
High-growth potential driven by opportunity to develop medical tourism,
Polyclinics (outpatient clinics), the provision of dental services, aesthetics
and laboratory diagnostics.
Only integrated player 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.
ROIC enhancement and substantially increased free cash flow
generation following the completion of a significant three-year investment
programme in 2018.
Since the spread of the COVID-19 epidemic, GHG announced readiness to
support the Government of Georgia in its efforts to fight the spread of the virus
in light of a spike in healthcare demand. GHG has put in place a respective
action plan to mitigate the risks from COVID-19 as further described in detail
in its Annual Report, available at: http://ghg.com.ge/ (2)
MARKET OPPORTUNITY
State healthcare budget is increasing in
line with countries nominal GDP growth –
State healthcare spending dynamics
GEL millions
10%
9%
9%
9%
681
710
760
8%
754
8%
754
574
281
343
305
329
337
364
2015
2016
2017
2018
2019E
2020B
Growth in Healthcare Service Market Expected to Continue – Double digit growth on the back
of favourable dynamics expected
GEL millions
M a r k e t C A G R 2 0 1 1 - 2 0 1 9 o f 1 3 %
T o t a l
3,488
669
3,218
607
1,217
1,311
4,062
806
1,504
3,760
734
1,404
1,395
1,508
1,622
1,752
1,716
343
714
659
2,034
438
782
814
2,464
543
908
1,013
3,062
696
1,092
1,273
M a r k e t
T o t a l
C A G R 2 0 2 0 - 2 0 2 1
o f 8 %
CAGR
’20-’21
4,765
968
1,722
4,397
884
1,611
1,903
2,075
10%
7%
9%
2012
2013
2014
2015
2016
2017
2018E
2019E
2020F
2021F
1,552
305
675
573
2011
State healthcare spending – Other
State healthcare spending – UHC
Healthcare spending as a % of total state spending
Pharma
Hospitals
Polyclinics
Source: Ministry of Finance of Georgia
Source: Frost & Sullivan analysis 2017
Hospitals market includes revenue of c.10% from speciality beds, which is non-addressable market for GHG.
Polyclinics market excludes dental and aesthetic services.
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38
Georgia Capital PLC Annual Report 2019
Georgia Capital PLC Annual Report 2019
39
PORTFOLIO COMPANIES CONTINUED
PUBLIC PORTFOLIO COMPANIES CONTINUED
FINANCIAL METRICS
Revenue (GEL millions)
963.1 +13.3%
EBITDA excluding IFRS 16 (GEL millions)
Net Profit excluding IFRS 16 (GEL millions)
154.2 +16.6%
69.1 +29.8%
Operating cash flow excl. IFRS 16 (GEL millions)
Capex (GEL millions)
125.2 +25.7%
42.0 -40.1%
ROIC adjusted1
14.9% +1.0ppts
OPERATING METRICS
Number of hospitals and clinics
Number of hospital beds
Hospitals bed occupancy rate2
52 -1
2,967 NMF
57.1% +2.4ppts
Number of community clinics beds
Number of pharmacies
Number of bills issued (millions)
353 NMF
296 +26
28.8 +1.7
Number of individuals insured
c.236,000 +50.3%
Insurance claims retention rates
within the Group
42.5% +3.1ppts
1 Adjusted to exclude newly launched hospitals and polyclinics that are in roll-out phase.
2 Excluding emergency beds.
Bank of Georgia Group’s strategic priorities are:
• 20%+ ROAE.
• Loan book growth of c.15%.
• Robust capital management:
– Capital Position: Aiming to maintain +200bps buffer for CET1 and
Tier 1 capital ratios over minimum regulatory requirement in the
medium term;
– Maintenance of regular dividend payouts, aiming 25-40% dividend
payout ratio; and
– Track record of GEL 648 million+ cash dividend paid since 2013,
within the targeted payout ratio range over past six years.
Given the current level of uncertainty with regard to the global impact of
COVID-19, the Board of Directors of BoG are keeping under review the
strategic targets based on at least 20% ROAE, and c.15% growth of its
loan book. In the meantime, the BoG Board decided not to recommend
a dividend to shareholders at the 2020 Annual General Meeting at this
stage. When the full economic impact of the COVID-19 pandemic is
better understood, the BoG Board will consider the appropriate level.
BANKING
Overview
Bank of Georgia Group is a Georgia-focused banking business with an
impressive track record of delivering superior returns and maximising
shareholder value. Diversified revenue sources, a growing loan book,
improved asset quality, efficient cost performance and fee income growth
are the main drivers of the exceptional results in terms of Bank of Georgia
Group profitability. JSC Bank of Georgia, the systemically important and
leading universal Georgian bank, is the core entity of Bank of Georgia
Group. It offers: a) retail banking and payment services (Retail Banking);
b) corporate and investment banking and wealth management operations
(Corporate and Investment Banking) in Georgia; and c) banking
operations in Belarus (BNB). BoG is well positioned to benefit from the
superior growth of Georgian economy through both its Retail Banking
and Corporate and Investment Banking services and aims to deliver on its
growth strategy with strong capital and liquidity positions. In March 2019,
JSC Bank of Georgia successfully priced a US$ 100 million offering of
Additional Tier 1 Capital notes (the first international offering of Additional
Tier 1 Capital notes from Georgia and the South Caucasus region) to
further improve its capital base. Bank of Georgia Group has two primary
segments: Retail Banking and Corporate and Investment Banking.
In Retail Banking, the prominent component of the banking business,
BoG runs a client-centric and solutions-based digital multi-brand offering
with the aim to reach the entire spectrum of retail customers through
its emerging, mass retail and affluent segments. In addition, BoG
serves micro, small and medium-sized enterprises (MSME) through
two respectively dedicated segments under the Retail Banking business.
In Corporate and Investment Banking, given the scale, a rich portfolio
of banking products and services, and industry and product expertise
that is possesses, BoG is a universal bank of choice and top-of-mind
advisor for Georgian corporates. Bank of Georgia Group has successfully
achieved its risk deconcentration and loan portfolio repositioning targets
by the end of 2017 and successfully continues its corporate loan book
growth, as well as increasing the share of fee and commission income
in the medium term. In wealth management, under the Corporate and
Investment Banking business, 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.
INVESTMENT RATIONALE
OWNERSHIP
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 (36.3%), loans (34.9%),
client deposits (36.3%) and equity (29.8%) as at 31 December 2019.
Growing market: The banking sector’s assets growth rate at 16.2%
(10-year CAGR).
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 2010-2018.
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 Group in accordance with the votes cast
by all other shareholders on all shareholder votes at any general meeting.
VALUE CREATION POTENTIAL
Loan book growth c.15%.
Maintenance of dividend pay-out ratio within 25-40%.
1 Market data based on standalone JSC Bank of Georgia accounts as of 31 December 2019 published by the National Bank of Georgia (NBG) www.nbg.gov.ge.
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewStrategic Review Our Business 40
Georgia Capital PLC Annual Report 2019
Georgia Capital PLC Annual Report 2019
41
PORTFOLIO COMPANIES CONTINUED
PUBLIC PORTFOLIO COMPANIES CONTINUED
PERFORMANCE TRACK RECORD
Dividend record1
GEL millions
10%
15%
30%
36%
33%
34%
32%
30%
30%
Loan book growth
MARKET OPPORTUNITY
Banking sector assets, loans and deposits
GEL billions
25.0% CAGR
2
.
5
2
6
1
3
.
4
1
6
.
0
2
3
.
7
1
5
.
0
1
7
.
9
3
1
6
.
1
1
6
.
0
1
7
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2
1
4
.
4
1
3
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6
5
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5
7
.
7
7
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6
7
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6
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7
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7
4
7
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9
3
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6
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6
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3
2
6
.
4
3
1
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0
3
3
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2
2
8
.
9
1
9
.
8
1
7
1
D i v i d e n d p e r s h a r e C A G R ( G E L ) – 3 4 . 3 %
2.08
1.92
1.20
1.60
7272
1.68
8080
9898
102102
0.56
5151
2424
2.44
122122
2.55
124124
27.0%
21.4%
24.5%
20.8%
15.9%
25%
20%
15%
10%
5%
3
.
1
8
.
0
7
.
0
7
.
1
9
.
0
1
5
.
2
7
.
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3
.
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4
7
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2
1
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2
2
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7
6
.
4
2
.
3
9
.
8
3
.
8
2
.
5
4
6
6
.
3
0.24
99
2010
2011
2012
2013
2014
2015
2016
2017
2018
2015
2016
2017
2018
2019
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total dividend paid for the year
Dividend per share
Payout ratio
1 Actual dividend per share information for 2010-2016 years is adjusted for 19.9% BoG share issuance.
Profits & ROAE2
GEL millions
Return on Average Equity (ROAE)
21.9%
22.2%
25.2%
26.4%
26.1%
500500
370370
379379
274274
296296
Stock price performance
GBP
22
20
18
16
14
12
10
8
GBP 16.25
as of 31 December 2019
2015
2016
2017
2018
2019
2 ROAE is adjusted for one-offs in 2018 and 2019 years.
8
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9
1
-
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D
Assets
Source: NBG
Loans
Deposits
One of the lowest levels of NPLS Worldwide, 2019
(Non-performing loans to total gross loans)
1.61.6
y
r
a
g
n
u
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1.91.9
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B
l
Source: IMF, NBG
FINANCIAL METRICS
ROAE1
26.1% -0.3ppts
NIM
5.6% -0.9ppts
Banking business loan book (GEL millions)
Cost/income2
11,931 +27.0%
37.8% +1.1ppts
7.67.6
7.67.6
8.68.6
1010
10.210.2
5.45.4
5.75.7
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NPL Coverage
80.9% -9.6ppts
Tier 1 capital adequacy ratio
13.6% +1.4ppts
1
2019 ROAE is adjusted for termination costs of former CEO and executive management, while 2018 ROAE is adjusted for demerger related expenses, one-off impact of
re-measurement of deferred tax balance and termination costs of the former CEO.
2 The full year cost/income ratio adjusted for GEL 12.4 million one-off employee costs (gross of income tax) related to termination benefits of the former executive management.
OPERATING METRICS
Number of retail clients
2,540,466 +4.1%
Number of digital transactions (millions)
181.2 +15.7%
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43
PORTFOLIO COMPANIES CONTINUED
PRIVATE LATE STAGE PORTFOLIO COMPANIES
WATER
UTILITY
Overview
The water utility business is a regulated monopoly in Tbilisi and the
surrounding area, providing water and wastewater supply services to
c.1.4 million residents and c.36,000 legal entities. Water Utility also operates
hydro power plants with total installed capacity of 149MW. On average,
half of the generated power is used by the business for water supply
purposes at regulated electricity tariff, while the rest is sold to third parties.
The business has a significant opportunity to increase its revenues and
operational cash flow over the next few years through the fair return on
extensive capital investments in the water utility network made during
the last few years. The business reduces self-consumption of energy,
hence freeing up energy for third-party sales. The efficiency, combined
with the electricity market deregulation and respective increase in electricity
market prices, is leading to increased revenues from electricity sales.
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. In the next phase
of deregulation, effective from May 2019, big industrial customers
with monthly electricity consumption of at least 5GWh were required
to register as direct customers, increasing the deregulated market
share of total electricity demand from c.6% to c.20%. On the back of
gradual market deregulation, management expects direct consumers
to constitute approximately 40-50% of the total demand, leading to
further 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). 2017–2019 have been the most capital-
intensive years for the business, which invested more than GEL 400 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.
The water tariffs are set by an independent regulatory body, GNERC,
in line with international best practices. Current tariff and WACC were
approved in 2017 for the 2018-2020 regulatory period, increasing the
residential water tariffs by 23.8% in Tbilisi and regulated WACC from
13.54% to 15.99%. Tariffs for 2021-2023, together with the regulated
WACC, will be set in 2020, on the back of increased capital expenditures
and respective growth in regulated asset base. New tariffs provide fair
return on investment, as well as compensating for eligible operating
expenses.
In 2019, the water utility business signed a privatisation exit agreement
with the Government of Georgia, whereby unconditional ownership title
over its shareholdings and assets has been confirmed, which will allow
the water utility business to further deliver on its strategic objectives
and firmly follow its path towards successful value realisation over
the next few years.
PERFORMANCE TRACK RECORD
Self-produced Electricity Consumption
KWh millions
EBITDA Track Record
GEL millions
Capex (including VAT)
GEL million
2014-2019 -43.6%
9
1
3
9
0
3
6
5
2
9
3
2
3
9
1
4
7
1
2 0 1 4 - 2 0 1 9 + 7 2 . 0 %
3
8
5
9
3
7
9
6
2
6
5
5
1
7
1
7
3
1
9
9
9
4
5
3
3
5
0 2014 2015 2016 2017 2018 2019
0 2014 2015 2016 2017 2018 2019
0 2014 2015 2016 2017 2018 2019
Efficiency Gains 2019
Elevation
KWh/m3
Level 4
Level 3
Level 2
Level 1
Level 0
2.3
2.2
0.8
0.4
0.0
52.6
0.1%
Metering program and grid
rehabilitation works focused
on higher elevation zones.
Metering programme and
grid rehabilitation works
focused on higher elevation
zones
3.6%
9.9%
33.6%
52.8%
0.0
0.0
% of total water supply
Down from 16% in 2014
Down from 49% in 2014
Up from 35% in 2014
52.6
MARKET OPPORTUNITY
Effect of new consumers on the market
Electricity market deregulation, effective from May 2019, enabled the company to immediately increase the selling price per KWh by at least 1.5x
13.6TWh
13.6TWh
INVESTMENT RATIONALE
VALUE CREATION POTENTIAL
Regulated monopoly in Tbilisi and surrounding districts with high
entry barriers.
EU harmonisation reforms in progress in utilities sector, expected to drive
water tariffs up.
Sectoral output increasing at a robust growth rate (on average 9.5%
in the last 10 years).
High GDP growth combined with rapid tourism growth drives high
demand from corporates.
4%
4%
6%
7%
1 MAY 2019
4%
4%
20%
7%
Stable regulatory environment with attractive return on investment.
Energy market deregulation positively affecting electricity sales price.
65%
Stable cash collection rates.
Diversified cash flow streams from water and electricity sales, the latter
being linked to US dollars.
Upside opportunity from efficiency gains – continued decrease in
self-consumption of energy, freeing up electricity for market sales.
Stable dividend distribution capacity.
79%
Direct consumers demand
Direct consumers with own generation
Distribution companies
Export
System losses
OWNERSHIP
Water Utility is 100% owned through GGU.
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PORTFOLIO COMPANIES CONTINUED
PRIVATE LATE STAGE PORTFOLIO COMPANIES CONTINUED
FINANCIAL METRICS
Total revenue (GEL millions)
Utility revenue (GEL millions)
Energy revenue (GEL millions)
163.5 +9.6%
EBITDA (GEL millions)
95.1 +14.0%
ROIC1
12.5% -1.2ppts
133.3 +1.1%
20.2 NMF
Operating cash flow (GEL millions)
Development Capex excl. VAT (GEL millions)
99.0 +21.3%
67.9 -49.2%
OPERATING METRICS
Water sales (m3 thousands)
178,416 -0.8%
Self-produced electricity consumption
(KWh thousands)
174,017 -9.9%
Number of new connections
Electricity generation (KWh thousands)
5,439 +8.5%
351,610 +8.6%
Energy sales (KWh thousands)
Average electricity sales price (Tetri/KWh)
177,593 +35.9%
11.3 +64.4%
VALUATION HIGHLIGHTS
Gel millions, unless otherwise noted
31-Dec-19
31-Dec-18
Change
LTM EBITDA
Multiple applied
95
8.8
83
14.0%
8.8
NMF
Enterprise value
837
738
13.5%
Net debt
(353)
(307)
15.1%
Equity fair value
484
431
12.3%
LTM ROIC1
12.5%
13.7%
-1.2ppts
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. m2 will capitalise on its strong brand name,
pricing power, experience in sales, excellent execution track record
and access to finance. In 2019, a masterplan brief was approved for
the largest franchise deal, where c.2,500 apartments are expected
to be delivered in 5 years.
Construction management. 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 continues to fully utilise the benefits of this vertical
integration and boost fee income generation from franchise deals
and third-party constructions.
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.
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. m2 has sold 2,855 apartments with 358,000 sq.m.
gross buildable area worth US$ 251 million since 2010 in 10 successfully
completed projects. Over the last seven years, the business distributed
US$ 55.1 million dividends, of which US$ 47.8 million represents
commercial spaces (ground floors) in the completed residential projects.
In addition to residential development, m2 focuses on franchising its brand
and uses its platform to develop third-party land plots. The business also
started to develop a distressed asset management arm in 2019.
Developing remaining residential land bank. Digomi is the only
on-going in-house project of Housing Development. The Digomi project,
which will add around 2,200 apartments to Housing Development’s
portfolio, will be developed in three stages. The construction and
development of c.132,000 sq.m. residential and c.35,000 sq.m.
commercial spaces will be completed by the end of 2023. m2 started
apartment pre-sales from February 2019 for stage one and has pre-sold
16,980 sq.m. with US$ 17.9 million sales value as of 31 December 2019,
representing approximately 77% of the total sellable area. Apartment pre-
sales for the second stage of the Digomi project started in December 2019,
further increasing its inventory levels by 47,167 sq.m. total sellable area.
m2 plans to utilise its existing land plots within three to four years and,
in parallel, start developing third-party land plots under franchise
agreements. However, the business might also engage in opportunistic
acquisitions of land.
INVESTMENT RATIONALE
VALUE CREATION POTENTIAL
Due to the shortage of housing from the 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 level is expected to
increase from the current low level.
Unlock land value by developing housing projects.
Development of third-party land – franchise m2 brand name. Undisputed
market leading platform of at least 2,5001 apartments to be delivered in
five years.
Earn construction management fees from third-party projects and bring
construction works in-house.
OWNERSHIP
Housing Development is 100% owned through m2, renamed as Georgia
Real Estate in 2019. Both names are used interchangeably throughout
the report.
1 ROIC is calculated as EBITDA less depreciation, divided by aggregate amount
of total equity and borrowed funds
1 2,500 apartments relate to the signed Tbilisi Airport Highway deal.
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47
PORTFOLIO COMPANIES CONTINUED
PRIVATE LATE STAGE PORTFOLIO COMPANIES CONTINUED
PERFORMANCE TRACK RECORD
10 completed projects
(2,855 apartments developed with
100% sales progress and
US$ 251 million sales value)
358,000 sq.m.
Gross Buildable Area on completed projects
US$ 41.9m
land value unlocked
3,225 apartments sold
(82.2% as a % of total with sales value of US$ 276m)
2 on-going projects
(with 1,067 apartments under development)
US$ 55.1m dividends distributed over 7 years
FINANCIAL METRICS1
Apartments sales revenue
(GEL millions)
55.4 -41.7%
Construction revenue
(GEL millions)
60.1 +65.2%
EBITDA (GEL millions)
(3.5) NMF
MARKET OPPORTUNITY
Household size driving demand for housing market
Average household size and home ownership, latest available data
59%
57%
54%
60%
54%
75%
71%
76%
69%
68%
92%
3.33.3
91% 90%
2.82.8
2.82.8
84%
2.82.8
97%
2.62.6
83%
2.42.4
85%
90%
82%
69%
2.32.3
2.32.3
2.22.2
2.22.2
OPERATING METRICS – DIGOMI PROJECT (STAGE I)
Price per square meter (US$)
Number of apartments sold
Square meter of apartments sold
1,053
301
16,980
Total sales value (US$ millions)
Cash received (US$ millions)
IFRS revenue recognition2 (%)
17.9
7.5
32%
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Average household size
Home ownership
Urbanisation level
Source: Eurostat, TBC Capital, World Bank, National statistics office of Georgia
Significant room for further growth in mortgages
Mortgage loans to GDP %
45%
43% 43%
41%
36% 35%
31% 30%
28%
25%
22%
17% 16%
14% 13%
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VALUATION HIGHLIGHTS
GEL millions, unless otherwise noted
31-Dec-19
31-Dec-18
Change
Enterprise value
205
174
17.7%
Net debt
(161)
(107)
50.0%
Equity fair value
44
67
-34.3%
Most of the housing stock needs replacement
Around 205,000 units (62%) of the apartments were
built between 1961 and 1990 and are out of their
usable lifecycle
205205
5353
0
6
9
1
<
7
7
5
0
0
2
-
1
9
9
1
0
9
9
1
-
1
6
9
1
6666
9
1
0
2
-
6
0
0
2
00
00
00
Source: IMF, Central banks
Apartment units by development period
Source: Galt & Taggart
1 The housing development business’ functional currency is US dollars.
2 Revenue from apartment sales is recognised over time based on the IFRS construction progress (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 the apartment selling price to recognise revenue from apartment sales.
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49
PORTFOLIO COMPANIES CONTINUED
PRIVATE LATE STAGE PORTFOLIO COMPANIES CONTINUED
• SME segment. Georgia’s insurance market for small and
medium-sized enterprises (SME) 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. Aldagi’s
MSME revenues have grown by 93% in 2019 (from GEL 0.7 million
to GEL 1.3 million).
• 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.
PERFORMANCE TRACK RECORD
Revenue
GEL millions
C A G R
+ 1
4 %
6
8
8
9
0
9
8
6
1
7
1
5
Profit and dividend payout ratio
GEL millions
ROAE
28%
37%
37%
38%
34%34%1
30%
1
8
1
8
1
1 %
2
6
1
A G R
C
4
1
1
1
7
64%
51%
68%
61%
0 2014 2015 2016 2017 2018 2019
2014 2015 2016 2017 2018 2019
Profit
Return On Average Equity (ROAE)
Dividend payout
1 Adjusted for non-recurring items.
P&C
INSURANCE
Overview
Over nearly three decades in the Georgian property and casualty
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,
achieved a ROAE of 30.4% and consistently distributed dividends over
the last three years within 60% payout ratio. Based on the latest available
market data as at 30 September 2019, Aldagi continues to be the most
profitable insurance company in the local market with 45% share of the
insurance industry profit and a market share of 29% based on gross
premiums earned.
The current low level of insurance market penetration in Georgia
(1.2%, of which 0.6% relates to property and casualty 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 P&C 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 7% of registered
cars are insured on the local market. Moreover, compulsory Border
Motor Third Party Liability (MTPL) insurance has become effective
from March 2018. Furthermore, a new law requiring a mandatory
local MTPL for all vehicles registered in Georgia is expected to kick
in and significantly boost retail market penetration. 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.
INVESTMENT RATIONALE
VALUE CREATION POTENTIAL
Significantly underpenetrated insurance market in Georgia (0.6%
penetration in property and casualty insurance market).
Market leader with a powerful distribution network of point of sale and
sales agents.
OWNERSHIP
P&C Insurance is 100% owned through Aldagi.
Compulsory border MTPL effective from 1 March 2018.
Local MTPL expected to kick in and provide access to untapped retail
CASCO insurance market with only 4% existing penetration.
Increasing footprint in untapped MSME sector, where Aldagi’s revenues
have grown by 93% in 2019 (from GEL 0.7 million to GEL 1.3 million).
Developing and introducing new digital channels to simplify purchase
of insurance products.
Undisputed leader in providing insurance solutions to corporate clients.
MARKET OPPORTUNITY
Market share, YTD Sep-19
Earned premiums, gross
%
7
1
r
e
h
t
O
%
5
i
d
r
A
%
5
o
a
r
I
%
3
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C
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%
0
2
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B
T
%
2
1
I
H
P
G
%
8
n
o
s
n
U
i
Insurance penetration and density
9.0%
9.6%
8.5%
1
1
1
1
8
8
,
6
6
6.0%
4.9%
6.1%
%
9
2
0
0
1
1
8
8
,
3
3
K
U
6
6
4
4
4
4
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3
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Georgia P&C
Penetration 0.6%
Density $25
2.2%
3.0%
1.4% 1.2%
1.4%
9
4
1
9
y
4
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1
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Insurance density USD2
Insurance penetration2
Source: Swiss Re Institute
Source: Insurance State Supervision Service of Georgia
2
Including healthcare insurance.
Market and Aldagi Revenue
GEL millions
32%
37%
38%
37%
37%
38%
32%
35%
CAGR 2010-2018
Market – 13%
Aldagi – 15%
27%
6
0
1
0
0
1
5
1
1
2
2
1
2
4
1
2
3
2
4
6
4
2
5
9
2
2010
2010
Market
6
8
2
7
2
2
9
7
1
2
0
2
7
6
1
7
6
8
0
9
YTD Sep-19
Market revenue
GEL 254 million
Aldagi share 29%
0
0
2011
2011
2012
2012
Aldagi
2013
2013
Market share
2014
2014
2015
2015
2016
2016
Source: Insurance State Supervision Service of Georgia
2017
2017
2018
2018
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PORTFOLIO COMPANIES CONTINUED
PRIVATE LATE STAGE PORTFOLIO COMPANIES CONTINUED
FINANCIAL METRICS
Earned premiums gross
(GEL millions)
98.4 +8.8%
Combined ratio
82.1% +6.6ppts
OPERATING METRICS
Active corporate clients
3,517 +13.1%
Corporate insurance policies written1
91,361 +51.7%
Net income
(GEL millions)
18.3 +7.3%
ROAE
30.4% -4.0ppts
Active retails clients
104,664 +8.5%
Retail insurance policies written
171,509 +14.2%
VALUATION HIGHLIGHTS
GEL millions, unless otherwise noted
31-Dec-19
31-Dec-18
Change
LTM net income
Multiple applied
18
9.0
182
3.3%
7.4
22.3%
Equity fair value
165
131
26.4%
LTM ROAE
30.4%
34.4%2
-4.0ppts
PRIVATE EARLY STAGE PORTFOLIO COMPANIES
RENEWABLE
ENERGY
Overview
Our renewable energy business continues to progress towards achieving
its medium-term goal to become a dominant player in the fast-growing
Georgian electricity market, which has benefited from recent market
deregulation. Georgia has gradually become a net electricity importer over
the last two years, with a record high 1.6TWh internal electricity deficit
in 2019, which is expected to grow significantly in the coming years.
During 2019, Renewable Energy continued to develop its pipeline
hydro and wind projects. In April 2019, the renewable energy business
successfully commissioned the first phase (30MW) of Mestiachala
hydro power plant, followed by commissioning of the remaining phase
(20MW) in June 2019. In late July 2019, the hydro power plans (HPPs)
were damaged by rock avalanche resulting from the collapse of part of a
distant mountain. The event, which has been characterised as a one in
5,000 year occurrence, interrupted the operation of the cascade of HPPs.
The first phase (30MW) of Mestiachala HPPs returned online in December
2019, while the second phase (20MW) is expected to be re-launched in
1H21. The insurance company has confirmed the business interruption
reimbursement for the year 2019 for both HPPs and is in process of
remitting the funds to the business. In November 2019, construction
works commenced on 46MW Zoti HPPs, located in the Western part
of Georgia, with expected net generation of 170GWh, where around
half of the generation is covered by a 15-year Government PPA.
The business also made two successful acquisitions in parallel with
developing greenfield renewable projects. In October 2019, Georgia
Capital acquired 100% equity stake in Hydrolea through its wholly-owned
subsidiary. Hydrolea operates three HPPs with an aggregate 20.6MW
installed capacity and has a greenfield HPP project with a 19MW targeted
installed capacity. All Hydrolea HPPs have high gross capacity factors –
averaging 58% – making the investment per annual GWh generation an
attractive alternative to a construction option. In November 2019, Georgia
Capital successfully participated in a public auction for a 100% equity
stake in Qartli Wind Farm and acquired the only operational wind farm in
Georgia at 7.2x EV/EBITDA 2020 through its wholly-owned subsidiary.
Qartli Wind Farm operates a 20.7MW installed capacity with a very high –
47% – average capacity factor. All of the acquired hydro and wind farms
benefit from guaranteed prices via their Power Purchase Agreements
(PPA) with the Government of Georgia for the next 4-10 years.
Currently, the renewable energy business has 91MW installed capacity
and a pipeline of c.350MW capacity in the medium term. On this basis,
the business aims to establish a renewable energy platform with strong
cash flow generation and profitability in US dollars, expected to enable
it to sponsor steadily increasing dividend payouts to shareholders.
INVESTMENT RATIONALE
VALUE CREATION POTENTIAL
Growing electricity market as supply lags behind the increasing demand,
creating opportunities.
Underutilised energy resources resulting in high availability of
economically feasible hydro and wind projects.
Cheap to develop – up to US$ 1.5 million for 1MW hydro and up to
US$ 1.4 million for wind development on average, with 1.5x higher
capacity factors compared to Europe over the last decade.
OWNERSHIP
Following the buyout of the 34.4% minority shareholder in GRPC on
25 February 2020, Georgia Capital’s renewable energy business consists
of its wholly-owned subsidiary GRPC (with 50MW Mestiachala HPPs) and
wholly-owned Hydrolea HPPs and Qartli Wind Farm (with 41MW installed
capacity in aggregate). In addition, the business has a pipeline of 350MW
renewable energy projects in the medium term.
Opportunity to establish a renewable energy platform with up to
440MW operating capacity over the medium term, targeting to capture
approximately one-third of deregulated electricity market.
Energy consumption has grown at 5.3% CAGR in last 10 years and is
expected to further grow by at least CAGR 5% over the next 10-15 years
on the back of the following key drivers:
• Rapid tourism growth combined with high GDP growth, with
pronounced growth in electricity-heavy sectors.
•
•
Increasing penetration of domestic appliances, with accelerating
imports of electricity-intensive conventional domestic devices.
Increasing number of installed residential and industrial air
conditioning systems on the back of decreasing unit prices, expected
to result in at least 5x growth in penetration level over the next decade.
Stable dividend provider capacity in the medium term.
1 Excluding credit life insurance.
2 Adjusted for non-recurring items.
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53
PORTFOLIO COMPANIES CONTINUED
PRIVATE EARLY STAGE PORTFOLIO COMPANIES CONTINUED
RENEWABLE ENERGY PROJECTS OVERVIEW
Targeting to earn on average c.12% US dollar ROICs from renewable energy projects
Project
Mestiachala HPPs
Zoti HPPs
Bakhvi 2 HPP
Racha HPPs
Wind Tbilisi
Wind Kaspi
Wind (other)
Recent acquisitions
Hydrolea HPPs
Darchi HPP
Qartli Wind Farm
Total
MWs
Project cost,
US$ million
50
46
36
38
54
54
99
21
19
21
438
62
61
47
59
67
76
137
38
27
27
605
Target
commissioning
date1
1H19
2H21
1H22
1H23
2H22
2H22
TBD
2H19
2H22
2H19
Gross
generation
(GWh)2
Gross
capacity
factor
PPA3
expiration
PPA tariff,
Us¢/KWh
174
173
130
168
172
211
340
39.8%
43.0%
41.2%
50.5%
36.3%
44.6%
39.2%
1H34
2H36
1H37
–
2H31
2H31
1H33
105
58.3% 1H22-2H28
89
85
53.3%
47.0%
1H32
1H30
1,647
5.5
5.1
5.5
–
6.5
6.5
6.5
5.6
5.6
6.5
Current stage
Operational4
Under construction
Feasibility
Feasibility
Development
Development
Feasibility
Operational
Feasibility
Operational
MARKET OPPORTUNITY
Electricity supply and consumption, 2019
1,400
1,200
1,000
800
600
400
200
0
Jan
Deficit (4 months)
Deficit (6 months)
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
• Electricity deficit during July-April.
• 22% of total consumption produced
by gas-fired TPPs, 13% – imported.
Hydros and Wind
TPPs
Imports
Consumption
Actual and forecasted consumption (TWh)
C o n s u m p t i o n C A G R 2 0 19 – 2 0 3 0 : 5 . 0 %
6.4 TWh
Consumption CAGR 20 09 –2019: 5.3%
4
.
9
4
.
7
9
.
7
2
.
7
3
.
8
3
.
8
5
.
8
3
.
9
3
.
9
0
.
0
1
0
.
9
5
.
0
1
7
.
9
3
.
1
1
0
.
2
1
5
.
4
1
5
.
4
1
2
.
3
1
5
.
5
1
5
.
5
1
5
.
5
1
5
.
5
1
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Actual generation Hydros and Wind
Forecasted generation Hydros and Wind
Actual consumption
Forecasted consumption
• Growth of internal consumption: 7.7% in 2017, 6.1% in 2018 and 1.5% in 2019.
• Consumption growth forecasted at minimum 5.0% CAGR in coming 15 years.
• Anticipated deficit of at least 6.4TWh by 2030.
In case of own projects target commissioning dates are indicative and subject to regulatory procedures. In case of acquisition projects, the date shows acquisition period.
1
2 Generation capacity refers to target gross annual generation.
3 Power Purchase Agreement.
4 The first phase (30MW) was launched on 8 April 2019, followed by the second phase (20MW) on 4 June 2019. Mestiachala HPP was flooded in late July 2019 and taken offline.
The first phase (30MW) of Mestiachala HPPs returned online in December 2019, while second phase (20MW) is expected to become operational in 1H21.
Low base and high CDD1 point towards 5x increase in AC penetration by 2030
1,457
299
418
107
223
362
%
8
8
s
u
r
p
y
C
%
7
4
a
i
t
a
o
r
C
%
6
3
a
i
r
a
g
u
B
l
%
3
3
l
y
a
t
I
%
1
3
i
n
a
p
S
%
0
1
i
a
g
r
o
e
G
AC penetration (2018)
Mean CDD
Source: World Bank’s World Development indicators; Geostat, Galt & Taggart, Eurostat
1 Cooling degree day.
FINANCIAL METRICS
Revenue (GEL millions)
16.2 NMF
EBITDA (GEL millions)
13.1 NMF
Development capex (GEL millions)
32.9 -51.8%
VALUATION HIGHLIGHTS
GEL millions, unless otherwise noted
31-Dec-19
31-Dec-18
Change
At acquisition price (GCAP share)
107
61
74.6%
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55
PORTFOLIO COMPANIES CONTINUED
PRIVATE EARLY STAGE PORTFOLIO COMPANIES CONTINUED
HOSPITALITY AND
COMMERCIAL REAL ESTATE
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.
The business targets 10% yield and 90% occupancy on rent-earning
commercial assets. The business earned annual gross yield of 9.5%
on US$ 44.9 million commercial assets portfolio with 87.1% occupancy
rate during 2019.
Overview
Hospitality business. 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, the hospitality business plans to increase its
presence in the hospitality sector and reach the total combined room
count of more than 1,000 rooms. The hospitality business aims to have
a geographically well diversified, mostly 3-star and 4-star hotel portfolio,
to tap unpenetrated markets in Georgian regions. The business currently
has one operational and two pipeline hotels in the capital city, and one
operational and seven pipeline hotels are located across the different
regions of Georgia. The targeted hotel portfolio comprises c.630
internationally branded hotel rooms and c.592 hotels rooms under
the business’s own brands, developed by Amber Group.
Our hospitality business launched its first 3-star Ramada Encore hotel
in Tbilisi in March 2018 under a development agreement with Wyndham.
The hospitality business launched its second operational hotel in
Gudauri, the leading ski resort of the Caucasus region, on 13 December
2019 and added 121 luxury rooms to the operating hotel room portfolio
under the “GUDAURI LODGE” brand. The business has five hotel
projects under construction with an expected 460 rooms on combined
basis. Additionally, there are four hotels in design stage with an expected
489 rooms in aggregate.
The total capital needed to complete the construction and development
of the hotels in the current pipeline is estimated at US$ 76.9 million.
The hospitality business targets 70%:30% debt to equity leverage ratio
at hotels after hotel opening and 50%:50% during construction stage.
The business targets to earn on average c.14% US dollar ROIC.
Commercial Real Estate. m2 manages a commercial real estate
asset portfolio, which it accumulated through its developments under
the housing development business, as well as opportunistic investments.
m2 will continue growing its commercial asset portfolio through enhancing
the income-generating assets by incorporating commercial elements
INVESTMENT RATIONALE
VALUE CREATION POTENTIAL
Increased number of tourists visiting Georgia every year: 5.1 million
visitors in 2019, up 6.8% y-o-y, 9.9% CAGR over the last six years.
Grow portfolio of rent-earning assets through real estate developments
and opportunistic acquisitions.
Tourism inflows up 1.4% y-o-y from US$ 3.2 billion to US$ 3.3 billion
in 2019; 11.5% CAGR over the last six years.
Reach more than 1,000 hotel rooms. Currently approximately c.1,222 rooms
are confirmed, of which 273 are operational and 949 are in the pipeline.
Targeting mostly 3-star and 4-star hotels, tapping into unpenetrated
markets in Georgian regions.
OWNERSHIP
Hospitality and Commercial Real Estate is 100% owned through m2.
HOSPITALITY PROJECTS OVERVIEW
Targeting to earn on average c.14% US dollar ROICs1 from hotels
Rooms
Construction
start date
Target opening
date2
Hotel
Ramada Encore Kazbegi, Tbilisi
GUDAURI LODGE
Ramada Melikishvili, Tbilisi
Kempinski, Tbilisi
Seti Square in Mestia, Svaneti
Ramada Kutaisi
Kakheti Wine & Spa
Shovi, Racha
Mestia, Svaneti
Telavi
Zugdidi
Total
Q1-2018
Q4-2019
Current Stage
Operational
Operational
Q2-2020
Construction
Q4-2020
Construction
Q1-2021
Construction
Q1-2021
Construction
Q2-2022
Construction
Q2-2020
Q4-2020
Q2-2020
Q1-2021
Q2-2022
Q1-2023
Q4-2022
Q3-2023
Design
Design
Design
Design
152
121
125
99
52
124
60
109
140
110
130
1,222
1 Target return on invested capital is calculated based on average stabilised EBITDA divided by total invested capital.
2 Target opening dates remain subject to adjustment following passing of the design stage.
MARKET OPPORTUNITY
Leasable modern office stock has high rent and yield among the peer cities
A significant portion of Georgian office stock is non-refurbished, soviet-era stock (traditional). Tbilisi has one of the highest prime office rents among
the Central and Eastern European (CEE) cities. Prime yield in Tbilisi stands at 11.7% vs a 7.1% average in peer cities.
Peer comparison: prime office rents and yields in 2018
16%
12%
8%
4%
0%
28%
22%
50%
Owner occupied
Traditional
Modern
Source: Galt & Taggart
40
30
20
10
0
38
8%
3838
l
u
b
n
a
t
s
I
12%
3232
32
i
v
y
K
2525
7%
25
s
n
e
h
t
A
2525
5%
25
w
a
s
r
a
W
12%
2323
6%
2222
6%
1919
6%
1919
22
19
i
s
i
l
i
b
T
s
u
n
i
l
i
V
19
n
n
i
l
l
a
T
23
t
s
e
p
a
d
u
B
8%
1818
18
a
fi
o
S
7%
1818
18
a
g
R
i
8%
1717
17
b
e
r
g
a
Z
6%
1818
18
l
a
v
a
s
i
t
a
r
B
Rent, US$ per sq.m. (left axis)
Prime yield (right axis)
Arrivals of tourists and tourism revenue – Georgia
5.15.1
4.84.8
3.2
3.3
4.14.1
2.7
3.33.3
2.1
2.92.9
1.7
2.92.9
1.8
33.0
1.9
2.52.5
1.4
1.81.8
1.0
2011
2012
2013
2014
2015
2016
2017
2018
2019
Arrivals of tourists (million)
Tourism revenue (US$ billion)
Source: Georgian National Tourism Administration; the National Bank of Georgia
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PORTFOLIO COMPANIES CONTINUED
PRIVATE EARLY STAGE PORTFOLIO COMPANIES CONTINUED
FINANCIAL METRICS1
NOI from operating leases
(GEL millions)
NOI from hospitality services
(GEL millions)
6.5 +40.8%
Revaluation gain
(GEL millions)
21.7 -21.5%
1.8 -6.1%
Commercial Real Estate portfolio
(GEL millions)
128.8 +90.3%
OPERATING METRICS
Commercial Real Estate
Gross yield (leased portfolio)
9.5% -0.4ppts
Occupancy rate
87.1% -3.0ppts
Leased area (sq.m.)
34,212 +53.2%
Hospitality – Ramada Encore performance
RevPAR (US$)
33.3 +0.5%
ADR (US$)
62.0 -17.0%
Occupancy
53.7% +9.3ppts
VALUATION HIGHLIGHTS
GEL millions, unless otherwise noted
31-Dec-19
31-Dec-18
Change
NAV3
LTM ROIC2
246
149
64.7%
6.5%
16.0% -9.5ppts
1 The hospitality and commercial real estate business’ functional currency
2
is US dollar.
ROIC is calculated as net operating income divided by aggregate amount of total
equity and borrowed funds. The y-o-y decrease in ROIC is mainly driven by lower
revaluation gain recorded in 2019 (down by GEL 6 million y-o-y) and also reflects
business being in a ramp-up phase.
3 NAV for the hospitality and commercial real estate business refers to IFRS 13 fair
value measurement methodology.
vineyard base increased from 86 hectares of vineyards to its current
704 hectares of vineyards. The business also has an additional 135
hectares of free land available for immediate vineyard development.
The acquisition of Alaverdi also tripled the wine business’s production
capacity from 9.4 million wine bottles to 28.4 million wine bottles per
annum, providing substantial relief in planned capital expenditures for
the next few years.
WINE
BUSINESS
Overview
Our wine business owns three top class wineries across Kakheti’s three
wine-making regions and is in the top five wine producers by vineyard
base in Georgia. The vast majority of our wine business’s vineyards
grow Georgia’s flagship red wine grapes, Saperavi. The wine business
sells around 5.9 million bottles of wine annually, with about 78% of sales
coming from exports and holds c.4.8% of Georgian wine export market.
In the medium term the 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. In 2019 and beyond, the wine business is progressing
against its strategic priorities to enter untapped strategic export markets,
diversify its product mix by portfolio premiumisation and optimise costs
through increased production capacity.
Diversification of exports. The wine business intends to access a
bigger share of export markets, by benefiting from favourable export
dynamics of Georgian wine, improving positions in traditional markets
and entering untapped strategic markets. The business is re-branding
and optimising its wine portfolio to better focus on EU, US and
Asian markets. The business, in partnership with Georgia’s artisan
winemakers, intends to introduce a limited collection of unique wines
to Georgia and the world. The business will be mostly focusing on big
markets like US and China, where it has already grown wine bottle sales
by 61% and 44% in 2019 from a very low base, with significant growth
potential in future.
Cost optimisation. The wine business aims to cultivate and purchase
vineyards to minimise reliance on purchased grapes and have a
significant cost advantage to produce wine with mostly self-harvested
grapes. The vineyards have c.5-7 years payback period with expected
c.25%-30% return on invested capital. Further, the business also aims
to enhance own storage and production capacity. During 2018-2019
the business acquired two wineries in line with its cost optimisation
strategy. Following the acquisition of Kindzmarauli Marani in May 2018,
and acquisition of Alaverdi winery in August 2019, the wine business’s
INVESTMENT RATIONALE
OWNERSHIP
Georgia is considered the “cradle of wine” with a rich, 8,000-year history
of wine-making and home to over 500 unique grape varieties.
Georgia’s favourable trade regimes (free trade agreements with EU and
China) provide potential for export growth for Beverages.
Growing urbanisation and tourism inflows are raising demand for bottled
wine locally.
Approximately 27% of the tourism inflows is spent on food
and beverages.
Georgia Capital owns 87% of the wine business.
VALUE CREATION POTENTIAL
Best-in-class distribution network platform.
Grow vineyard base to 1,000 hectares, from current 704 hectares.
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PORTFOLIO COMPANIES CONTINUED
PRIVATE EARLY STAGE PORTFOLIO COMPANIES CONTINUED
MARKET OPPORTUNITY
Georgian wine exports
E xpor t Sales (US $) over past 6 year s increased at 8.7% CAGR
185185
144144
4747
5959
9898
3636
5050
114114
7777
170170
8686
9393
238238
203203
FINANCIAL METRICS
Revenue
(GEL millions)
42.2 +43.6%
EBITDA
(GEL millions)
8.7 +22.1%
Operating cash flow
(GEL millions)
2.8 NMF
2013
2014
2015
2016
2017
2018
2019
Wine exports (bottles)
Wine exports (US$ millions)
Source: LEPL Georgian National wine agency
OPERATING METRICS
Wine bottle sales
5,865 +35.0%
of which export sales
4,544 +46.5%
Wine consumption per capita, litres (2019)
19.9
19.9
00
G e orgia
1.7
1.7
C hin a
3.5
3.5
U krain e
4.6
4.6
J a p a n
3.8
3.8
K a z a k h sta n
31.3
31.3
26.4
26.4
28
28
23
23
24.1
24.1
11.9
11.9
13.6
13.6
7
7
P ola n d
R u ssia
S A
U
C ze c hia
N eth erla n d s
G er m a n y
K
U
B elgiu m
00
Primarily established export markets
Target and emerging export markets
Source: TBC Capital
Georgian wine bottle sales, by export countries
6262%
3737%
2828%
1111%
1010%
Russia
Ukraine
Baltics
Poland
3%
3
77%
4%
4
5%
4%
5
4
Kazakhstan
66%
88%
87%
88%
China
Other
Country share in TV&KM Export Portfolio
Country share in Georgian Wine Export
Source: National statistics office of Georgia
VALUATION HIGHLIGHTS
GEL millions, unless otherwise noted
31-Dec-19
31-Dec-18
Change
LTM EBITDA1
Multiple applied
Enterprise value
Net debt
Kindzmarauli at acquisition price
Alaverdi at acquisition price
Equity fair value
10
10.0
95
(31)
–
16
72
5
89.1%
9.1
46
9.9%
NMF
(7)
NMF
26
–
NMF
NMF
57
26.9%
LTM ROIC2
6.2%
12.1% -5.9ppts
1 LTM EBITDA includes distribution business. LTM EBITDA is stated excluding
Kindzmarauli and Alaverdi, valued at acquisition price in 2018 and 2019, respectively.
2 ROIC is calculated as EBITDA less depreciation, divided by average amount of total
equity and borrowed fund. The continued investment in export market diversification
together with integration costs of the Kindzmarauli and Alaverdi acquisitions drove
the decrease in ROIC.
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PORTFOLIO COMPANIES CONTINUED
PRIVATE EARLY STAGE PORTFOLIO COMPANIES CONTINUED
MARKET OPPORTUNITY
Per capita beer consumption implies room for growth
Annual beer consumption (litre per capita) in 2019
Georgia falls behind beer consumption
per capita against EU
8383
8484
6666
4949
3434
3535
5
5
8
8
1515
0
Azerbaijan Armenia
Turkey
China
Georgia
Ukraine
Russia
USA
EU
Source: TBC Capital
Domestic market share1
9%
12%
20%
32%
Efes Georgia
Zedazeni
GBG
Castel
Other
27%
1 Management estimate at
the end of 2019 year.
Strong export market for carbonated soft drinks
Growing market
• Export value of US$ 26.5 million (41.8 million litres) in 2018.
• 50%+ CAGR in 2015-2018 years; greater organic demand from
CIS countries.
Export in more than 25 countries
• Recently, more countries have been importing Georgian CSD,
showing its growing popularity.
Starting from 2H19, the beer business benefited from its full scale launch
of new brands and improved product mix, which allowed the business
to achieve a break-even EBITDA in 2H19. The strong portfolio allowed
the business to increase its beer market share from 14% in 2018 to 20%
in 2019. Meanwhile the business also started to tap the international
markets, by exporting its mainstream beer and lemonade brands.
Currently the business has the strongest portfolio in terms of brand
equity, which is its key competitive advantage and value creation driver.
With a strong management team with a proven track record, the beer
business aims to capture growth opportunities in both the local and
export beverages markets through premiumisation strategy.
BEER
BUSINESS
Overview
The beer business produces beer and lemonade and owns a 10-year
exclusive license from Heineken to produce and sell Heineken beer
brands in Georgia. The local beer market consists of four major players
with the first two having 59% of beer market share. Our beer business
has a 20% market share (as of 31 December 2019) and has the leading
beer portfolio in terms of brand equity, led by local champions and
Heineken-licensed brands.
During 2017, when the business was launched, it actively invested in beer
facilities to accommodate the production of beer and lemonade. However,
the launch of key Heineken brands was delayed, thereby negatively
impacting the 2018 performance. By the end of 2018, Beverages
strengthened its beer business with new C-level management, which
was a starting point for a turnaround path in the beer business in 2019.
In the beginning of 2019, the beer portfolio included only three brands:
ICY – flagship mainstream beer brand, imported Heineken – undisputed
leader in premium segment, and Black Lion – the leading Georgian craft
beer producer, acquired in 2018. During the first five months of 2019,
the beer business launched new brands and focused on producing
quality beverages.
In March, the business acquired a prominent Georgian beverages brand
– Kazbegi, followed by a relaunch of Kazbegi mainstream beer and
lemonade brands in April. Later, the business acquired licenses from
Heineken to produce Amstel and a full range of Krusovice beer. The
business also had a successful launch of its local light beer – Kayaki –
the first local light beer in the upper mainstream segment. As a result,
the business added three upper-mainstream segment beer brands by
the end of May 2019. Finally, after numerous successful consecutive
trial brews of Heineken, the business received the license to brew
commercial batches of Heineken. Locally brewed Heineken beer is
available in stores from August 2019.
INVESTMENT RATIONALE
OWNERSHIP
Georgia falls behind beer consumption per capita against EU.
Georgia Capital owns 87% of the beer business.
53% CAGR growth in soft drinks export over 2015-2018.
Georgia’s favourable trade regimes (free trade agreements with EU and
China) provide potential for export growth for Beverages.
VALUE CREATION POTENTIAL
Best-in-class distribution network platform.
10-year exclusivity from Heineken to produce and sell beer in Georgia.
One of the strongest brand equities across the Georgian beer market.
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PORTFOLIO COMPANIES CONTINUED
PRIVATE EARLY STAGE PORTFOLIO COMPANIES CONTINUED
FINANCIAL METRICS
Revenue
(GEL millions)
43.6 +48.9%
EBITDA
(GEL millions)
(6.5) +53.1%
OPERATING METRICS
Beer sales (litres, thousands)
21,831 +58.1%
Lemonade sales (litres, thousands)
3,282 +51.0%
VALUATION HIGHLIGHTS
GEL millions, unless otherwise noted
31-Dec-19
31-Dec-18
Change
LTM Revenue1
Multiple applied
47
2.2
28
67.9%
2.2
NMF
Enterprise value
104
61
70.7%
Net debt
(86)
(64)
34.8%
Black Lion at acquisition price
Equity fair value
–
15
7
4
NMF
NMF
LTM ROIC2
-15.5%
-22.0% +6.5ppts
PIPELINE PORTFOLIO
EDUCATION
INVESTMENT RATIONALE
Highly fragmented private school market.
Large and growing market.
Efficiency upside.
High trading multiples.
Low base – 3.8% of GDP, compared to 4.6%
of peers1.
Overview
There are currently c.60,000 learners in private schools in Georgia,
representing 10% of the total school education market. Georgia Capital
expects that the private school market in Georgia will double in size over
the next five years. The market is currently very fragmented, with no
single player having more than 2% market share. Georgia Capital intends
to create a diversified business model combining premium, mid-level and
affordable school segments. The Group aims to implement a partnership
model across all schools with the Group holding majority stakes. By 2025
the Group aims to generate GEL 70 million EBITDA with up to 30,000
learners and additional GEL 185 million gross capital allocation. In 2019,
Georgia Capital acquired majority stakes in three leading schools,
with strong brand names in the attractive private education business.
The first, British-Georgian Academy (70% stake) is the leading school
in the premium segment of the market. The second, Buckswood
International School (80% stake) is well-positioned in the mid-level
segment. Both schools were acquired at a 6.4x EV/EBITDA 2020. The
third school is Green School (80%-90% ownership 2), a leading player in
the affordable education segment, acquired at 5.6x EV/EBITDA multiple.
Georgia Capital plans to increase maximum capacity of existing learners
at all three schools by expanding the existing campuses and adding new
ones in Tbilisi and surrounding areas.
The table below summarises the recent investments in the education
business:
School
BGA
Segment
Deal
close date
Total capital
allocation
from GCAP3
Debt/
Equity
GCAP
ownership
Current
capacity of
learners
Targeted
capacity of
learners
Premium
23 July 2019
GEL 75 million
Buckswood
Mid-level
29 July 2019
GEL 24 million
Green School
Affordable
22 August 2019
GEL 21 million
Total
GEL 120 million
50%
50%
50%
70%
80%
80%-90%2
800
760
1,250
2,810
3,200
2,980
5,000
11,180
Targeted cost
per learner
GEL 35,000-40,000
GEL 13,000-18,000
GEL 6,500-8,500
1 2017 data. Source: World bank, Eurostat.
2 80% equity stake in the current campus and 90% equity stake in three new schools that will be developed under Green School brand.
3
Includes actual and projected future capital allocations.
MARKET OPPORTUNITY
Medium-term demand outlook for private high schools
Currently: 10% private
In five years: 20% private
10%
20%
90%
80%
1
Normalised for annualisation of revenues from newly launched brands. LTM revenue is stated excluding Black Lion in 2018, as Black Lion was valued at cost as of 31 December 2018.
2 ROIC is calculated as EBITDA less depreciation, divided by average amount of total equity and borrowed fund. The beer business performance was negatively affected by delays
in launching Heineken brand, as described above, and the business had negative ROIC for two consecutive years.
Private
State
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65
PORTFOLIO COMPANIES CONTINUED
PIPELINE PORTFOLIO CONTINUED
EDUCATION BUSINESS STRATEGY
Diversified business model with strategy 1-2-3
Strong platform to facilitate growth and scale to become the leading integrated education player with up to 30,000 learners by 2025
1
2
3
Annual tuition fee:
GEL 15,000+
Premium
c.3,500
learners
BGA
• Partnership model, with 70-90% majority stakes.
• Education business holding company won’t exist.
• GCAP involvement will be limited to: strategy setting, hiring a financial director,
Annual tuition fee:
GEL 5,000-15,000
Mid-level
Annual tuition fee:
Up to GEL 5,000
Affordable
c.7,000
learners
Two partners
c.16,500
learners
Three partners
oversight of capex spending.
GEL 70 million+ EBITDA by 2025
GEL 185 million gross capital allocation from GCAP through 2025
VALUATION HIGHLIGHTS
GEL millions, unless otherwise noted
31-Dec-19
31-Dec-18
Change
At acquisition price (GCAP share)
56
7
NMF
AUTO
SERVICE
Overview
Georgia Capital sees strong value creation opportunity in the auto
services industry, which is currently a very fragmented market with
approximately GEL 2.8 billion1 annual revenues. The leading player
controls c.16% of the market, while the rest of the market is dominated
by small, owner-operated lower-end service shops. The number of
vehicles has grown at 7% CAGR over the last seven years, while the
vast majority of vehicles in the country remains largely outdated. The
attractive growth rates combined with the expected increase in customer
spending due to the stricter regulatory environment make the auto
service business an attractive strategic opportunity. Georgia Capital
aims to build a diversified business model with digital platform combining
many different auto-related services: car services and parts, secondary
car trading, car insurance and periodic technical inspection (PTI).
PTI business. The Group began constriction of PTI centres in 1H18
and launched the PTI business from March 2019 under the name of
Greenway Georgia (GWG). As part of the Georgia-EU Association
Agreement, Georgia started implementation of a mandatory vehicle
inspection programme in several phases, starting from January 2018.
In July 2018, GWG won state tender to launch and operate 51 periodic
technical inspection lines across Georgia with a 10-year licence. Technical
inspection prices are set at GEL 60 and GEL 100 for light vehicles and
heavy vehicles, respectively. GWG is the only player on the market with
support from an international partner, Applus+, a Spain-headquartered
worldwide leader in testing, inspection and certification services with a
market presence in more than 70 countries. GWG finalised construction
of 26 centres (10 locations in the capital city and 16 locations in the
regions) and became fully operational from March 2019. In November
2019, GWG became a member of CITA – international motor vehicle
inspection association https://citainsp.org/what-is-cita/.
GWG serviced 342,275 cars (of which, 246,932 were primary
checks) in 2019, capturing current market share of 36%. GWG invested
GEL 48 million to commence its operations, of which, GEL 5 million was
equity capital provided by Georgia Capital and the rest was financed by
borrowings from a local financial institution.
Car services and parts. Georgia Capital acquired an 80% interest
in Amboli, at the end of June 2019. Amboli is an importer, distributor,
wholesaler and retailer of car consumables and spare parts and with
approximately 1% market share, is the second largest player on the
market. Georgia Capital paid GEL 3.4 million for the acquisition and
also contributed GEL 1.6 million pro-rata capital into equity to fund
the business growth. The transaction values Amboli at 0.7x EV/Sales.
Secondary car trading. By the end of 2019, Auto Service entered
the car import market, where annually c.63,000 secondary vehicles
are imported, increasing our addressable market by approximately
GEL 1 billion. During 2019, the business imported 190 cars. There are
approximately 1,700 entities (vast majority of them are dealers) importing
vehicles in Georgia. All of the importers are offering only buying and
transportation services, while the auto service business is targeting
to offer all necessary car services, making car buying experience
exceptional for the clients.
Georgia Capital will continue to create a car ecosystem combining
different car-related services. By combining several areas of expertise
and exploiting synergies between the businesses, Georgia Capital will
be able to offer a full range of car services through a digital platform.
The auto service business will be mostly financed through debt,
with limited equity capital allocation from Georgia Capital.
INVESTMENT RATIONALE
VALUE CREATION POTENTIAL
Georgia’s auto park continues to grow steadily, with 7% CAGR during the
years 2012-2019.
Room for growth in the highly fragmented auto service market in Georgia
with approximately GEL 2.8 billion1 annual revenues.
Georgia lags behind developed countries by number of private passenger
cars per capita, showing room for further growth3.
Vehicles older than 10 years represent 90% of total auto park.
OWNERSHIP2
Georgia Capital owns 80-100% of the auto service business.
Aiming to build a diversified business model with digital platform
combining many different auto-related services: car services and parts,
car insurance, secondary car trading, periodic technical inspection (PTI).
In July 2018, the PTI business (Greenway Georgia or GWG) won state
tender to launch and operate 51 periodic technical inspection lines across
Georgia with a 10-year license.
GWG is the only player on the market with support from an international
partner, Applus+, a Spain-headquartered worldwide leader in testing,
inspection and certification services, with a market presence in more
than 70 countries.
1 The auto service business started selling imported secondary cars, increasing total addressable market by GEL 1 billion.
2 80% ownership in Amboli and 100% in the PTI business.
3 Source: Galt & Taggart.
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PORTFOLIO COMPANIES CONTINUED
PIPELINE PORTFOLIO CONTINUED
FINANCIAL METRICS – PERIODIC TECHNICAL INSPECTION BUSINESS
Revenue (GEL millions)
EBITDA (GEL millions)
12.9
3.3
Gross margin
66.0%
EBITDA margin
25.3%
DIGITAL
SERVICES
OPERATING METRICS – PERIODIC TECHNICAL INSPECTION BUSINESS
Total number of cars serviced
342,275
of which, primary
246,932
of which, secondary
95,343
VALUATION HIGHLIGHTS
GEL millions, unless otherwise noted
31-Dec-19
30-Jun-19
Change
EBITDA1
7
7
NMF
Multiple applied
10.4
10.1
2.8%
Enterprise value
Net debt
Acquisitions at acquisition price
Equity fair value
70
(49)
5
26
68
2.8%
(49)
1.0%
5
24
NMF
5.7%
1 Combination of the last six months and the next six months earnings.
Overview
On 8 May 2019, Georgia Capital acquired a 60% equity stake in Redberry,
a leading Georgian digital marketing agency. Redberry was fully-owned
and managed by two young Georgian entrepreneurs who will remain
with the business. The total cash consideration for the acquisition was
US$ 3.2 million, of which, US$ 0.4 million was used to acquire the equity
stake from the existing shareholders and US$ 2.8 million capital was
injected to fund business growth. To capitalise on the high growth digital
sector, the Group plans to further focus on digital start-up developments
through the recent acquisition by: 1) creating digital start-ups focused
on Georgia, with small investment sizes of c.US$ 100 thousand per
each start-up; and 2) developing digital sales channels/business lines
for Georgian corporates through joint venture partnerships models.
Acquisition of Redberry enables us to have a platform for investments in the digital business
About Redberry
• One of the most successful Georgian digital
marketing agencies.
• Providing tech-based marketing solutions to
large Georgian corporates and government
agencies.
• US$ 0.4 million cash consideration to
acquire 60% equity stake.
US$ 2.8 million new capital injected for digital start-up development
1
Joint ventures with corporates – partnership model with
minority stake of c.20%.
2 Creating digital start-ups focused and applicable to
Georgia (c.US$ 0.1 million per start-up).
Redberry has developed the app “Lunchoba”, engaged in delivering
ready-made food to the offices.
VALUATION HIGHLIGHTS
GEL millions, unless otherwise noted
31-Dec-19
31-Dec-18
Change
At acquisition price (GCAP share)
9
–
NMF
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69
S172 STATEMENT
Statement by the Directors in performance of their statutory
duties in accordance with Section 172(1) Companies Act 2006
The Directors must act in accordance with a set of general duties.
These duties are detailed in the UK Companies Act 2006 and include
a duty to promote the success of the Company, which is summarised
below. As part of their induction, the Directors are briefed on their duties
and they can access professional advice on these – either through the
Company or, if they consider it necessary, independently.
Steps the Board takes to meet its Section 172 responsibilities
• The Board agenda has been revised in 2019 to include further
information for Directors on each of the provisions of Section 172
within the Act.
• As detailed above, the Board has focused in 2019 upon long-term value
generation opportunities, taking into account likely macroeconomic
changes and their impact on stakeholder considerations.
• The Board has actively engaged, both as a whole and on an
individual basis, with employees across each business of the Group,
with a view to further understanding their views. Kim Bradley began
his work as the designated Non-Executive Director to engage with
the workforce this year. You can read about all of this in more detail
in the Directors Governance Statement on page 124.
• The Board continues to reflect regularly on the quality of Board and
Committee meeting materials, and will continue to consider whether
further information is required within such materials on stakeholder
considerations. In addition, management have been instructed to
ensure that proposals to the Board and Investment Committee
specifically highlight those matters which Directors are required to
consider in order to discharge their responsibilities under Section 172
so that each of our stakeholder groups are considered.
In summary, under Section 172 of the UK Companies Act 2006,
a director of a company must act in the way he considers, in good faith,
would most likely promote the success of the company for the benefit of
its shareholders. In doing this, the director must have regard, amongst
other matters, to the:
•
likely consequences of any decisions in the long term;
interests of the company’s employees;
• need to foster the company’s business relationships with suppliers,
•
customers and others;
impact of the company’s operations on the community
and environment; and
• company’s reputation for high standards of business conduct
and need to act fairly as between members of the company.
These matters are discussed in more depth in the stakeholder
engagement section on pages 133 to 135.
The Board of Directors consider that they, both as a whole and individually,
have acted in a way that they consider, in good faith would be most
likely to promote the success of Georgia Capital plc for the benefit of its
members as a whole (having regard to the stakeholders and matters set
out in s172 (1) (a-f) of the Companies Act 2006.
How the Board is kept informed with stakeholder views
Stakeholder
Our employees
Our community
Our investors
Our shareholders
Read more
Page 135
Page 135
Page 134
Page 133
Examples of how our stakeholder considerations influenced Board
decision making are outlined on pages 134-135 in our Stakeholder
Engagement table.
Photo Bridge of Peace – a bow-shaped
pedestrian bridge over the Mtkvari River
in downtown Tbilisi, capital of Georgia.
Steel and glass construction illuminated
at night, creates a contemporary design
feature connecting Old Tbilisi with the
new district.
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71
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 Valuation and Investment
Committees and executive management, is ultimately responsible
for the Group’s risk management and internal controls with a view
to maintaining ongoing sustainability.
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 Group’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 – a diversified, resilient, fast-growing
economy across the last decade.
• Sector focus: investing mostly in fragmented and underdeveloped
markets, particularly targeting high-multiple service industries.
• Return target: the ROIC, MOIC and IRR combination is the key decision
making matrix used in the investment decision making process.
– MOIC and IRR are determined at GCAP level, as the Group
evaluates achievable money multiples with all acquisitions and
analyses them in combination with the expected IRR. Returns
are individually assessed, subject to a minimum 25% IRR at exit.
– ROIC is evaluated for financing projects and reinvestment at
each portfolio company level. Different yields are appropriate
for different industries.
• Georgia Capital also aspires to become a third-party money manager
and earn management fees which will further increase the Group’s
capital returns and diversify its cash flow streams.
New investments made by Georgia Capital need to be consistent with
our aspiration 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 and Valuation Committee which focuses on upholding standards of
integrity, financial reporting and valuation framework, risk management
systems, going concern, internal control and assurance frameworks. The
Audit and Valuation Committee’s activities are discussed further on pages
140 to 144. 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 138 to 139.
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 Valuation and Investment Committees, as
appropriate, as well as the Board.
A description of emerging and principal risks and uncertainties, including
recent trends and outlook, as well as mitigation efforts, can be found on
pages 75 to 79 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 and Valuation 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.
• Principal Committee for
managing the Group’s
portfolio companies 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.
• 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 portfolio companies.
• Provides oversight and
challenge of underlying
assumptions on the valuation
of the private portfolio
companies 54.4% of net
assets at 31 December 2019.
Over the next five years
Georgia Capital targets to
increase share of private
assets to 80% in its portfolio.
• Direct engagement with the
external auditor, who involve
their specialist valuations
team.
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.
MANAGEMENT BOARD
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RISK MANAGEMENT CONTINUED
Bodies implementing the risk management system
As mentioned on page 70, 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
Valuation 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.
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.
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: liquidity management thresholds; limits on possible
losses from the foreign currency risks; tax legislation; and all financial
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, provides practical
advice and tax optimisation plans for the Group and also assesses
the entire Group’s tax risks and exposures.
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 and Valuation 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 and Valuation 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:
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 actively monitors performance of portfolio companies on a
regular basis and delivers daily NAV development reports, weekly liquidity
reports and 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.
• 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 and proper manner.
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 and Valuation Committee.
IFRS technical accounting group
The IFRS technical accounting group, part of the Finance department,
is responsible for monitoring the Group’s compliance with relevant
International Financial Reporting Standards. The IFRS technical
accounting group 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 group delivers training on new IFRS standards, issues Group
accounting policies, produces general guidance memos on application
of IFRS and memoranda on complex, one-off transactions and also
prepares quarterly RADAR reports to the Audit and Valuation Committee
summarising material transactions across the Group, including its
portfolio companies with respective financial impact.
Valuation workgroup
The Group has established a valuation workgroup, consisting of members
of the Finance and Investment departments, which is responsible for
the fair value assessment of the Group’s private portfolio companies at
each reporting date. The workgroup reports to the Management Board
and estimates fair value of investments by applying an appropriate
valuation technique in compliance with IFRS 13. In order to ensure
compliance with IFRS 13 requirements, increase the transparency of
valuation and to ensure that consistent approach is applied in similar
facts and circumstances, the workgroup developed a valuation policy
and monitors compliance across all investments. The applied valuation
methodology makes maximum use of market-based information, is
consistent with models generally used by market participants and is
applied consistently from period to period, except where a change would
result in a better estimation of fair value. The workgroup recommends
fair values of private portfolio investments at each reporting date and
prepares quarterly valuation reports for the Management Board and
Audit and Valuation Committee describing valuation techniques applied
and inputs used, with particular focus on the assumptions supporting
the unquoted investments, any valuation uncertainties and the proposed
disclosure in the financial statements. The valuation workgroup applies
care in exercising judgement and making necessary estimates due to
uncertainties inherent in estimating fair value for private companies.
The valuation workgroup may also involve third-party professionals
in assessing fair value of investments in exceptional circumstances.
Internal Control
Georgia Capital’s internal control over the financial reporting is focused
primarily on ensuring efficient and reliable control of valuation of private
portfolio companies as well as the Group’s consolidation process.
With respect to Internal Control over financial reporting, our financial
procedures include a range of system, transactional and management
oversight controls. The board and management of each private portfolio
company is responsible for ensuring the efficiency of the private portfolio
company’s internal control structures, risk management and financial
reporting. The private portfolio companies’ boards ensure that Georgia
Capital’s Board receives information on any issues that could affect
Georgia Capital’s business or financial reporting. 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 department discuss financial reporting,
valuations and associated internal controls with the Audit and Valuation
Committee, which reports significant findings to the Board. The Audit and
Valuation 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 and Valuation Committee meeting and the Audit and Valuation
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 123. The Director’s considered that the Company has
sufficient cash and liquid funds to cover the liabilities when they fall due.
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 Company
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 Company’s value. Georgia Capital runs an in-
depth annual business planning process, involving both the management
of portfolio companies 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 2020,
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 Group.
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 18 to 35;
the Group’s principal and emerging risks and uncertainties, principally
those related to regional instability, portfolio company strategic
and execution risk, investment risk, adverse economic conditions,
implications of novel coronavirus, the depreciation of the Lari, lack of
liquidity and how these risks and uncertainties are managed, as set
out on pages 75 to 79;
the effectiveness of our risk management framework and internal
control processes; and
• stress testing, as described below.
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RISK OVERVIEW
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 portfolio companies’ 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, currency and macroeconomic environment related risks,
including those relating to the recent worldwide COVID-19 outbreak.
Further, the Group has identified climate change related risks as emerging
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 a single reasonable 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 economic consequences of COVID-19,
GEL depreciation against the US dollar, market competition, operational
underperformance, inability to timely receive construction permits
(for our housing development business) and project cost overruns for
the water utility, hospitality and renewable energy businesses. Given
COVID-19 related developments and contingency plans announced by
GHG PLC and BOG PLC, the Group’s scenario also excludes dividend
inflows from Listed assets. The Group identified the following mitigating
actions: suspension of share buybacks and suspension of capital
allocations together with optimization of cash operating expenses.
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 March 2020, Georgia Capital holds
GEL 304 million assets across cash, marketable debt securities and
loans issued to portfolio companies. Additionally, the Group also
holds GEL 660 million equity securities of London Stock Exchange
listed GHG PLC and BoG PLC as at 31 March 2020. Therefore, in a
worst-case scenario, with risks modelled to materialise simultaneously
and for a sustained period of time, the likelihood of the Group having
insufficient resources to meet its financial obligations is very low. 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 2020 to 31 December 2022.
Understanding our risks
We continuously monitor our internal and external environment to ensure that any new principal or emerging risk is identified in a timely manner and
responded to appropriately. The Directors have carried out a robust assessment of the principal and emerging risks facing the Group, including those
that would threaten its business model, future performance, solvency or liquidity. We define our principal risks as those that have the potential to impact
the delivery of our strategic objectives materially. We also monitor risks which includes new and emerging risks which may have the potential to become
principal risks but are not yet considered to be so. Emerging risks usually have large uncertain outcomes which may become certain in the longer term
(beyond one year) and which could have a material effect on the business strategy if it were to occur.
Principal risks and uncertainties
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. The order in which the principal risks and uncertainties appear does not denote their order of priority. 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.
PRINCIPAL RISK/
UNCERTAINTY
KEY DRIVERS/TRENDS
MITIGATION
NOVEL CORONAVIRUS (COVID-19) RISK
As of this writing, the coronavirus (COVID-19) outbreak in Georgia is not, or at least not yet, as severe as in many
other countries. The Georgian Government has taken significant actions early, including flight bans, school
and business closings and tele-working recommendations. Most Georgians have taken the recommendations
seriously and modified their behaviours accordingly. In a population of about 3.7 million, there have been
148 confirmed cases, 27 recovery cases and zero deaths as of 3 April 2020. Most cases remain traceable
and there is still some hope that community spread can be more limited than elsewhere.
The full extent of the damage from the coronavirus pandemic is very difficult to assess and will not be known
until the severity and duration of the outbreak, both in Georgia and worldwide, are clear. Nevertheless, the
governmental measures already implemented, and the related behavioural shifts, (both in Georgia and elsewhere)
mean that the Georgian economy and our businesses are already being negatively impacted.
In our listed assets, the banking sector will be particularly vulnerable to an economic downturn. Our healthcare
business may experience some upside but will also be affected by treatment (especially elective treatment)
postponements, the potential for falling footfall and discretionary spending in the pharmacies and increased
health insurance costs. It will also face operational challenges if the outbreak is so severe as to put a strain on its
facilities or seriously affect its caregiving personnel. Both BoG and GHG have suspended dividend payments.
In our private portfolio, tourism is a significant component of the Georgian economy and the hospitality business
is affected directly by the travel restrictions and fear of contagion. Restaurants are closed. Both of our operating
hotels are closed and bookings are way down. Significant reduction of domestic and external demand will
depress the housing development and commercial real estate businesses and other businesses offering
ordinary goods and services, like beverages and auto services.
The coronavirus clearly presents quite difficult to assess near- and medium-term risks to the Georgian economy,
especially to tourism, and will prove to be a major challenge for the economy. The outbreak presents both supply
and demand side shocks and will have multiple repercussions through various channels, depending on severity and
duration. As a small open economy (external merchandise trade around 74% of GDP), Georgia is highly dependent
on foreign currency inflows to finance its current account deficit, so material deterioration in tourism revenues or
a substantial fall in foreign investment sentiment will significantly impact growth prospects. The global spread of
downside risks will contract foreign demand and thus exports, as well as reduce remittance inflows. Measures
preventing the virus from spreading and increased uncertainty will significantly affect domestic sentiment and
demand, negatively impacting consumption and domestic absorption as a whole.
A large part of Georgia Capital’s portfolio is concentrated across defensive countercyclical sectors: the water
utility and healthcare and pharmacy distribution businesses. Georgia Capital has a strong liquidity position,
with GEL 304 million liquid assets and loans issued at 31 March 2020 (GEL 364 million at 31 December 2019).
We are also satisfied that Georgia Capital’s liquidity forecast is adequate considering the novel coronavirus risk,
as described in the viability statement on pages 73-74. Further, Georgia Capital does not have capital commitments
or a primary mandate to deploy funds or divest assets within a specific time frame. Therefore, capital allocations
to portfolio companies may be suspended, if needed. As described in viability statement on page 74, the Group
identified the following mitigating actions: suspension of share buybacks and suspension of capital allocations
together with optimization of cash operating expenses.
From the macroeconomic perspective, the fundamentals remain strong, as the preliminary current account deficit
reached a historic low in 2019, public debt is far below its capped level, reserve coverage remains adequate and
there is policy space for support. Both fiscal and monetary authorities have announced coordinated measures to
mitigate the negative impact of the shock, with the scale of stimulus depending on the severity of the pandemic.
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REGIONAL INSTABILITY RISK
INVESTMENT RISK
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 continuation 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, our financial position and valuations of our listed and private portfolio companies.
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 2016, and the
European Parliament’s approval of a proposal on visa liberalisation for Georgia in 2017, can potentially intensify
tensions between the countries. Russia banned direct flights on July 8, 2019 and recommended to stop selling
holiday packages to Georgia. The decision was made in response to anti-Putin protests in Tbilisi, which started
after a member of the Russian parliament addressed the Georgian parliament in Russian from the speaker’s chair.
The ongoing conflict between Russia and Ukraine, and Russia’s and Turkey’s worsening relations with the US and
between themselves, also increase uncertainties in the region. There is an ongoing conflict between Azerbaijan
and Armenia which impacts the region.
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 poor performance. Investment risks include inadequate
research and due diligence of new acquisitions and bad timing of the execution of both acquisition and
divestment decisions. The valuation of investments can be volatile in line with the market developments.
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 (consisting of the full Board) for
approval. The Committee reviews and approves or rejects proposals for development, acquisition and sale of
investments and decides on all major new business initiatives, especially those requiring a significant capital
allocation. The Investment Committee focuses on both investment strategy and exit processes, while also
actively managing exit strategies in light of the prevailing market conditions.
LIQUIDITY RISK
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, from suspension of dividends from
portfolio companies, from not holding cash or being able to raise debt.
MITIGATION
The Group actively monitors significant developments in the region and risks related to political instability and
the Georgian Government’s response thereto. It also develops responsive strategies and action plans of its own.
The Georgian export market shifted significantly away from the Russian market after Russia’s 2006 embargo,
and the Group participated in that shift.
KEY DRIVERS/TRENDS
The Government’s ongoing action plan to further diversify tourism revenues will serve well to reduce exposure
on Russia, with tourism revenues from the EU increasing by 20% y-o-y in 2019 – and again the Group is playing
a role in this. While financial market turbulences and geopolitical tensions affect regional trading partners,
Georgia’s preferential trading regimes, including DCFTA with the EU and FTA with China, support the country
to enhance resilience to regional external shocks.
REGULATORY RISK
MITIGATION
PRINCIPAL RISK/
UNCERTAINTY
The Group owns businesses operating across a wide range of industries: banking, healthcare services, pharmacy
and distribution, property and casualty insurance, real estate, water utility and electric power generation, hydro
power, wine and beverages, education, auto service and digital services. Many of these industries are highly
regulated. The regulatory environment continues to evolve, and we cannot predict what additional regulatory
changes will be introduced in the future or the impact they may have on our operations.
KEY DRIVERS/TRENDS
Each of our businesses is subject to different regulators and regulation. Legislation in certain industries, such as
banking, 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.
MITIGATION
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 where possible in constructive
dialogue with regulatory bodies and seek external advice on potential changes to legislation. We then develop
appropriate policies, procedures and controls as required to fulfil our compliance obligations. Our compliance
framework, at all levels, is subject to regular review by Internal Audit and external assurance providers.
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 from suspended dividend inflows from the Group’s portfolio companies;
or excessive investments in long-term assets and a resulting mismatch in the availability of funding to meet
liabilities, or failure to comply with the creditor covenants causing Event of Default or Default.
The liquidity management process is a regular process, where the framework is approved by the Board and
is monitored by senior management and 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 senior management 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. JSC Georgia Capital successfully issued 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 dividend inflows from its portfolio companies and on its ability to realise its listed
securities on the public markets. 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); and
the market value leverage (Net Debt divided by 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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PORTFOLIO COMPANY STRATEGIC AND EXECUTION RISKS
CURRENCY AND MACROECONOMIC ENVIRONMENT RISKS
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.
KEY DRIVERS/TRENDS
MITIGATION
The Group will normally seek to monetise its investments, including through initial public offering, strategic sale
or other appropriate exit, typically within five to 10 years from acquisition and we face market and execution risk
in connection with exits at reasonable prices.
Each of our private portfolio companies (Water Utility; Renewable Energy; Housing Development; Hospitality
and Commercial Real Estate; P&C Insurance; Beverages; Education; Auto Service; and Digital Services) and our
listed assets (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
at reasonable prices. It may not be possible or desirable to divest, including because suitable buyers cannot be
found at the appropriate times, or because of difficulties in obtaining favourable terms or prices, or because the
Group has failed to act at the appropriate time.
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. We carry our private portfolio companies at fair value in our NAV Statement. After the switch
to IFRS 10 on 31 December 2019 the valuations are audited, increasing the credibility of fair valuation and limiting
the risk of mispricing the asset.
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 in 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.
PRINCIPAL RISK/
UNCERTAINTY
Unfavourable dynamics of major 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.
The Lari floats freely against major currencies. Lari depreciation against the US dollar was 7.1% y-o-y at the end
of 2019. The Lari depreciation was likely mainly driven by negative expectations caused by air travel ban, political
tensions and protests. NBG responded by hiking the monetary policy rate by 250 basis points to 9% and declared
that the policy stance will continue to be tightened until inflationary expectations are alleviated. COVID-19 outbreak,
fear of recession and dropping oil prices caused significant capital outflows from our region, leading yields to widen
and currencies to depreciate. GEL followed the trend and depreciated by 9% YTD as of 3 April 2020. NBG sold
US$ 60 million on FX auctions in March, kept tightened policy and committed to use all available instruments, if
necessary, to ease the pressure on the prices. 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,
consequently, deteriorates its operating solvency in a specific currency or group of currencies due to the fluctuation
of exchange rates. The risk is mainly 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 regional turbulences and global slowdown risks,
Georgian economic growth remains robust, inflation is managed and resilience to external shocks improves.
A strong external performance supported a higher than expected 5.1% real GDP growth in 2019, while average
annual inflation was 4.9%, a result of depreciation-driven inflationary expectations and one-off factors like
increase in excise tax. The current account deficit reached a historic low of 5.1% of GDP in 2019. The tight
monetary policy stance is appropriate to the current macroeconomic environment, while the fiscal stance is
expected to be expansionary. Official reserve assets continued to increase and amounted to US$ 3.5 billion at
the end of 2019, providing the necessary buffer for the economy. In 2019, Fitch and S&P upgraded the 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 major drivers for the reduced risk premium of the country.
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.
The 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. Senior management 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.
Emerging risks
The Group’s risks are continually reassessed and reviewed through a horizon scanning process, with escalation and reporting to the Board.
The horizon scanning process fully considers all relevant internal and external factors, and is designed to consider and capture the following risks:
current risks which have not yet fully crystallised and do not have previous known experience against which they can be assessed and risks which
are expected to crystallise in future periods, typically beyond one year.
In 2019, the Group has identified climate change as an emerging risk. Since the Group’s businesses are very much dependent on such climate
elements as precipitation, wind speed and air temperature, the Group’s development will be affected definitely by climate change. This is critical to
protecting and enhancing the value of our assets and we monitor our governance and risk management framework to ensure that sustainability-related
risks in our portfolio remain an important part of our agenda and are treated as a priority by our portfolio company management teams. Our portfolio
companies’ approach and the procedures to climate risk is discussed further under resources and responsibilities section on pages 80 to 89.
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RESOURCES AND RESPONSIBILITIES
SUSTAINABILITY LIES AT THE HEART
OF OUR BUSINESS
WE ARE COMMITTED 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, anti-corruption and anti-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 have board representation in our private portfolio companies and use it to maintain close relationships with the management of those companies
as described within the strategy section on pages 18 to 35. As a consequence of our involved investment style, we manage our portfolio companies
in the best interests of our shareholders and other stakeholders, as well as striving to contribute to wider society. We continue to meet with our
shareholders and listen to any concerns they may have. With a portfolio of GEL 2.3 billion 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, fostering continuous employees’ development 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.
Non-Financial Information Statement
The EU Non-Financial Reporting Directive requires us to disclose certain information on the way we operate and manage social and environmental
challenges. The following table summarises where you can find further information on each of the key areas of disclosure that the directive requires.
Further information on our policies can be found here: https://georgiacapital.ge/governance/cgf/policies.
Reporting Requirement
Social matters
Employee matters
Environmental matters
Sponsorship and Charity
Access to Education
Healthy lifestyle
Supporting People with Disabilities
Energy
Tourism
Education
Affordable Housing
Talent Attraction
Training and Development
Gender Diversity
Occupational Health and Safety
Environment and Social Policy
Energy Efficient Buildings
Renewable Energy Businesses
Sustainable Water Management
Environmental and Social Action Plan (ESAP)
Specialised Medical and Biological Waste Disposal
Human Rights
Human Resources and Human Rights Policy
Anti-Corruption and Anti-Bribery Code of Ethics
Anti-Bribery and Anti-Corruption Policy
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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.
Sponsorship and charity
As part of 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
2019, the Group spent a total of GEL 3.4 million
to finance different sponsorship and charitable
activities, some of which are listed below.
Total sponsorship and charitable expenditure of the
Group, 2019 (GEL thousands)
900
3.4mln
2,544
Charity
Sponsorship
Georgia Capital and GHG support the
Caucasus Nature Fund (CNF), as we are
involved in the Project of Maintenance of
Caucasus Natural and Cultural Heritage.
The fund helps to support the effective long-
term management of the protected territories
of Armenia, Azerbaijan and Georgia. Georgia
Capital and GHG donated US$ 10,000 and
GEL c.44,800 to the project, respectively.
Georgia Capital was a founding Partner of UK
Season in Georgia 2019. Within the programme
the UK Embassy delivered more than 60 events
across the country that captured the best of
friendship between Georgia and UK. Georgia
Capital donated GBP 50,000.
Georgia Capital participated in the selection of
the Fulbright Program Scholar and sponsored
selected candidate with GEL 138,862.
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 purpose
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.
In 2019, the renewable energy business
continued to implement several social projects
to support education, tourism and sports in
Mestia, Svaneti region. In 2019, the business
fully upgraded the libraries at all schools in
Mestia. The aim of the project is to promote
youth education and create more opportunities
for young people. GGU supported several
important ski competitions for Svaneti region
tourism development. In 2019, the renewable
energy business also started implementing social
projects in Zoti, Guria region. Social projects
are mainly focused on education and sports. In
2019, GGU also participated in a planting trees
programme in Tbilisi to support the creation of
environmental and green spaces in the city.
The healthcare services of GHG cover more
than 75% of the Georgian population with
clinics, located across the country providing
access to high-quality medical care, even to
those living in remote mountain regions. In 2019,
GHG carried out 28 different free screening
programmes in total for up to 72,000 patients.
Furthermore, in 2019, GHG’s hospitals business
carried out 24 different free-of-charge medical
check-ups, benefiting up to 2,830 patients. Such
free-of-charge medical check-up and screening
programmes include managing tuberculosis,
cancer screenings, hepatitis C screening and
antenatal programmes. As in other parts of
the world, diabetes in Georgia is on the rise,
with the incidence rate per 100,000 citizens
now reaching 506. To address the disease’s
increasing prevalence, GHG offers a 50%
discount on test strips to patients with diabetes.
Apart from this, during the year GHG spent up
to GEL 2 million to provide free medical services
to the socially and economically disadvantaged
groups of the population. In cooperation with
other healthcare institutions, GHG arranges free
blood donations for its patients. In 2019, GHG
introduced GPC laboratory in its pharmacies
and has already opened eight blood collection
points and plans to continue the process to
arrive at c.50 blood collection points in the
coming years. GHG traditionally participates in
the Government subsidised Children’s Oncology
Programme and offers cancer treatment to
children with different oncology disorders
(leukemia, 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 2019, more than 672 patients with
different types of cancer received treatment at
Iashvili’s onco haematological department.
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 offers 11 short-term vocational
courses to more than 600 construction
specialists/workers annually.
GGU has been involved in vocational
programmes to promote and raise the
awareness about the company and specific
professions of water supply and sewerage
systems among the younger generation.
GGU trained future employees (10 students)
with relevant knowledge of water supply and
sewerage systems. Together with local and
international partners, GGU has successfully
implemented several vocational programmes,
among which were programmes for welders,
locksmiths and plumbers.
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RESOURCES AND RESPONSIBILITIES CONTINUED
The water utility business opened the Training
Centre in 2017, aiming to prepare 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 GGU to develop
engineering and other technical qualifications in
line with today’s technological development and
innovations. At this time up to 3,000 employees
have been trained/retrained in the Training Centre.
The Beverages business is part of a charity
programme that supplies books for children
without parental care and from large families,
as well as for the rural school libraries.
As part of its initiative to promote a healthy
lifestyle, m2 became the general sponsor of
the Georgian Rugby Union. m2 and “Rugby
Union of Georgia” signed a Memorandum of
Cooperation in 2019. m2 has been funding
the rugby club “Lelo” for several years, as well
as the regional football in Telavi and Zugdidi.
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.
Aldagi started promoting safe driving with a
project that offered safe drivers a chance to
receive up to 30% price discount on their car
insurance policy premiums.
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. In 2019,
GEL 167,800 was spent on financing these
TV programmes (GEL 120,300 in 2018).
In 2019, GHG’s clinics business launched
the Student’s Programme. GHG signed a
Memoranda of Understanding (MoU) with
22 universities, in which c.20,000 students
were involved. Within this programme, GHG
offered students an extended coverage under
UHC and additional discounts on various
medical and dental services. During the year,
the healthcare business spent GEL 100,000
on these activities. Within the framework of
MoUs, successful students were also offered
a six-month scholarship and employment in
different administrative positions at GHG’s
clinics. In 2019, GHG sponsored medical
conferences (GIMPHA, Laparoscopic Surgery
Conference, Emory Conference, Reproductive
Health Conference, etc.) and workshops,
which brought together medical scholars
and healthcare practitioners from Europe,
Asia, the US and Georgia to share knowledge
and experience that influence and shape
healthcare delivery. Total financial support of
the conferences amounted to GEL 297,427
in 2019 (GEL 531,544 in 2018).
Promoting and enhancing healthy
lifestyle
Our beverages business produces and
sells Georgian wine locally and exports to
17 countries. The business actively promotes
responsible drinking and have developed a
special campaign, “DON’T DRINK AND DRIVE”.
As part of its sponsorship activities, the
Beverage business seeks to promote a healthy
and active lifestyle. As the sponsor of the
Georgian Rugby Union, Georgian National
Olympic Committee and Georgian National
Paralympic Committee, the business aims to
attract more youngsters to healthy activities.
To promote a healthy lifestyle among children,
in 2019, GHG entered into MoUs with 10
kindergartens and is in the process of negotiation
with a further 35 kindergartens and schools.
The business provides free medical support
and screening programmes for different
diseases to the pupils and teachers of the
participating entities.
Supporting people with disabilities
In 2019, m2 funded the rehabilitation course
for children with autistic spectrum disorders
in Kutaisi with GEL 100,000.
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
framework of Protection of Children with
Disabilities – a project carried out by the
Ministry of Labor, 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 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.
Socially-oriented products and services
Georgia Capital realises significance of its
investment activities across Georgia for the
Georgian emerging economy. The Group is
actively investing in industries with strategic
importance to the development of the country.
Energy
The average growth of electricity consumption
in Georgia has been 5.3% over the last 10 years.
The Group is investing in renewable energy to
respond to growing demand by developing
hydro and wind power plants across Georgia.
As of 31 December 2019, the renewable energy
business operates HPPs and wind farms of
91MW installed capacity and, in addition, has
a pipeline of up to 350MW capacity hydro and
wind power plants. The Group’s involvement
in the renewable energy business supports
the country’s sustainable growth.
Tourism
Georgia’s tourism industry has achieved
remarkable growth over the past decade, hitting
record numbers of tourists arrivals of 7.7 million
in 2019, with a 11.5% CAGR since 2011. Tourism
represents the largest component of service
exports in Georgia’s Balance of Payments
(BoP), accounting for 72%, up from under 40%
a decade ago. Georgia has the potential to
place itself on the world map as a prominent
tourist destination due to its unique nature and
cultural heritage, its tradition of hospitality and
by focusing on niche areas, for example, wine,
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
have a portfolio of more than 1,000 operational
hotel rooms. The first 152-room Ramada
Encore hotel, located on Kazbegi Avenue,
Tbilisi, has been operational since March 2018.
m2 is also developing a 4-star Ramada hotel
in Kutaisi (under construction, 121 rooms),
where the international airport serves low-
cost airlines, making the city popular with
tourists visiting Georgia. In 2019, m2 signed a
management agreement with Kempinski to
manage the only luxury hotel in its portfolio.
Following initial acquisition in December 2017,
m2 held a 60% stake in Kempinski hotel and
the business announced the buyout of the
remaining 40% equity stake in February 2019.
The business expects to position Kempinski
hotel as a culinary hub, both for locals and
tourists. The facilities will include a range of
exclusive gastronomic experiences. Built
into the neighbouring mountain, the hotel
will invite guests to taste the best Georgian
wines, as well as explore spectacular views of
Tbilisi old town. The business has two more
internationally branded hotels in the pipeline: a
4-star business-class hotel, Ramada Melikishvili
(under construction, 125 rooms) and Zugdidi
hotel (at design stage, 130 rooms).
2021. Green School acknowledges its social
responsibilities and tries to make its input
in different ways. The school provides free
education for 170 socially vulnerable children.
Affordable housing
Over the last 10 years, the Georgian real estate
market has experienced a significant increase
in demand. One of the factors driving the
demand of the housing market is a decrease in
the average household size, which has already
dropped from 3.7 individuals in 2008 to 3.3
in 2018, in Georgia. This figure is expected to
move closer to the EU average of 2.3, however,
the family size in Tbilisi has been shrinking
steadily. Based on the social development
pattern in comparable countries, the overall
trend is expected to be continued, which will
generate additional demand for housing. Also,
around 35% of housing units in Tbilisi were built
more than 40 years ago and are reaching the
end of their usable life cycle. 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.
m2 is a major player in Georgia’s real estate
market, offering its customers turnkey
apartments with fine-tuned infrastructure.
m2 has completed 10 projects so far, and has
delivered them to its customers within, and
frequently ahead, of the agreed deadlines.
m2 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 in its buildings, which in turn
translates into lower utility expenses incurred
by the tenants. The level of energy savings in
m2 buildings is significantly above the average
residential property in Tbilisi.
m2 started the construction of a completely
new district, m³ Saburtalo, which provides
mixed-used real estate development
project, aggregating residential, commercial,
and entertainment buildings in a single
neighbourhood. m3 Saburtalo will be a new
district in Tbilisi with a modern architecture.
The district was designed with a multifunctional
infrastructure and distinctive landscape design.
The central part of the district will be occupied
by a park. In June 2017, m2 acquired BK
construction LLC, a real estate construction
company, which has reduced m2’s construction
cost and improved the design management
process through vertical integration, giving m2
the ability to reach the lower-end segment.
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 companies.
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;
• grievances;
•
• anti-nepotism.
retrenchment; and
We are committed to employee engagement
and we believe that effective communication
is key. We strive to provide our employees
with a continuous flow of information, which
includes 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 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 the
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.
In 2019, m2 created a new brand name,
Amber Group, under which the business will
develop the following hotels: Seti Square Mestia
(under construction, 52 rooms), Kakheti Wine
& Spa (under construction, 60 rooms), Gudauri
(operational, 121 rooms), Telavi (at design
stage, 110 rooms), Shovi (at design stage,
109 rooms), Mestia Svaneti (at design stage,
140 rooms). Amber Group will focus on the
unique Georgian culinary and the traditional
Georgian winemaking, and will promote
Georgia internationally.
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, which is very fragmented
and unaffordable for most of the population,
making room for private sector development.
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. By 2025, the Group aims to have up to
30,000 learners, with GEL 185 million gross
capital allocation. In 2019, Georgia Capital
acquired majority stakes in three leading
schools in the attractive private education
market. 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.
Green School represents affordable private
school within Georgia Capital’s education
portfolio. The school offers affordable tuition
to the emerging middle-class in Georgia and
is regarded as one of the best value for money
mass schools in the country. According to the
plan, the school will add two new campuses
and increase number of learners to c.2,000 by
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RESOURCES AND RESPONSIBILITIES CONTINUED
Talent attraction
Sustained development of the Group’s
businesses requires the strengthening of the
teams, 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 2019, an intern from
Limerick University spent two months working in
the Finance department at the Georgia Capital
office in Tbilisi. In 2019, 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 2018 were
promoted to managerial positions Group-wide.
In 2019, GHG participated in 29 job fairs in
different universities and colleges and recruited
more than 192 students. Also under the Student
Internship Programme, 500 students had
internships in GHG facilities, 106 of which were
hired by GHG. GHG has signed MoUs with
15 nursing colleges in all regions of Georgia.
GHG has an exclusive partnership agreement
with the pharmacy college Orientiri. GHG
offers grants to its employees who have no
pharmaceutical education. After two years of
college, they can graduate with a pharmacy
degree and start a career in one of GHG’s
pharmacies. GHG finances 50% of the total
tuition fee. 14 participants are already enrolled
and are expected to graduate in 2020, and
three of them are already working with GHG.
The main goal of the project is to address the
shortage of qualified pharmacists.
opportunity to receive external training in well-
known training institutions outside of Georgia.
In 2019, Georgia Capital conducted training in
giving and receiving feedback in the Deliberately
Developmental Organization and continued
coaching for its employees at all levels. Training
provides an individual approach towards
developing leadership skills. Employees
involved in training developed their skills and
gained 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 story in the company and explain their
values and approaches.
In order to maximise staff potential, the
P&C insurance business promotes lifelong
professional and personal development.
Internal professional education is comprised
of a wide range of internal and external training
sessions, specifically designed to meet the
needs of the front and back office employees.
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.
Selected mid-level and senior-level employees
are given the opportunity to receive external
education in well-known universities abroad.
In 2019, GGU continued implementing
a 360-degree assessment for the entire
management team, 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 more than 35 employees.
Training and development
To manage our employees in a way that best
supports our business strategy and employees
growth professionally, 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.
GGU continues to concentrate on staff
development as one of the key pillars for
sustainable growth of the business. In 2019,
career development plans have been developed
across each function within the company at the
level of individual employees. The development
plans include professional, hard and soft skill
training, along with personal transformation
programme, leadership and coaching.
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
Along with GGU’s engineering manual,
Construction and Exploitation of Water Pipes
and Sewage Systems, in 2019, GGU finalised
two engineering manuals – Regulations of
Water Supply Emergency Works and Water
Supply Network Exploitation Rules. The aim
of these manuals is to increase the qualification
level of employees and to standardise the
processes. Several company-wide projects,
executed in 2019, are worthy of attention as
well. One of them includes providing certified
first aid training for its employees as mandatory,
along with the health and safety training. More
than 150 employees have been certified in
first aid. Also, for the first time in 2019, service
standards and the code of conduct were
developed and documented into manuals for
more than 20 positions responsible for daily
communication with customers, third parties,
Government, police, etc. More than 500
employees have been retrained with the
new standards and the code of conduct.
The GHG Leadership Programme is one of
the pillars of GHG Human Capital Strategy.
The programme is designed for 250 middle-
level managers to further develop and improve
their managerial and leadership skills. 179
managers have already taken the five-month,
180-hour General Management Course since
2017. GHG balances gender composition
in their Leadership Programme, where 67%
of the participants are female and 33% are
male. GHG has also developed a Personal
Development Programme, which further builds
leadership competencies through effective
performance feedback and coaching sessions.
In 2018 and 2019, 106 middle-managers used
the 360-degree feedback tool and developed
their personal plans and 75 of them also took
part in individual coaching sessions.
In 2019, GHG invested GEL 4 million in training
and development courses for medical and
administrative staff. GHG offers continuous
medical education through the EVEX Learning
Centre. In 2019, the EVEX Learning Centre
trained a total of 3,208 nurses (both employees
and candidates), 2,623 physicians and 450
back office employees and managers. In 2019,
EVEX Learning Centre conducted a six-month,
108-hour Basic Nursing Course for students
and nursing professionals willing to start a job in
GHG hospitals. 132 of them were offered jobs
at GHG healthcare facilities. In 2019, GHG’s
hospitals business developed and implemented
the E-Testing module to make the staff
attestation process more efficient. 745 nurses
participated in the e-testing attestation process.
Professional development of GHG’s pharmacy
and distribution business employees is led by
the GEPHA Training Centre trainers. In 2019,
the GEPHA Training Centre trained a total of
4,000 participants. Among them, 186 students
took a preparation course for pharmacists and
35 of them were offered a job. GHG launched
a new 27-hour, four-day Basic Sales Skills
training programme for pharmacists. The
programme started in November 2019 and
plans to train all front office staff by the end
of 2020 (2,100 trainees in total).
GHG’s medical insurance business also operates
its own Imedi L Academy, offering specialised
vocational training programmes and courses to
its employees. Imedi L Academy trained 1,442
participants in 2019. In May 2019, GHG opened
GHG Library “The Exploration Centre” in its
head office. The library contains more than 600
books about professional, business, leadership
and other fields. In line with GHG’s strategy to
develop a new generation of doctors in Georgia,
GHG operates a postgraduate residency
programme in a number of fields since 2015.
Currently, GHG has 237 talented residents
involved in 29 specialities; 14 of them have
received a 100% grant and 37 an 80% grant,
while 32 residents have obtained student loans.
In 2019, 44 residents completed the programme.
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, a commitment to
eliminating 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 2019, Georgia Capital had a
total of 21,446 employees across the Group, of
which 14,374 are females and 7,072 are males.
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. m2 systematised its
approach to gender equality and executed
specific goals throughout the year. In addition,
according to the new administrative law,
every agreement concluded in the company
is reviewed to ensure none of them are
discriminative to women. m2 has an established
internal grievance mechanism for employees to
file complaints on gender-based discrimination,
and 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 as yet.
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.
Human Rights Policy
The Human Resources Policy is 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 is part of the Human
Resources Policy and covers the following:
• equal opportunities and anti-discrimination;
• work environment free of harassment; and
• grievance policy.
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.
This Policy applies to all employees and includes
procedures in relation to employment processes,
training and development, procedures on
recruitment and on the continuity of employment
of employees who become disabled during the
course of their employment.
Gender diversity at 31 December 2019
Board of Directors at Georgia Capital PLC
6
2019
2018
1
1
Directors
114
5
6
2019
30
84
2018
20
57
Senior managers
421
2019
176
245
2018
109
155
All employees*
21,446
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.
2019
2018
14,374
7,072
13,714
6,286
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
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;
•
• ensuring that anti-bribery and anticorruption
clauses are incorporated in the agreements
with customers and third parties;
• ensuring that anti-bribery and anticorruption
matters are included in contractual
agreements with partners/counterparties; and
Female
Male
Age diversity at 31 December 2019
All employees*
21,446
3,922
5,667
5,553
6,074
230
Over 51 years old
41-50 years old
31-40 years old
21-30 years old
Less than 20 years
old
* Excluding temporary employees.
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RESOURCES AND RESPONSIBILITIES CONTINUED
• 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 third parties might
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 the Deputy CEO and
the General Counsel have the authority to
conduct periodic compliance checks of the
operations of the Group.
We are pleased to confirm that there have been
no instances of violation of the Anti-Bribery and
Anti-Corruption Policy during 2019.
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 critical in
the construction business and therefore to
enhance the awareness of health and safety
risks associated with the construction process,
m2 conducts regular training and educational
seminars for employees and contractors.
In 2019, the number of health and safety
training hours amounted to approximately 120.
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.
Environmental matters
The Group recognises that its operations
have both direct and indirect impact on the
environment. An Environment and Social
Policy has been established which sets out
the Company’s approach on this matter. 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 impact on
the environment is created by our Housing
Development, Hospitality and Commercial
Real Estate, Water Utility and Renewable
Energy businesses.
Environmental consideration is an integral
part of our Housing Development business,
managed by m2. m2 delivers environmentally
conscious products whilst being aware of the
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 the use of electricity.
Aiming at increasing the efficient use of energy,
water and materials, m2 installs energy-efficient
lighting systems and uses low emission
window glass and other modern insulation
materials to cover the façade of the buildings.
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 the 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.
m2 develops more green spaces providing
universal access to safe, green and public
spaces in all projects.
In 2019, m2, together with the Tbilisi City Hall
Environmental Protection Service, planted
about 500 trees on the right and left banks of
the river Mtkvari in the frame of the landscaping
campaign. The participants in the campaign
landscaped an additional territory of 1 hectare
in the city.
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. 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. EV
chargers will be gradually installed in each
residential complex and gifted to the residents.
Water utility and renewable energy businesses,
managed by GGU, are in 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 that 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’s urban water
management includes the production and
treatment 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 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, GGU has successfully
managed to decrease the self-consumed
electricity consumption throughout last several
years and from consumption level of 239 million
KWh in 2017, GGU reached 174 million KWh in
2019. GGU intends to maintain self-produced
electricity consumption in the range of 170-
175KWh 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 business 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, an environmental
and social audit of the GGU was performed. The
environmental and social audit report covered
the environmental topics, 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 business 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
for all companies under the GGU.
Currently, ESMS is fully introduced at GGU. This
strongly supports the organisation to enhance its
environmental performance, and also to manage
its environmental responsibilities in a systematic
manner. In January 2020, the water utility business
was certified as meeting the requirement and
scope of registration – ISO14001: 2015. Similar
certification process for obtaining ISO14001: 2015
for Gardabani WWTP started in February 2020.
It is recommended, that each company within the
GGU group achieves the mentioned standard.
Besides, the perfection of environmental
performance, ISO14001:2015 will support
GGU’s sustainable financing. In line with the
EU classification system for environmentally
sustainable economic activities (Taxonomy),
in regard to the EU Green Bond Standard (EU
GBS), the company will need to be Taxonomy-
aligned in order to be qualified as an eligible
issuer of the bond. According to the Taxonomy
Technical Report, a minimum requirement is the
implementation and adherence to a recognised
environmental management system (ISO 14001,
EMAS, or equivalent).
The water utility business understands well
the complexity of water management issues,
which are separated into distinct topics
such as Economics, Water Quality, and the
Environment. In order to effectively manage
drinking water security, the business invested in
comprehensive researches for the development
of the Integrated Water Management Plan for
the Tbilisi Reservoir. In April 2019, the first part
of Integrated Water Management Plan for the
Tbilisi Reservoir was published. The document
was developed by Kocks Consult GmbH
with co-financing from KFW/DEG (Deutsche
Investitions-und Entwicklungsgesellschaft
mbH). Active collaboration with the Tbilisi
City Hall, the Tbilisi City Council and other
stakeholders around the Tbilisi Reservoir
management is on-going. As a result, a final
“Integrated Water Management Plan” will
be elaborated as a policy document, which
will ensure high quality drinking water and
sustainable use of the reservoir in general.
GGU’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.
In October 2019, Early Warning System (EWS)
for Zhinvali HPP was successfully tested and
launched. The area under the responsibility of
the water utility business corresponds to the
15km downstream in the Zhinvali Dam.
In order to protect population and environment,
the EWS was implemented in this area.
Other than drinking water supply and power
generation, Zhinvali Dam plays a key role in
controlling floods and other geo-hazards. It is
built as a safe structure, complying with strict
standards. Zhinvali HPP EWS consists of:
a) high accuracy hydrological and meteorological
data monitoring system, b) the warning system,
covering the area that gets flooded by a
warning signal within a relevant time, and
c) the notification system, informing the first
responders of an emergency via voice and
text message.
In order to respect all the rules and instruction,
and to perform regular testing and continuous
maintenance of the equipment, special training
for EWS management team was conducted.
Zhinvali HPP EWS enables the water
utility business to leverage best practices,
innovative methodologies and existing assets
to share actionable early warnings and build
sustainability for water and climate information.
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
business elaborates Environmental and Social
Impact Assessment (ESIA) documentation,
which also includes a scoping report and,
if needed, a Resettlement Policy Framework
(RFP) and a respective Resettlement Action
Plans (RAP).
The renewable energy business’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 group of
companies at GGU 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.
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RESOURCES AND RESPONSIBILITIES CONTINUED
Since the GGU’s business is very much
dependent on such climate elements as
precipitation, wind speed and air temperature,
the business’s development will be 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.
GGU 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 during
construction and operation of the proposed
development, thereby reducing resource
consumption and greenhouse gas emissions.
GHG’s medical waste management
recordkeeping standards remain in line
with national legislative requirements. 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 conducts internal
trainings on waste management procedures.
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, GHG clinics collect
and dispose of medical and biological waste
through a specialised outsourced service.
For waste collection, GHG uses plastic bags or
containers that have sufficient strength and are
secured with staples. 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 examines
monthly reports and imposes penalties if
necessary. In total, GHG hospitals generated
682 tonnes of medical waste in 2019, compared
to 600 tonnes in 2018.
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 has responsibly reduced
these implications:
• by constructing a CO2 recovery plant, which
captures the carbon dioxide released during
the beer production process;
• by constructing a wastewater treatment
plant, that cleans wastewater chemically,
biologically and physically to obtain
ecologically safe wastewater.
As for direct environmental impact, we believe
that the impact of the insurance businesses
is not significant. Nevertheless, there are
a number of measures in place within the
business to reduce electricity, paper, water
and fuel consumption.
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 179 to 252. 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 2019 (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.
2019
2018
23,845
39,409
13,579
18,199
40,266
13,525
76,833
71,990
22,706
21,309
3.38
3.38
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ALTERNATIVE PERFORMANCE MEASURES
Alternative Performance Measures
(APMs) 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. 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.
Under an exception to the usual principles
of IFRS 10 that require consolidation of
subsidiaries, entities that meet the definition
of an “investment entity” instead measure
their investments in their subsidiaries at fair
value. Georgia Capital meets investment
entity definition under IFRS from 31 December
2019 and, as a result, the accounting basis
was changed from consolidation to fair value
measurement effective on that date. For
some time and increasingly, management
has been viewing itself as an investment
entity and has been providing alternative
performance measures (APMs) based on its
statement of net asset value (NAV Statement)
and a Management Income Statement.
The final step which triggered the adoption
of the investment entity exception was the
creation of the valuation process enshrined
in the terms of reference of the new Audit
and Valuation Committee and the creation of
that Committee on 31 December 2019. The
application of this exception brings Georgia
Capital’s IFRS financial statements more into
line with the NAV Statement and Management
Income Statement, described below. Net asset
value disclosed under the NAV Statement
immaterially differs from IFRS equity value as at
31 December 2019. The Management Income
Statement is prepared under the adjusted IFRS
methodology in 2019 and represents an APM,
which has not been audited.
Net Asset Value (NAV) Statement
The Group makes investments in portfolio
companies indirectly, held through intermediate
Georgian holding company, JSC Georgia Capital,
which is the principal subsidiary of Georgia
Capital PLC. The application of IFRS 10 requires
us to fair value the intermediate holding company
JSC Georgia Capital, which was previously
consolidated line by line. This fair value approach,
applied at the intermediate holding company
level, effectively obscures the performance of
our equity capital investments and associated
transactions occurring in the intermediate holding
company. The financial effect from the valuation
of the underlying portfolio companies are
aggregated into a single value. The breakdown
of the value of JSC Georgia Capital is presented
in Note 31 within the IFRS financial statements.
To maintain transparency in our report and aid
understanding we present a NAV Statement,
which is closely aligned with the presentation
of the JSC Georgia Capital Balance Sheet in
Note 31 of the IFRS financial statements. Net
asset value disclosed under the NAV Statement
immaterially differs from IFRS equity value as at
31 December 2019. The opening NAV was not
audited. However, the year-end 2018 NAV is
reported in the NAV Statement under the same
methodology as closing year-end 2019 NAV.
The NAV Statement is simply a “look through”
of the IFRS 10 Balance Sheet to present the
underlying performance.
The NAV Statement breaks down NAV into
its components and provides rollforward of
the related changes between the reporting
periods, including a snapshot of the Group’s
financial position at the opening and closing
dates. 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 on page 95.
– NAV per share represents total NAV
divided by the number of outstanding
shares at the end of the period, i.e. the
number of issued shares at the end of
the period less unawarded shares in
management trust.
Management Income Statement
The Management Profit and Loss Statement is
an aggregation of GCAP’s stand-alone Profit
and Loss Statement and fair value change of
portfolio companies during the reporting period.
The following methodology underlies the
preparation of Management Income Statement.
• The top part of the income statement
(GCAP Net 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 distributed or declared annual dividend
proceeds from portfolio companies during
the reporting period, b) interest income on
liquid funds and loans issued, c) interest
expenses on debt incurred at GCAP level
(which consists of the bonds issued) and
d) expenses incurred at GCAP level.
• Fair value change of portfolio companies
(Total Investment Return) represents fair value
changes in the value of portfolio companies
during the reporting period, as valued in
the period-end NAV Statement. A detailed
valuation methodology is described on page
95. We view fair value changes of portfolio
companies as a metric to measure the
total investment return of Georgia Capital’s
holdings, which itself reflects value creation
for a shareholder.
• Following the aggregation of GCAP Net
Operating Income and Total Investment
Return, we arrive at management income
before foreign exchange movements for the
period.
• Below the income before foreign exchange
movements line, to arrive at management
net income, we present GCAP gains or
losses from foreign exchange movements.
In line with the change to disclose private
businesses at fair value instead of book value
in the NAV Statement from the FY18 results
announcement, Georgia Capital is presenting
the performance of each portfolio company
in its Management Income Statement on fair
value basis starting from the 1H19 results
announcement.
Read more on financial performance
in the Strategic Review on pages
97 to 122.
Read more on about the use of APMs
in the Financial Review on pages
90 to 94.
Before the transition date of 31 December 2019,
Georgia Capital consolidated the results of its
investments in its IFRS income statement.
As a result of reflecting the change in the
status of the business to an investment entity, a
cumulative transition gain of GEL 588.8 million
was recognised on 31 December 2019.
Therefore, the FY19 profit for the year within
the IFRS consolidated income statement
was GEL 604.3 million compared to the net
income under management accounts of
GEL 71.6 million. A gain from the change
to investment entity status represents the
difference between: a) the previous carrying
amount of the subsidiaries and b) the fair
value of the subsidiaries disclosed in NAV
Statement. Starting from 2020, the net income
under the IFRS income statement is expected
to be closely aligned to the net income under
Management Income Statement.
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 99 to 107,
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 90 to 94
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.
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 investment return
A metric to measure the value
creation power of Georgia Capital
from its investments.
Net income
A performance metric to measure
the value creation power of
Georgia Capital during the period.
Total investment portfolio value plus
net other assets/liabilities 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, based on
a valuation technique believed to be
most appropriate to that investment as
described in the valuation methodology
on page 95.
NAV per share is calculated as NAV
divided by the number of outstanding
shares at the end of the period, i.e.
issued shares at the end of the period
less unawarded shares in management
trust.
GCAP net operating income reflects
the net result of: a) dividend income
accrual based on paid or declared
annual dividend proceeds from
portfolio companies to be collected
during the year; b) interest income on
liquid funds and senior loans issued;
c) interest expenses on debt incurred
at GCAP level; and d) operating
expenses incurred at GCAP level.
Fair value change of portfolio
companies (Total Investment Return)
represents fair value changes in the
value of portfolio companies during
the reporting period, as valued in the
period-end NAV Statement.
Aggregation of GCAP net operating
income and total investment return
less GCAP gains or losses from
foreign exchange movements.
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
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.
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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 portfolio
companies’ operational
performance and the profitability
of those companies’ operations.
The Company considers EBITDA
to be an important indicator of
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.
Multiple of Invested Capital
(MOIC)
A measure to evaluate
Georgia Capital’s efficiency
in allocating 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.
Value creation/total return
To measure the annual shareholder
return on each portfolio company
for Georgia Capital.
Earnings before interest, taxes,
non-recurring items, FX gain/losses
and depreciation and amortisation.
N/A
N/A
N/A
N/A
N/A
N/A
N/A
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.
MOIC is calculated as follows:
a) the numerator is the cash and non-
cash inflows from dividends and sell-
downs plus fair value of investment at
reporting date; and b) the denominator
is the gross investment amount.
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 the adjusted to remove capital
injections (if any) to arrive at the total
value creation/investment return.
GEL thousands,
unless otherwise
noted
Total investment
return
Net foreign
currency loss
Net income per
management
accounts
Difference between
Shareholder return
and IFRS profit
of portfolio
companies
Profit attributable to
non-controlling
shareholders
Gain on change in
Investment entity
status
Reversal of
intragroup dividend
income
Reversal of hotel
revaluation gains
for Group
consolidation
purposes
Reversal of fair
valuation of debt
securities
measured
at FVOCI
Reversal of gains on
intragroup sale
of assets
Other
Profit for the
period (IFRS
Consolidated)
Liquid funds
A measure to evaluate the
Company’s liquidity.
Includes marketable debt securities
and issued short-term loans.
GHG
BOG
Water
Utility
Housing
Development
P&C
Insurance
Renewable
Energy
Hospitality
and
Commercial
Real Estate
Beverages
Pipeline
businesses
Corporate
Centre
Inter-Business
Eliminations/
Consolidations
Group
total
Income Statement reconciliation for FY19
(203,109)
140,240
52,953
(23,630)
34,399
–
–
–
–
–
(203,109)
140,240
52,953
(23,630)
34,399
–
–
–
9,918
(15,017)
16,397
81,348
–
–
–
(21,948)
9,918
(15,017)
16,397
59,400
226,430
(140,240)
(17,483)
6,834
(16,119)
2,796
5,932
(10,884)
(20,803)
833
(28)
(4,782)
752
–
–
–
–
–
–
–
93,499
(21,948)
71,551
36,463
35,004
38,229
–
–
–
–
–
–
61,550
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
588,830
–
588,830
–
–
–
–
–
(97,268)
(97,268)
(16,517)
(16,517)
(6,231)
(6,231)
(3,425)
(3,425)
(4,141)
(4,141)
35,470
(16,796)
18,280
3,629
15,822
(30,683)
(3,654)
648,230
(127,582)
604,266
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RECONCILIATION OF ADJUSTED IFRS MEASURES TO IFRS FIGURES CONTINUED
VALUATION METHODOLOGY
GEL thousands,
unless otherwise
noted
GHG
BoG
Water
Utility
Housing
Development
P&C
Insurance
Renewable
Energy
Hospitality
and
Commercial
Real Estate
Beverages
Pipeline
Businesses
Corporate
Centre
Inter-Business
Eliminations/
Consolidations
Group
total
Fair Value FS
430,079
597,735
483,970
43,853
164,923
106,800
245,558
87,119
93,046 (499,215)
– 1,753,868
Balance sheet reconciliation at 31 December 2019
Transfer of market
value of 19.9%
in BoG to
Corporate Center
Other
Total equity
attributable to
shareholders
of Georgia
Capital (IFRS)
–
–
(597,735)
–
–
–
–
–
–
–
–
–
–
–
–
–
597,735
–
–
–
–
(1,846)
(1,846)
430,079
–
483,970
43,853
164,923
106,800
245,558
87,119
93,046
98,520
(1,847) 1,752,021
Equity investments in Georgia Capital’s portfolio companies are measured at fair values at each reporting date in accordance with IFRS 13, Fair Value
Measurement. Fair value, as defined in IFRS, 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 listed portfolio companies
Equity instruments listed on an active market are valued at the price within the bid/ask spread, that is most representative of fair value at the reporting
date, which usually represents the closing bid price.
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.
The value of an unquoted equity investment is generally crystallised through the sale or flotation of the entire business. Therefore, the estimation
of fair value is based on the assumed realisation of the entire enterprise at the reporting date. Recognition is given to the uncertainties inherent in
estimating the fair value of unquoted companies and appropriate caution is applied in exercising judgements and in making the necessary estimates.
Fair value of equity investment is usually determined using one of the valuation methods 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 the company 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. Some peer-group companies’ multiples may be more heavily weighted during valuation if their characteristics are closer to those of
the company being valued than others.
As a rule of thumb, last 12-month earnings will be used for the purposes of valuation. Earnings are adjusted where appropriate for exceptional,
one-off or otherwise adjustable items.
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/adjusted EBITDA for the last 12 months (LTM EBITDA). In exceptional cases,
where EBITDA is negative, peer EV/Sales (enterprise value to sales) multiple may be applied to last 12-month recurring/adjusted 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 (assuming 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 be determined using the 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 allocated between Georgia Capital and other shareholders of the portfolio
company, if any.
Fair valuation of equity using peer multiples can be used for businesses within financial sector (e.g. insurance companies).
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VALUATION METHODOLOGY CONTINUED
FINANCIAL REVIEW
The financial review includes forward looking statements that have not been revised to take
account of our companies’ rapidly evolving responses to the coronavirus outbreak and its
effects on their prospects. They should be read in conjunction with the discussion of the
outbreak’s possible consequences included in Principal risks and uncertainties on page 75.
Discounted cash flow
Under the discounted cash flow (DCF) valuation method, fair value is estimated by deriving the present value of the business using reasonable
assumptions of expected future cash flows and the terminal value, and the appropriate risk-adjusted discount rate that quantifies the risk inherent
to the business. The discount rate is estimated with reference to the market risk-free rate, a risk adjusted premium and information specific to the
business or market sector. DCF is mostly used to estimate fair values of project-based cash-flow driven businesses.
Net Asset Value
The net assets methodology (NAV) involves estimating fair value of equity investment in a private portfolio company based on its book value at
reporting date. This method is appropriate for businesses whose value derives mainly from the underlying value of its assets and where such assets
are already carried at their fair values (fair values determined by professional third-party valuation companies) on the balance sheet.
Validation
Fair value of investments estimated using one of the valuation methods described above is cross-checked 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 depending on the industry of the company. The company develops fair value range based on these techniques and
analyses whether the 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.
Based on DCF, the company might make the upward or downward adjustment to the value of the valuation target as derived from the primary
valuation method. If fair value estimated using discounted cash flow analysis significantly differs from the fair value estimate derived using the
primary valuation method, the difference is examined thoroughly, and judgement is applied in estimating fair value at the measurement date.
Valuation of equity investments in private portfolio companies
The table below summarises fair valuation of equity investments in our private portfolio companies as at 31 December 2019:
GEL thousands, unless otherwise noted
Valuation method
Multiple applied
Late stage portfolio
Water Utility
Housing Development
P&C Insurance
Early stage portfolio
Renewable Energy
Hospitality and Commercial Real Estate
Beverages – wine
Beverages – beer
Pipeline
Education
Auto Service
Digital Services
Other
Total
1 Combination of the last six months and the next six months earnings.
EV/EBITDA (LTM)
Discounted Cash Flow
P/E (LTM)
At acquisition price
NAV
EV/EBITDA (LTM)
EV/Sales (LTM)
At acquisition price
EV/EBITDA1
At acquisition price
At cost
8.8
n/a
9.0
n/a
n/a
10.0
2.2
n/a
10.4
n/a
n/a
Fair value
692,746
483,970
43,853
164,923
439,477
106,800
245,558
72,042
15,077
93,046
56,350
25,757
8,790
2,149
1,225,269
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.
The Group operates as a holding company of a diversified group of companies focused on acquiring and developing businesses in Georgia, and
its strategy is to exit portfolio companies over a five to 10 year time horizon – it is not in the business of managing or owning portfolio companies
indefinitely. As such, and in order to present 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 a holding company basis (management accounts). Our Group
level discussion therefore focuses more on the management accounts, whereas, at the portfolio company level we present IFRS financial statements
for each company and our discussion focuses on IFRS results.
Georgia Capital meets investment entity definition under IFRS from 31 December 2019 and as a result, the accounting basis was changed from
consolidation to fair value measurement effective on that date. The application of this exception brings Georgia Capital’s IFRS financial statements
more into line with the management accounts. For details on the change in accounting basis please refer to pages 90 to 91. To provide full
transparency and appropriate balance between our management account and IFRS discussion, a full reconciliation of our holding company basis
management accounts to the IFRS statements is provided on pages 93-94. The management accounts are an alternative performance measure
(APM); the basis for their preparation is described on pages 90 to 92.
Performance Highlights (IFRS)
GEL thousands, unless otherwise noted
Group consolidated
Revenue1
Gross profit1
Cash flow from operating activities excluding IFRS 161
GHG
Revenue
EBITDA excl. IFRS 16
Private, late stage
Revenue, Water Utility
EBITDA2, Water Utility
Gross real estate profit, Housing Development
EBITDA2, Housing Development
Earned premiums, net, P&C Insurance
Net income, P&C Insurance
Private, early stage
Revenue, Renewable Energy
Revenue, Hospitality and Commercial Real Estate
Revenue, Beverages3
Private, pipeline
Revenue, periodic technical inspection (PTI)4
FY19
FY18
Change
1,473,437
590,413
228,539
960,558
154,220
163,454
95,075
15,794
(3,466)
75,339
18,325
16,171
37,588
124,705
12,917
1,282,995
493,111
163,502
846,306
132,274
149,127
83,376
21,373
15,994
67,488
17,082
–
38,467
76,214
–
14.8%
19.7%
39.8%
13.5%
16.6%
9.6%
14.0%
-26.1%
NMF
11.6%
7.3%
NMF
-2.3%
63.6%
NMF
1 Consolidated IFRS numbers include GHG results. Please refer to GHG’s public announcement on FY19 performance, available at http://ghg.com.ge/financial-results.
2 EBITDA is an alternative performance measure (APM) and is defined on page 255 in the glossary.
3
4 The PTI business is presented within Auto Service segments results.
Includes revenue from distribution business.
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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)/gain
Net realised gains from investment securities measured at FVPL
Net realised gains from investment securities measured at FVOCI
Interest income
Interest expense
Net operating income before non-recurring items
Net non-recurring items
Gain from change in investment entity status
Profit before income tax expense
Income tax expense
Profit for the period
Total profit/(loss) attributable to:
– shareholders of Georgia Capital PLC
– non-controlling interests
– basic earnings per share
– diluted earnings per share
FY19
FY18
1,473,437
(883,024)
590,413
(317,927)
272,486
357
24,953
(110,075)
(41,663)
1,654
1,187
30,672
(150,370)
29,201
(9,130)
588,828
608,899
(4,633)
604,266
569,262
35,004
16.45
16.09
1,282,995
(789,884)
493,111
(268,608)
224,503
247
23,875
(66,449)
(37,546)
–
–
23,275
(96,895)
71,010
(41,251)
–
29,759
(3,606)
26,153
(254)
26,407
(0.01)
(0.01)
Change
14.8%
11.8%
19.7%
18.4%
21.4%
44.5%
4.5%
65.7%
11.0%
NMF
NMF
31.8%
55.2%
-58.9%
-77.9%
NMF
NMF
28.5%
NMF
NMF
32.6%
NMF
NMF
The Group recorded net operating income before non-recurring items of GEL 29.2 million (down 58.9% y-o-y) reflecting increased depreciation and
amortisation expenses, net interest expenses and unfavourable impact from foreign exchange movements:
• Net Interest expense amounted to GEL 119.7 million (up 62.6% y-o-y), mainly reflecting impact from IFRS 16 on GHG and the increased holding
company net interest expenses due to incomplete 2018 year of operations for GCAP since its demerger on 29 May 2018. Further, the net interest
expenses were up in the water utility and in the beverages businesses in line with increased leverage to finance capital expenditures for water
supply infrastructure and to support the working capital needs of the beer business, respectively.
• Foreign exchange loss amounted to 41.7 million, more than half of which 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$ 192 million (GEL 550 million)
at 31 December 2019. The remaining foreign currency loss is mainly attributable to the pharmacy and distribution and water utility businesses.
About 70% of inventory purchases in the pharmacy and distribution business are denominated in foreign currency and Water Utility’s borrowings
are mainly denominated in EUR. Overall, in 2019 the local currency devalued by 7.1% against USD and 4.5% against EUR.
• Depreciation and amortisation increased to GEL 110.1 million (up 65.7% y-o-y) reflecting a) IFRS 16 impact, mainly on GHG; b) launch of the PTI
business; c) acquisition of three top schools and Hydrolea HPPs; and d) construction completion of greenfield renewable and hotel projects.
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.
Under an exception to the usual principles of IFRS 10 that require consolidation of subsidiaries, entities that meet the definition of an “investment
entity” instead measure their investments in their subsidiaries at fair value. Georgia Capital meets investment entity definition under IFRS from
31 December 2019 and, as a result, the accounting basis was changed from consolidation to fair value measurement effective on that date. Georgia
Capital recorded a gain from the change to investment entity status of GEL 589 million in the FY19 IFRS income statement, representing the
difference between: a) the previous carrying amount of the subsidiaries, and b) the fair value of the subsidiaries disclosed in NAV Statement below.
As a result of the movements described above, consolidated IFRS net profit was GEL 604.3 million in 2019 (up from GEL 26.2 million in 2018).
2019 diluted and basic EPS were GEL 16.09 and GEL 16.45, respectively, up from GEL (0.01) in 2018.
Georgia Capital highlights – Management Accounts1 (GEL thousands except for per share information)
As a result of strong operating performance across the businesses, launch of greenfield projects and acquisitions, Georgia Capital generated
consolidated gross profit of GEL 590.4 million in 2019 (up 19.7% y-o-y). The increase was driven by the following factors:
a) The healthcare and pharmacy business gross profit was up by 13.0% to GEL 284.3 million, as GHG started to capture benefits following the
completion of significant three-year investment programme in 2018. The y-o-y increase in gross profit from healthcare services was largely driven
by a successful ramp-up of the newly-launched hospitals. The double-digit growth in gross profit in the pharmacy and distribution business
reflects both the business expansion by 26 new pharmacies and organic sales growth.
b) The beverages business gross profit was up 50.7% y-o-y to GEL 44.4 million on the back of increased export wine sales and increased revenues
following the successful launch of new beer brands.
c) The water utility business gross profit was up by 12.4% to GEL 115.8 million mainly on the back of increased electricity sales revenue following the
electricity market deregulation, effective from May 2019.
d) The renewable energy business recorded GEL 16.1 million gross profit, reflecting the launch of Mestiachala hydro power plants in mid-2019 and
acquisition of Hydrolea HPPs end of October 2019.
e) Acquisitions of three top schools in 2019 contributed GEL 11.4 million to the consolidated gross profit.
f) The launch of the periodic vehicle inspection business in 2019 added GEL 8.5 million of the gross profit for the Group.
g) The gross profit from Housing Development was down by 52.1% to GEL 7.6 million, negatively affected by a delay in receiving the construction
permit from Tbilisi City Municipality for Digomi project.
Operating expenses were up 18.4% y-o-y in 2019, where the most material y-o-y impact was driven by the increased holding company costs due
to incomplete 2018 year of operations for GCAP since its demerger on 29 May 2018. Further, the increased operating expenses reflect acquisitions,
launch of periodic technical inspection business operations and greenfield renewable and hotel projects. The operating expenses were also up due
to upfront costs for the new residential projects in the housing development business, while anticipating to launch the residential and construction
projects in the pipeline. As a result, consolidated EBITDA was up by 21.4% y-o-y to GEL 272.5 million in 2019.
Georgia Capital NAV overview2
NAV per share, GEL3
Net Asset Value (NAV)
Total portfolio value
Liquid assets & loans issued
Net debt
Georgia Capital performance2
Total portfolio value creation
of which, listed businesses
of which, private businesses
Investments
Share buybacks
Dividend income
Management fee expense ratio4
Net income/(loss)
Dec-19
Dec-18
46.84
1,753,868
2,253,083
363,773
(493,565)
44.32
1,688,221
1,883,374
605,130
(196,915)
FY19
FY18
134,371
(33,937)
168,308
357,557
124,781
122,219
1.8%
71,551
(683,209)
(637,780)
(45,429)
84,785
87,414
72,504
1.0%
(766,131)
Change
5.7%
3.9%
19.6%
-39.9%
NMF
Change
NMF
-94.7%
NMF
NMF
42.7%
68.6%
0.8ppt
NMF
1 Please see the pages 90 to 92 where we describe the methodology for management accounts and where we define each highlight presented in the table above.
2 Please see the NAV rollforward on page 101 in NAV Statement, where we present the drivers of change in NAV and portfolio value.
3 We calculate NAV per share in both years as NAV divided by the number of issued shares at the end of the period less unawarded shares in management trust. This represents
a change from adopted approach in 2018 Annual Report, when bought back shares and unvested management shares were also deducted for calculation.
4 LTM GCAP management fee expenses expressed as a percentage of average market capitalisation during the last twelve months. Total LTM operating expenses including fund
type expenses at 2.4% in FY19. FY18 expense ratio is not comparable due to incomplete year of operations for GCAP since its demerger on 29 May 2018.
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Key points
• NAV per share up 5.7% to GEL 46.84 on the back of 3.9% growth in NAV and 1.7% decrease in number of shares outstanding.
– The private businesses led to 10.1% growth in NAV per share, which was offset by 4.4% negative impact from listed businesses.
– GEL 165 million value creation from BoG, offset by GEL 199 million decrease in the value of our holding in GHG.
– GEL 168 million value creation in private portfolio (18.6% growth in private portfolio value), of which, value creation excluding multiple change
Net Asset Value (NAV) Statement
Our NAV Statement breaks down NAV into its components and provides rollforward of the related changes between the reporting periods,
including a snapshot of the Group’s financial position at the opening and closing dates. For the detailed valuation methodology of the investments,
please refer to page 95. Net asset value disclosed under the NAV Statement immaterially differs from IFRS equity value as at 31 December 2019. The
methodology underlying the presentation of the NAV Statement is included on page 90.
was GEL 145 million.
– Increase of our shareholding in GHG by 13.6% to 70.6% in exchange for 3.4 million CGEO share issuance.
– 3.5 million CGEO shares worth GEL 125 million bought back in 2019, while 2.7 million shares were cancelled.
• Disciplined investments amounting to GEL 358 million across our portfolio lay grounds for future value creation, of which:
– GEL 113 million capital allocation for acquisition of 13.6% equity stake in GHG.
– GEL 40 million investment in securing high quality partnerships with three top schools with excellent management teams.
– GEL 46 million investment in acquisition of high-quality wind and hydro assets, increasing installed capacity by 42MW to 91MW.
– GEL 37 million invested in the development of pipeline hotels in line with the strategy to develop more than 1,000 rooms.
– Alaverdi acquisition for GEL 16 million tripled existing wine production capacity and added 244 hectares of vineyards.
– GEL 10 million allocation for acquisition of the second largest auto service industry player, Amboli, and successful launch of PTI.
– Kazbegi brand acquisition for GEL 10 million, which added the top Georgian beverages brand to our beer business portfolio.
– Entered the high growth digital services industry by acquiring the leading digital marketing agency, Redberry, for GEL 9 million.
• GEL 122 million dividends were collected from our listed and private late stage assets (GEL 72.5 million in 2018)1.
• Consolidated IFRS cash flow from operating activities, excluding IFRS 16 impact, up 39.8% y-o-y to GEL 229 million in 2019.
NAV Statement
GEL thousands, unless otherwise noted
Dec-18
1. Value
creation1
2a.
Investments
2b.
Buybacks
2c.
Dividends
3. Operating
expenses
4. Liquidity/
FX/Other
Dec-19
Change
%
Listed portfolio companies
GHG
BoG
Total listed portfolio value
Listed portfolio value change %
Private portfolio companies
Late stage
Water Utility
Housing Development
P&C Insurance
Early stage
Renewable Energy
Hospitality and Commercial Real Estate
Beverages
Of which, wine
Of which, beer
Pipeline
Education
Auto Service
Digital Services
Other
520,332
457,495
977,827
(199,127)
165,190
(33,937)
-3.5%
628,326 157,009
74,953
431,017
35,624
66,785
46,432
130,524
(5,098)
271,288
–
61,182
9,918
149,079
(15,016)
61,027
(1,098)
56,771
(13,918)
4,256
16,397
5,933
–
7,071
17,056
(1,326)
–
–
(659)
188
112,856
–
112,856
11.5%
698
–
698
–
173,287
45,618
86,561
41,108
16,369
24,739
70,716
49,279
10,027
8,790
2,620
Total private portfolio value
905,547 168,308
244,701
Private portfolio value change %
18.6%
27.0%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(3,982)
(24,950)
(28,932)
-3.0%
(93,287)
(22,000)
(59,254)
(12,033)
–
–
–
–
–
–
–
–
–
–
–
(93,287)
-10.3%
Total portfolio value (1)
1,883,374 134,371
357,557
Total portfolio value change %
7.1%
19.0%
– (122,219)
–
-6.5%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
430,079
–
–
597,735
– 1,027,814
5.1%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
692,746
483,970
43,853
164,923
439,477
106,800
245,558
87,119
72,042
15,077
93,046
56,350
25,757
8,790
2,149
-17.3%
30.7%
5.1%
10.3%
12.3%
-34.3%
26.4%
62.0%
74.6%
64.7%
42.8%
26.9%
NMF
NMF
NMF
NMF
NMF
NMF
– 1,225,269
35.3%
–
35.3%
– 2,253,083
19.6%
–
19.6%
Net debt (2)
of which, cash and liquid funds
of which, loans issued
of which, gross debt
Net other assets/(liabilities) (3)
of which, share-based compensation
(196,915)
299,650
305,480
(802,045)
1,762
–
–
–
–
–
–
–
(193,482)
(188,842)
(4,640)
–
(51,219)
–
(124,781)
(124,781)
–
–
–
–
72,875
72,875
–
–
49,344
–
(19,869)
(19,869)
–
–
(14,522)
(14,522)
(31,393)
172,856
(148,956)
(55,293)
8,985
14,522
(493,565)
211,889
151,884
(857,338)
(5,650)
–
NMF
-29.3%
-50.3%
6.9%
NMF
NMF
Net Asset Value (1)+(2)+(3)
1,688,221 134,371
112,856
(124,781)
–
(34,391)
(22,408) 1,753,868
3.9%
NAV change %
8.0%
6.7%
-7.4%
0.0%
-2.0%
-1.3%
3.9%
1 Dividends received by Georgia Capital, referred throughout this document, were collected through JSC Georgia Capital, Georgian holding company of the Group.
allocated to listed portfolio.
NAV per share increased by 5.7% during 2019 on the back of value creation across our portfolio companies and share buybacks. The value creation
and buybacks contributed by 8.0% and 3.2% to the NAV per share growth, respectively, which was partially offset by: a) 3.4 million GCAP share
issuance for the acquisition of 13.6% stake in GHG (-2.1% impact); b) management platform related costs (-2.0% impact); and c) net interest expense
and FX movements (-1.3% impact).
1 Please see definition in glossary.
2 Please see Note 3 on page 99.
3 NAV per share allocation across listed and private assets is calculated based on respective share in total portfolio value. 3.4 million shares issued for GHG acquisition is fully
Shares outstanding
38,089,558
–
3,435,438 (4,083,025)
–
– 37,441,971
Net Asset Value per share2
44.32
NAV per share change %
3.53
8.0%
(0.95)
-2.1%
NAV per share, listed portfolio3
NAV per share, private portfolio3
23.01
21.31
–
–
1.43
(0.90)
(0.59)
3.2%
0.0%
-2.0%
-1.3%
-1.7%
5.7%
-8.4%
20.9%
46.84
5.7%
21.07
25.77
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Portfolio overview
Our portfolio value was up by 19.6% to GEL 2.3 billion in 2019, reflecting 5.1% and 35.3% growth in listed and private businesses, respectively.
The value of our investment in listed assets increased by GEL 50 million during 2019 on the back of: a) GEL 140 million market value increase of our
investment in BoG; b) GEL 113 million investment in GHG to increase equity stake from 57% to 70.6%; c) GEL 203 million market value decrease
in our 70.6% holding in GHG, and d) GEL 29 million dividends from BoG and GHG. The value of our private portfolio companies increased by
GEL 320 million in 2019 reflecting GEL 168 million value creation and GEL 151 million net capital allocation from Georgia Capital.
1) Value creation
The private portfolio businesses generated GEL 168 million value for the Group in 2019 (10% growth in NAV per share), as a result of the strong
operating performances and uplifts in valuations from changes in the peer group multiples. However, this was partially offset by GEL 34 million
negative value creation from listed assets (-2.0% impact on NAV per share). BoG share price recovery during 2019 strongly supported NAV per
share growth with GEL 165 million value creation (9.8% growth in NAV per share). However, we had a GEL 199 million negative value creation on
our investment in GHG (-11.8% impact on NAV per share), as GHG share price decreased from 2.04 on 31 December 2018 to 1.23 on 31 December
2019. Our holdings of GHG equity shares increased from 57% to 70.6% on 18 December 2019 following the completion of a share exchange facility
(Share Exchange Facility), whereby GCAP exchanged one share in GHG for 0.192 shares in GCAP. Further details of the transaction are available at
the following link: https://georgiacapital.ge/ir/ghg-shares. Following the completion of the Share Exchange Facility, GCAP issued 3.4 million
new shares valued at GEL 113 million for the acquisition of 13.6% equity stake in GHG.
The table below summarises value creation drivers in our businesses in 2019:
Portfolio businesses
GEL thousands
Listed
GHG
BoG
Private
Late stage
Water Utility
Housing Development
P&C Insurance
Early stage
Renewable Energy
Hospitality and Commercial Real Estate
Beverages
of which, wine
of which, beer
Pipeline
Education
Auto Service
Digital Services
Other
Total portfolio
Operating
performance
(1)
Greenfields
(2)
Multiple change
and FX
(3)
Value creation
(1)+(2)+(3)
109,745
136,926
78,954
35,624
22,348
(27,181)
–
(8,646)
(18,535)
(4,617)
(13,918)
–
–
–
–
–
109,745
34,961
–
–
–
–
18,564
–
18,564
–
–
–
16,397
–
17,056
–
(659)
34,961
23,602
20,083
(4,001)
–
24,084
3,519
–
–
3,519
3,519
–
–
–
–
–
–
23,602
(33,937)
(199,127)
165,190
168,308
157,009
74,953
35,624
46,432
(5,098)
–
9,918
(15,016)
(1,098)
(13,918)
16,397
–
17,056
–
(659)
134,371
Listed businesses
GHG continued to deliver a strong operating performance in 2019 with EBITDA increasing 16.6%1 y-o-y in 2019. GHG improved its adjusted return on
invested capital, from 13.9% to 14.9%, and posted 25.7% y-o-y growth2 in operating cash flow generation in 2019. A substantially reduced investment
programme was reflected in a positive free cash flow generation of GEL 77 million in 2019 (up from GEL 14 million in 2018). Georgia Capital received
a GEL 4.0 million dividend payment from GHG on 12 July 2019. The strong operating performance was not reflected in GHG’s share price, which
retreated from GBP 2.04 at 31 December 2018 to GBP 1.23 at 31 December 2019. As a result, we had a GEL 199 million negative value creation on
our investment in GHG. GHG’s public announcement on FY19 performance is available at http://ghg.com.ge/financial-results.
BoG’s share price recovered during 2019 by 18.0% to GBP 16.25 at 31 December 2019 leading to GEL 140 million increase in the market value of
the Group’s equity stake in BoG. In June 2019, we received GEL 25.0 million dividend payment from BoG. As a result, aggregate value creation from
BoG investment was GEL 165 million in 2019. BoG’s public announcement on FY19 performance is available at https://bankofgeorgiagroup.
com/results/earnings.
Private late stage businesses
The 14.0% increase in Water Utility’s LTM EBITDA contributed to approximately GEL 99.3 million growth in Enterprise Value (EV), which was partially
offset by GEL 46.3 million net debt widening. Strong cash flow generation and operating performance enabled business to pay GEL 22.0 million
dividend in 2019, which was reduced y-o-y. While the recent investment in infrastructure and water supply network modernization are expected to
positively affect the tariff-setting process. The scheduled WSS1 tariff revision for the upcoming 3-year regulatory period effective from 1 January 2021
dictated prudence in setting the dividend. The valuation was slightly affected by a negative GEL 4 million effect from the multiple decrease from 8.84
at 31 December 2018 to 8.80 at 31 December 2019. As a result, GEL 75.0 million equity value was created in 2019.
Housing Development is valued at GEL 43.9 million using discounted cash flow method. Following the receipt of construction permit for its largest
residential project, Digomi, together with the strong project pipeline, expected cash inflows were increased, leading to GEL 35.6 million in value creation.
Construction works commenced on 1 July 2019 and the business already reached 76.9% sales progress in the first stage of Digomi project. Completion
of earlier projects and strong sales allowed the business to make a GEL 59.3 million dividend distribution in 2019, up from GEL 10 million last year.
The 7.3% increase in P&C Insurance’s LTM net income resulted in GEL 12 million increase in fair value, while the multiple increase from 7.4 to 9.0
generated GEL 24.1 million in value. Multiples improved significantly across all peer group companies during 2019. P&C Insurance paid a dividend
of GEL 12.0 million in 2019 on the back of strong cash flow generation and stable operating performance. As a result, GEL 46.4 million value was
created in 2019.
Private early stage businesses
Renewable Energy has successfully commissioned its first hydro power plant in 1H19, which is still carried at cost in the NAV Statement. The 50MW
Mestiachala HPPs posted GEL 12.6 million EBITDA since the launch in April 2019, of which, GEL 10.0 million represents the expected insurance
reimbursement for business interruption due to flood damage discussed on page 115. We expect that value creation from Mestiachala HPPs will be
reflected in the NAV over the coming quarters, as the hydro demonstrates stabilised performance and cash flow generation following the full recovery
from the flood damage.
Hospitality and Commercial Real Estate created GEL 9.9 million value during 2019. The business recorded GEL 18.6 million revaluation gain from
the first-time revaluation of greenfield hotels and commercial assets, which was partly offset by GEL 8.6 million decrease in NAV due to the increased
operating expenses for development of pipeline hotels. Our new hotel in the ski and mountain resort Gudauri was opened on 13 December 2019,
and the business is working on two new Tbilisi hotels: we plan to open the Ramada Melikishvili in 1H20 and follow with the Kempinski hotel in 2H20.
The December 31, 2019 NAV growth also reflects a GEL 49.3 million addition of commercial space (ground floors in completed residential projects)
allocated to Hospitality and Commercial Real Estate from Housing Development. The properties were valued at c.10% yield in USD terms.
The wine business continued to progress in line with its strategic priorities, delivering a 44% topline growth. However, the continued investment in
export market diversification together with integration costs of the Kindzmarauli and Alaverdi acquisitions drove GEL 4.6 million negative impact from
operating performance. The multiple increase from 9.1 to 10.0 added GEL 3.5 million value and as a result, value creation was negative GEL 1.1 million
in 2019. The business expects to continue extracting synergies from Kindzmarauli and Alaverdi and to benefit from export market diversification in
the coming quarters. The Alaverdi winery, which added 244 hectares of vineyards and tripled the business’s production capacity, is carried at its
acquisition price.
The beer business performance was negatively affected by delays in launching Heineken brands, and had a negative GEL 13.9 million impact on value
creation. The 67.9% increase in LTM normalised2 revenue drove GEL 43.0 million increase in Enterprise Value, which was offset by GEL 22.3 million
net debt widening and GEL 14.6 million capital allocation from Georgia Capital to finance working capital needs. Operating performance began to
improve significantly in 2H19, while all Heineken brands have been launched from July, and the beer EBITDA was at break-even level in 2H19.
Pipeline businesses
Auto Service combines our vehicle technical inspection business valued at GEL 20.7 million and our Amboli auto service business valued at its
acquisition price of GEL 5.0 million at 31 December 2019. Periodic technical inspection became mandatory in Georgia in 2H18 and the business
successfully launched 26 PTI centres in March 2019, while managing to generate GEL 3.3 million EBITDA in 2019. At 31 December 2019, the periodic
technical inspection business was valued using EBITDA earnings of GEL 6.7 million3 and an EV/EBITDA multiple of 10.4, resulting in the GEL 20.7 million
valuation. As the greenfield business has demonstrated stable performance, a GEL 17.1 million value was created from the revaluation in 2019 on top
of the GEL 5.0 million capital allocated from Georgia Capital.
The Education business and the Digital Services business are carried at acquisition prices at 31 December 2019. We expect that value creation
from recent acquisitions will be reflected in NAV Statement over the coming quarters.
We continued the research and evaluation of new investment opportunities, while GEL 0.7 million feasibility costs were expensed during 2019,
representing a negative value creation on Other pipeline projects.
1 Excluding IFRS 16 impact.
2 Water supply and sanitation.
1 Water supply and sanitation.
2 Normalised for annualisation of revenues from newly launched brands.
3 Combination of the last six months and the next six months earnings.
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FINANCIAL REVIEW CONTINUED
2) Investments
During 2019, we invested GEL 358 million across our portfolio, of which, GEL 113 million was invested in listed businesses, GEL 173 million was invested
in early stage portfolio companies and GEL 71 million in the pipeline businesses. The following capital allocation decisions were made during 2019:
• GEL 113 million capital was used for the acquisition of 13.6% holding in GHG as part of Share Exchange Facility.
• GEL 45.6 million was allocated to Renewable Energy in 2019 for the acquisition of Hydrolea HPPs (GEL 29.5 million) and Qartli WPPs
(GEL 12.6 million), while GEL 3.5 million was allocated for the development of pipeline HPPs and WPPs.
• GEL 37.3 million cash capital was allocated to Hospitality and Commercial Real Estate for development of pipeline hotels, while we also
allocated finished commercial properties of GEL 49.3 million valued at c.10% yield in USD terms.
• GEL 16.4 million was allocated to Wine for the acquisition of Alaverdi winery.
• GEL 10.1 million was invested in Beer for the acquisition of prominent beverages brand Kazbegi. We also allocated GEL 14.6 million to finance
working capital needs.
• GEL 49.3 million was allocated to Education in 2019. GEL 39.7 million was invested in securing high quality partnerships with three top schools
with excellent management teams. GEL 1.3 million was allocated for the existing land development, GEL 2.3 million was used to acquire new land
for a premium school development and GEL 5.2 million was used to acquire new land for a mid-level school development.
• GEL 10 million was allocated to Auto Service, of which GEL 5 million was for the launch of PTI business. In addition, GEL 3.4 million was used
to acquire an 80% equity stake in Amboli and GEL 1.6 million was an additional pro-rata equity capital injection into Amboli to fund the growth
of the business.
• GEL 9 million was allocated to Digital Services, of which, GEL 1.2 million was for the acquisition of Redberry and GEL 7.6 million was an
additional equity capital injection to fund the business growth.
• GEL 2 million capital was invested in the research and evaluation of new investment opportunities.
3) Dividends
Georgia Capital recorded GEL 122 million dividends in 2019, of which, GEL 29 million were from listed assets and GEL 93 from late stage
businesses: BoG – GEL 25.0 million, GHG – GEL 4.0 million, P&C Insurance – GEL 12 million, Water Utility – GEL 22.0 million and Housing
Development – GEL 59.3 million.
Valuations of our holdings in portfolio companies reflecting value creation and capital allocation activities discussed above are summarised in the
following table. The table also shows multiples applied at year-end 2019 and 2018:
GEL thousands, unless otherwise noted
Valuation method
Fair value
31-Dec-19
Fair value
31-Dec-18
Change Change %
Multiple1
31-Dec-19
Multiple1
31-Dec-18
Listed portfolio (1)
GHG
BoG
Private portfolio (2)=(a)+(b)+(c)
Private late stage portfolio (a)
Water Utility
Housing Development
P&C Insurance
Private early stage portfolio (b)
Renewable Energy
Hospitality and Commercial Real Estate
Beverages – wine4
Beverages – beer
Private pipeline (c)
Education
Auto Service
Digital Services
Other
Public markets
Public markets
1,027,814
430,079
597,735
977,827
520,332
457,495
49,987
(90,253)
140,240
5.1%
-17.3%
30.7%
1,225,269
905,547
319,722
35.3%
692,746
628,326
64,420
10.3%
EV/EBITDA LTM2
Discounted Cash Flows
P/E (LTM)
483,970
43,853
164,923
431,017
66,785
130,524
52,953
(22,932)
34,399
12.3%
-34.3%
26.4%
439,477
271,288
168,189
62.0%
At acquisition price
NAV3
EV/EBITDA (LTM)
EV/Sales (LTM)
At acquisition price
EV/EBITDA5,6
At acquisition price
At cost
106,800
245,558
72,042
15,077
93,046
56,350
25,757
8,790
2,149
61,182
149,079
56,771
4,256
5,933
7,071
(1,326)
–
188
45,618
96,479
15,271
10,821
87,113
49,279
27,083
8,790
1,961
74.6%
64.7%
26.9%
NMF
NMF
NMF
NMF
NMF
NMF
–
–
8.8
N/A
9.0
N/A
N/A
10.0
2.2
N/A
10.4
N/A
N/A
–
–
8.8
N/A
7.4
N/A
N/A
9.1
2.2
N/A
N/A
N/A
N/A
Total portfolio value (3)=(1)+(2)
2,253,083 1,883,374
369,709
19.6%
Net debt overview
Net debt increased by GEL 297 million to GEL 494 million in 2019, where the increase was driven primarily by GEL 125 million share buybacks and
by net GEL 121 million cash investments. GCAP cash operating expenses of GEL 20 million, foreign exchange loss of GEL 21 million and Share
Exchange Facility transaction costs of GEL 6 million also contributed to the widening of Net Debt.
1) Investments and dividends
During 2019, GEL 358 capital was invested across our portfolio companies, of which GEL 194 million was cash capital allocation, GEL 113 million was
share capital allocation and GEL 49 million was commercial real estate spaces allocation to the commercial real estate business, as described earlier
in this report. Further, GEL 73 million cash dividends were collected from our portfolio companies. As a result, net increase in net debt from net cash
investments was GEL 121 million.
2) Buybacks
During 2019, 3.5 million shares were bought back for total cash consideration of GEL 125 million (US$ 43.8 million), of which, 2.1 million shares were
bought under the share buyback programme and 1.4 million shares for the management trust. GCAP cancelled 2.7 million shares bought back under
the completed US$ 45 million share buyback programme, transferred 0.7 million shares from treasury to the management trust and issued 0.7 million
shares for share compensation awards in respect of FY18 services. The buyback and cancellation (3.2% growth in NAV per share) together with
issuance of 3.4 million shares (-2.1% impact on NAV per share) drove a 1.7% decrease in the number of outstanding shares during 2019. Please see
the detailed rollforward of changes in the number of outstanding shares on page 122.
Below we describe the components of net debt as at 31 December 2019 and at 31 December 2018:
GEL thousands, unless otherwise noted
Cash at banks
Internationally listed debt securities
Locally listed debt securities
Loans issued
Total Cash and liquid funds (a)
Gross Debt (b)
Net debt (a)+(b)
31-Dec-19
31-Dec-18
118,458
69,712
23,719
151,884
363,773
142,284
129,295
28,071
305,480
605,130
(857,338)
(802,045)
(493,565)
(196,915)
Change
-16.7%
-46.1%
-15.5%
-50.3%
-39.9%
6.9%
NMF
Cash and Liquid Funds
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 2019, cash and liquid funds were allocated in internationally and locally listed debt securities. Internationally
listed debt securities include Eurobonds issued by Georgian corporates. Locally listed debt securities are local bonds issued by Georgian corporates,
which are listed and traded on the Georgian Stock Exchange.
At 31 December 2019, loans issued primarily refer to the following facilities: (i) a GEL 49.7 million (US$ 17.3 million) to the housing development business;
(ii) a GEL 28.8 million (US$ 10.0 million) loan to the hospitality and commercial real estate business; (iii) a GEL 35.7 million (US$ 12.4 million) loan to the
renewable energy business and (iii) a GEL 34.4 million (US$ 12.0 million) loan issued to the BoG holding company as part of the demerger, maturing
in March 2020. During 2019 we collected GEL 199 million net cash from the repayment of our high quality loans issued to portfolio companies,
leading to a 50% decrease in issued loan balance.
Gross Debt
At 31 December 2019, the outstanding balance of US$ 300 million six-year Eurobonds due in March 2024 was GEL 857 million, reflecting foreign
exchange loss of GEL 57 million from GEL depreciation against USD during 20191. Gross debt balance further increased by GEL 55 million coupon
accrual1, which was offset by GEL 57 million coupon payment1 in 2019.
1 Multiples are rounded to one decimal points.
2 LTM refers to Last Twelve Months, NTM refers to Next Twelve Months.
3 NAV for the hospitality and commercial real estate business refers to IFRS 13 FV measurement methodology.
4 LTM EBITDA used for wine business valuation includes distribution business.
5 Combination of the last six months and the next six months earnings.
6 Amboli, a recently acquired auto service industry player, is stated at acquisition price.
1
FX, coupon payment and coupon accrual are included in Liquidity Management/FX/Other column in NAV Statement.
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FINANCIAL REVIEW CONTINUED
Income statement (Management Accounts)
The management P&L is an aggregation of: a) GCAP’s stand-alone P&L and b) fair value change in the value of portfolio companies during the
reporting period. For details on the methodology underlying the preparation of management account income statement, please refer to page 90
in this report.
Georgia Capital generated Gross operating income of GEL 115.7 million in 2019 on the back of strong dividend inflows, as discussed above in this
report. Georgia Capital earned an average yield of 7.6% on the liquid assets and issued loans in 2019, of which 9.6% was earned on the loans issued
and 5.4% on the liquid funds. The coupon on the US$ 300 million bond, issued in March 2018, is 6.125%. As a result, GEL 6.5 million of net interest
expense was recorded during 2019 at GCAP level. The table below summarises net interest expense components for 2019 and 2018:
Income statement
GEL thousands, unless otherwise noted
Dividend income
Interest income
Realised/unrealised (loss)/gain on liquid funds
Interest expense
Gross operating income
Operating expenses
GCAP net operating income
Fair value changes of portfolio companies
Listed portfolio companies
Of which, Georgia Healthcare Group PLC
Of which, Bank of Georgia Group PLC
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 Real Estate
Of which, Beverages
Pipeline businesses
Of which, Auto Service
Of which, other
Total investment return
Income before foreign exchange movements and non-recurring expenses
Net foreign currency loss
Non-recurring expenses
Net income
FY19
FY181
Change
122,219
39,044
9,547
(55,071)
115,739
(34,391)
81,348
(62,869)
(203,109)
140,240
75,021
63,722
52,953
(23,630)
34,399
(5,098)
–
9,918
(15,016)
16,397
17,056
(659)
72,504
35,282
(5,984)
(44,711)
57,091
(18,689)
38,402
(661,655)
(413,148)
(248,507)
(94,058)
(86,944)
(67,164)
(8,824)
(10,956)
(6,682)
4,700
40,515
(51,897)
(432)
(1,326)
894
12,152
(755,713)
93,500
(20,967)
(982)
71,551
(717,311)
(25,371)
(23,449)
(766,131)
68.6%
10.7%
NMF
23.2%
NMF
84.0%
NMF
-90.5%
-50.8%
NMF
NMF
NMF
NMF
NMF
NMF
-23.7%
NMF
-75.5%
-71.1%
NMF
NMF
NMF
NMF
NMF
-17.4%
NMF
NMF
GEL thousands, unless otherwise noted
Interest income
Of which, interest income on loans issued
Of which, interest income on liquid funds
Realised/Unrealised gains on liquid funds
Interest expense
Net interest expense
FY19
39,044
23,611
15,433
9,547
(55,071)
(6,480)
FY18
Change
35,282
20,300
14,982
(5,984)
(44,711)
10.7%
16.3%
3.0%
NMF
23.2%
(15,413)
-58.0%
GCAP management fee expenses have a targeted cap of 2% of Georgia Capital’s market capitalisation. LTM management fee expense ratio was 1.8%
at 31 December 2019. Total LTM operating expense ratio including fund type expenses was 2.4% in 2019. FY18 expense ratio is not comparable due
to incomplete year of operations for GCAP since its demerger on 29 May 2018. The components of GCAP’s operating expenses are presented in the
table below:
GEL thousands, unless otherwise noted
Administrative expenses1
Management expenses – cash-based2
Management expenses – share-based3
Total operating expenses
Of which, fund type expense4
Of which, management fee
FY19
(11,542)
(8,327)
(14,522)
(34,391)
(8,488)
(25,903)
FY18
(5,717)
(5,331)
(7,641)
(18,689)
(4,337)
(14,352)
Change
NMF
56.2%
90.1%
84.0%
95.7%
80.5%
Total investment return represents the increase/(decrease) in the fair value of our portfolio. Total investment return of GEL 12 million and dividend
income of GEL 122 million together led to GEL 134 million value creation in 2019 as presented in the NAV Statement. Investment return in 2018 was
negatively impacted by adverse global market conditions at year-end and amounted to negative GEL 756 million. The reconciliation of FY19 value
creation with NAV Statement is provided on page 122. We discuss valuation drivers for each business on pages 102 to 104 and the performance of
private businesses is discussed on pages 108 to 121.
The Group’s net income is then driven by net foreign currency loss during 2019. GCAP incurred a net foreign currency loss of GEL 20.9 million
in 2019 from GEL devaluation against US dollar due to its net foreign currency liability balance amounting to c.US$ 192 million (GEL 550 million)
at 31 December 2019, i.e. difference between foreign currency denominated financial assets and financial liabilities. As a result of the movements
described above, net income was GEL 71.6 million in 2019.
1
In line with the change to disclose private businesses at fair value instead of book value in the NAV Statement from FY18 results announcement, Georgia Capital is presenting
the performance of each portfolio company in its management income statement on fair value basis starting from 1H19 results announcement. y-o-y performance has not been
discussed in details, as management believes that FY18 is not directly comparable and the y-o-y comparison is not useful for users.
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 and staff.
4 Fund type expenses include expenses such as audit fees, fees for legal advisors, Board compensation and corporate secretary costs.
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Key points
• 9.6% growth in FY19 revenues primarily driven by increased electricity sales.
• FY19 energy revenue more than doubled y-o-y, reflecting 64.4% increase in the average electricity sales price.
• Positive operating leverage of 9.0 ppts in 2019 drove 14.0% growth in EBITDA.
• Outstanding collection rates and positive operating leverage drive FY19 operating cash flow up 21.3%.
• Development capex down significantly by 49.2% and FCF was positive at GEL 16.8 million in 2019.
Income statement highlights
The 9.6% growth in FY19 water utility revenues was primarily driven by increased electricity sales, which more than doubled y-o-y and amounted
to GEL 20.2 million. The solid growth in electricity sales reflects significant improvements in average electricity sales price (up from 6.9 Tetri/KWh
to 11.3 Tetri/KWh) and continued savings in Water Utility’s self-produced electricity consumption. Over the last four years the business reduced
self-produced electricity consumption by 45.5% from 319 million KWh in 2015 to 174 million KWh in 2019 (down by 9.9% y-o-y in 2019). Electricity
market deregulation, effective from May 2019, had an immediate impact on electricity sales prices and is anticipated to positively affect revenue
streams from electricity sales going forward. Growth in top-line was also supported by increased water supply revenues (up 1.1% y-o-y) mainly
on the back of strong business activity across various industries. Continued efficiency improvements were reflected in positive operating leverage
of 9.0 ppts in 2019, leading to 14.0% y-o-y growth of FY19 EBITDA to GEL 95.1 million.
Net interest expense was up 71.7% y-o-y in 2019 in line with increased leverage during 2H18 to finance capital expenditures. The average balance
of borrowings increased from GEL 284 million in 2018 to GEL 348 million in 2019. Foreign exchange losses of GEL 7.6 million in 2019 reflect the
currency translation impact of GEL depreciation against the Euro. GGU recorded losses on its unhedged position of GEL 126.4 million in Euros
at 31 December 2019. As a result, Water Utility profit was GEL 33.2 million in 2019 (down by 3.8% y-o-y).
Balance sheet highlights
The 13.3% increase in property, plant and equipment in 2019, was primarily due to development works on water utility infrastructure carried out during
the year in order to upgrade the network. Such efficiency programmes have a dual effect of reducing own electricity consumption and increasing
third party electricity sales. Additionally, regulated capex is included in the Regulated Asset Base, used by the regulator to calculate fair return on
investment. Development capex substantially decreased during the year by 49.2%, following the completion of privatisation obligations in 1H19.
The increase in total liabilities is due to increased borrowings obtained from financial institutions to support capital expenditures.
Water Utility switched from fair value measurement of its property plant and equipment to cost model based on international best practices,
in order to better align IFRS treatment of PPE with regulatory accounting principles. Comparative periods were also retrospectively restated.
Cash flow highlights
FY19 operating cash flow was up by 21.3% to GEL 99.0 million on the back of stronger EBITDA and outstanding water supply receivable collection
rates. During 2019, the collection rates for legal entities and households were 99% and 94%, respectively. On top of improved operating cash,
the development capex almost halved and free cash flow was positive GEL 16.8 million in 2019 (up from negative GEL 66.0 million in 2018).
In 2019 Water Utility distributed dividends in amount of GEL 22.0 million.
FINANCIAL REVIEW CONTINUED
IFRS RESULTS/BUSINESS DEVELOPMENT – INDIVIDUAL BUSINESS UNITS/SEGMENTS
The following sections present the IFRS results and business development derived from our IFRS accounts for each of the late stage and early stage
portfolio companies. For the pipeline companies we present information on the investments and where available business development.
Water Utility
INCOME STATEMENT HIGHLIGHTS1
(GEL thousands, unless otherwise noted)
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
Foreign exchange (loss)/gain
Net profit
CASH FLOW HIGHLIGHTS1
Cash flow from operating activities before maintenance capex
Maintenance capex
Cash flow from operating activities
Cash flow used in investing activities
Of which, development capex (net of VAT)
Free cash flow2
Cash flow from financing activities
Net Proceeds from borrowings
Dividends paid out
Cash ending balance
BALANCE SHEET HIGHLIGHTS1
Total assets
Property, plant and equipment
Trades and other receivables
Cash balance
Total liabilities
Long-term borrowings
Total equity
Key Highlights
(GEL millions, unless otherwise noted)
Revenue
EBITDA
Development capex
Maintenance capex3
FCF
Cash from operations
Net debt
FY19
FY18
163,454
133,284
20,216
9,954
(61,054)
(7,325)
95,075
58.2%
(31,188)
(24,184)
1,104
(7,586)
33,221
98,973
(22,580)
76,393
(59,559)
(67,910)
16,834
(3,314)
48,659
(22,000)
26,581
591,036
522,702
22,357
26,581
432,741
353,021
158,295
149,127
131,814
9,052
8,261
(60,718)
(5,033)
83,376
55.9%
(23,681)
(14,086)
(6,121)
(4,970)
34,518
81,586
(22,541)
59,045
(125,091)
(133,652)
(66,044)
19,303
70,890
(28,840)
13,713
514,418
461,385
19,657
13,713
368,781
300,076
145,637
Change
9.6%
1.1%
NMF
20.5%
0.6%
45.5%
14.0%
2.3ppts
31.7%
71.7%
NMF
52.6%
-3.8%
21.3%
0.2%
29.4%
-52.4%
-49.2%
NMF
NMF
-31.4%
-23.7%
93.8%
14.9%
13.3%
13.7%
93.8%
17.3%
17.6%
8.7%
FY19
163.5
95.1
67.9
22.6
16.8
99.0
352.4
FY18
149.1
83.4
133.7
22.5
(66.0)
81.6
306.5
change
9.6%
14.0%
-49.2%
0.2%
NMF
21.3%
15.0%
Key performance metrics
(GEL millions, unless otherwise noted)
31 December 2019
Net investment
2019 dividend
ROIC4
MOIC4
IRR4
131.5
22.0
12.5%
2.6x
30.7%
1 Prior period financial statements were restated due to transition to cost model.
2 Free cash flow is calculated as follows: cash flow from operating activities less cash used in investing activities.
3 Capex figures are stated including VAT.
4 Please see definitions on page 255.
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FINANCIAL REVIEW CONTINUED
Housing Development
INCOME STATEMENT HIGHLIGHTS
(GEL thousands, unless otherwise noted)
Gross profit from apartments sale3
Gross profit from construction services
Gross real estate profit
Revaluation of commercial property
Operating expenses
EBITDA
Profit/(loss)
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 & debt securities issued
Cash, ending balance
BALANCE SHEET HIGHLIGHTS
Total assets
Land bank
Inventories
Total liabilities
Deferred income
Total equity
Key highlights
(GEL millions, unless otherwise noted)
Revenue
Gross real estate profit
EBITDA
Development capex
Maintenance capex
FCF
Cash from operations
Net debt
FY19
7,611
7,601
15,794
–
(19,260)
(3,466)
(16,796)
(8,948)
(12,439)
27,197
57,647
15,602
Dec-19
223,735
1,552
97,075
228,392
27,792
(4,657)
FY182
15,882
5,334
21,373
5,524
(10,903)
15,994
2,167
(10,154)
(13,691)
16,595
(850)
10,467
Dec-182
248,609
8,722
102,923
183,236
23,295
65,373
Change
-52.1%
42.5%
-26.1%
NMF
76.6%
NMF
NMF
11.9%
-9.1%
63.9%
NMF
49.1%
Change
-10.0%
-82.2%
-5.7%
24.6%
19.3%
NMF
2019
117.7
15.8
(3.5)
17.2
–
(21.4)
(8.9)
160.8
20183
132.4
21.4
16.0
13.7
–
(23.8)
(10.2)
107.2
Change
-11.1%
-26.1%
NMF
25.5%
NMF
10.1%
11.9%
50.0%
Key performance metrics
(GEL millions, unless otherwise noted)
31 December 2019
Net investment
2019 dividend
MOIC1
IRR1
(59.4)
59.3
2.1x
16.3%
1 Please see definition on page 255.
2
In line with new requirements under IFRS, starting from 2019 the Group ceased capitalisation of borrowing costs to cost of inventory (represented by residential apartments)
from the moment when such properties become available for sale. Comparative periods were respectively restated.
3 Revenue from apartment sales is recognised over time based on the IFRS construction progress (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 the apartment selling price to recognise revenue from apartment sales.
Key points
• The largest in-house residential project Digomi is gaining momentum.
– Construction permit received at the end of June 2019, driving significant growth in 2H19 gross profit.
– Sales progress on the first stage reached 77% of total saleable area.
– Apartment pre-sales for the second stage started in December 2019.
• GEL 59.3 million dividend was distributed in 2019.
• A masterplan brief was approved for the largest franchise deal – c.2,500 apartments to be delivered in 5 years.
Income statement highlights
The Housing Development gross profit from apartment sales fluctuates with the cycle of projects and strength of demand in the market for
affordable housing.
Housing Development successfully completed one residential project in 2019, reaching in total 10 completed projects and 2,855 completed
apartments with 100% sales progress. For most of 2019, and in the medium term, however, the largest driver of the cycle of our projects was
and will be the Digomi project, which is currently our only ongoing housing project. Digomi is our largest ever in-house residential project, with an
aggregate c.132,000 sq.m. in residential space, and also includes 35,000 sq.m. in commercial space. The project is being developed in three stages.
Stage I involves 22,089 sq.m. of residential space. Stage II will add 47,167 sq.m. in residential space to Housing Development’s inventory. Stage III
is the largest, with more than 63,014 sq.m. in residential space. A delay in receiving the construction permit from Tbilisi City Municipality delayed the
project’s launch by several months and slowed the planned momentum of our project cycle. Construction works for Stage I finally commenced in
July 2019. The project is expected to be completed in 2023.
With the permit finally approved at the end of June 2019, continued healthy market conditions meant that the Digomi project contributed to the
significant growth in 2H19 gross profit (more than doubled h-o-h and up by 8.4% y-o-y to GEL 11.0 million). The Digomi project’s sales progress
reached 77% of total sellable area in Stage I where 16,980 sq.m., with US$ 18 million value has been sold in 2019. However, the business recognised
only US$ 5.0 million sales revenue, in line with the IFRS construction progress of the project. In December 2019, Housing Development started
apartment pre-sales for the second stage of Digomi which adds an estimated US$ 53 million sales value to the Housing Development’s inventory.
The pre-sales for Stage III (the largest), are expected to kick in from 4Q20.
FY19 gross real estate profit was strongly supported by the construction segment, which generated gross profit of GEL 7.6 million in 2019,
up 42.5% y-o-y. Construction fees were mainly driven by six on-going hotel projects during the year in the hospitality business and by two third-party
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.
FY19 operating expenses increased by 76.6% y-o-y to GEL 19.3 million and resulted in negative FY19 EBITDA of GEL 3.5 million. The operating
expenses include upfront costs for the new projects. The increase reflects continued growth of the company, while anticipating to launch the
residential and construction projects in the pipeline.
Balance sheet highlights
Total assets decreased by 10.0% in 2019, mainly reflecting GEL 59.3 million dividend distribution to Georgia Capital.
Cash flow highlights
Following commencement of construction the Digomi project, Housing Development generated GEL 7.8 million operating cash flow in 2H19.
However, FY19 operating cash flow was negative GEL 8.9 million due to low levels of inventory in 1H19. In November 2019, Housing Development
has successfully placed US$ 35 million of a 3-year bonds into the local market with an annual coupon rate of 7.5%. The proceeds from placement
were used to refinance existing US$ 25 million local bonds issued in 2016. The remaining proceeds were earmarked to finance the development
of Digomi project, where cash collection was lower than expected at 42%, negatively impacted by construction permit delay.
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FINANCIAL REVIEW CONTINUED
FY18
Change
Key points
• Border third-party liability insurance and organic business growth drive revenue up 11.6% y-o-y.
• GEL 12 million dividend was paid out on the back of strong operating cash flow generation.
67,488
(25,748)
(9,520)
32,220
3,988
20,586
(652)
20,072
(2,990)
17,082
20,940
(3,907)
(10,000)
11,103
Dec-18
38,967
31,442
18,931
145,710
45,664
18,932
89,572
56,138
11.6%
21.6%
28.3%
-1.3%
94.8%
3.2%
NMF
4.6%
-10.7%
7.3%
-6.8%
NMF
44.3%
-69.2%
Change
10.6%
16.8%
-74.3%
37.4%
NMF
-74.3%
53.7%
11.5%
Income statement highlights
The FY19 P&C insurance business revenues increased by 11.6% y-o-y as a result of growth in earned premiums from: (i) compulsory border
third-party liability insurance, introduced in March 2018 (up GEL 1.5 million y-o-y); (ii) organic growth in credit life insurance (up 23.0% y-o-y); (iii) credit
unemployment and property insurance (up GEL 2.3 million y-o-y); (iv) agro insurance (up GEL 0.6 million y-o-y); and (v) compulsory personal accident
insurance, effective from 1 January 2019 (up GEL 0.5 million y-o-y on the back of 26,328 policies written in 2019). P&C Insurance’s key performance
ratios remained healthy during 2019 as noted below:
Key ratios
Combined ratio
Expense ratio
Loss ratio
FY19
82.1%
40.6%
41.6%
FY18
75.5%
37.3%
38.2%
Change
6.6ppts
3.3ppts
3.4ppts
The 6.6 percentage point y-o-y increase in the FY19 combined ratio was mostly due to increased loss ratio and higher commission rates on credit
life, property and compulsory insurance. The 3.4 percentage point y-o-y increase in the FY19 loss ratio was due to increased net claim expenses,
predominantly in the credit life insurance portfolio. Additionally, unusually high claims were incurred on several large contracts in motor and property
insurance, among them losses caused by natural disasters. As a result, Aldagi’s net income was up 7.3% y-o-y, resulting in 30.4% ROAE in 2019
(34.4% in 2018). Over the next several years, the P&C insurance business expects to build a healthier retail client portfolio in motor insurance,
which is a largely untapped market with only 4% existing penetration providing significant room for growth.
Balance sheet highlights
At 31 December 2019, total assets stood at GEL 200.3 million, up 37.4% from 31 December 2018. The growth was driven by 10.6% increase in
cash and liquid funds. The decrease in pension assets and pension liabilities resulted fully from new state pension regulation that came into effect
from 1 January 2019. P&C Insurance’s solvency ratio stood at 119% at 31 December 2019, above the required minimum of 100%.
Cash flow highlights
Operating cash flow was down 6.8% y-o-y in 2019, due to a settlement of large claim in 2H19, for which the reinsurers’ share was received in prior
periods. P&C Insurance paid a GEL 12 million dividend in 2019, up 20% from GEL 10 million in 2018.
FY19
75,339
(31,310)
(12,212)
31,817
7,769
21,242
–
20,995
(2,670)
18,325
19,521
(12,719)
(14,430)
3,421
Dec-19
43,105
36,730
4,868
200,274
100,886
4,868
137,663
62,611
2019
75.3
18.3
–
–
17.5
19.5
–
2018
67.5
17.1
–
–
18.5
20.9
–
Change
11.6%
7.3%
NMF
NMF
-5.4%
-6.8%
NMF
Key performance metrics
(GEL millions, unless otherwise noted)
31 December 2019
Net investment
2019 Dividend
ROAE1
MOIC1
(25.9)
12.0
30.4%
19.7x
Property & Casualty Insurance
INCOME STATEMENT HIGHLIGHTS
(GEL thousands, unless otherwise noted)
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 profit
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
Key highlights
(GEL millions, unless otherwise noted)
Earned premiums, net
Net income
Development capex
Maintenance capex
FCF
Cash from operations
Net debt
1 Please see definition on page 255.
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115
FINANCIAL REVIEW CONTINUED
FY19
16,171
(3,081)
13,090
2,784
(117,526)
(88,015)
140,205
171,767
35,254
Dec-19
441,484
340,035
35,254
291,987
274,322
149,497
113,000
FY18
–
(769)
(769)
(696)
(62,295)
–
63,228
55,495
8,388
Dec-18
169,304
114,645
8,388
75,145
70,711
94,159
61,203
Change
NMF
NMF
NMF
NMF
88.7%
NMF
NMF
NMF
NMF
Change
NMF
NMF
NMF
NMF
NMF
58.8%
84.6%
FY19
16.2
13.1
117.4
(114.7)
2.8
239.1
FY18
–
(0.8)
62.3
(63.0)
(0.7)
62.3
Change
NMF
NMF
88.4%
-82.1%
NMF
NMF
Key performance metrics
(GEL millions, unless otherwise noted)
31 December 2019
Net investment
2019 dividend
ROIC1
MOIC1
IRR1
98.9
–
4.3%
1.1x
5.2%
Key points
• A year of significant growth – increasing installed capacity to 91MW and progressing on the 350MW pipeline.
– The first hydro power plants (HPP), Mestiachala HPPs launched in 1H19 on time and within budget before suffering flood damage.
– Acquisition of Hydrolea HPPs with an aggregate 20.6MW installed capacity.
– Acquisition of 20.7MW Qartli wind farm, the only operational wind farm in Georgia.
– Construction works commenced on 46MW Zoti HPPs in 4Q19, expected to be operational in 2H21.
– The Government approved the concept of 108MW wind power plant (WPP) projects, expected to be commissioned in 2H22.
• FY19 EBITDA at GEL 13.1 million with 80.9% EBITDA margin.
Income statement highlights
The Renewable Energy’s FY19 revenues of GEL 16.2 million includes revenue from electricity sales of GEL 6.1 million, of which GEL 4.7 million was
contributed by Mestiachala HPPs with 54.1GWh generation. The annual net generation capacity of Mestiachala HPPs is projected at approximately
171GWh on stabilised basis. Hydrolea HPPs added GEL 1.4 million to FY19 revenues on the back of 8.6GWh generation since acquisition on
29 October 2019. The remaining GEL 10.0 million revenue represents expected business interruption (BI) reimbursement by insurance company
for foregone electricity sales revenues from Mestiachala HPPs during August-December. The insurance company has confirmed the amount of BI
reimbursement for the year 2019 for both HPPs and is in process of remitting the funds to the business. The first phase (30MW) of Mestiachala HPPs
was launched on 8 April 2019, followed by the second phase (20MW) on 4 June 2019. Total project cost was US$ 62.0 million, in line with budgeted
US$ 1.2 million per MW. The HPPs were affected by flooding resulting from a rock avalanche and were taken offline in late July 2019. Operations
successfully resumed at the first phase (30MW) within the expected timeline and at the originally planned generation level in December 2019.
Based on the updated schedule the second phase (20MW HPP) is expected to return online in 1H21 following the comprehensive assessment
of remaining restoration works. As a result, FY19 EBITDA amounted to GEL 13.1 million with 80.9% EBITDA margin.
Balance sheet highlights
In 2019, Georgia Capital continued to invest in the renewable energy business, successfully acquiring 100% equity stakes in high quality assets:
Hydrolea HPPs (total consideration of GEL 66.5 million, of which GEL 29.5 million is GCAP equity) on 29 October 2019 and Qartli wind farm (total
consideration of GEL 41.3 million, of which GEL 12.7 million is GCAP equity) on 15 November 2019. Hydrolea operates three HPPs with an aggregate
20.6MW installed capacity and has a greenfield 19MW HPP project, expected to be operational by the end of 2022. All of the acquired hydro and
wind assets have high gross capacity factors (58% for hydro and 47% for wind on average) and benefit from guaranteed prices via Power Purchase
Agreements (PPA) with the Government of Georgia for the next 8-10 years. The wind PPA has US$ 65/MWh tariff and hydro PPA prices range from
55.4 US¢/MWh to 56.6 US¢/MWh.
The 58.8% y-o-y increase in total equity is mainly driven by capital allocation from GCAP for recent acquisitions. Overall the energy business is
financing the projects with up to c.30% equity contribution. In addition to recent acquisitions, the increase in total assets also reflects finalisation
of construction works on Mestiachala HPPs.
Renewable Energy continues to develop its pipeline projects with targeted 350MW installed capacity in the medium term. The concept approval
of Tbilisi and Kaspi WPPs represents significant milestone in the process of obtaining PPAs, expected to be finalised in the near future.
The table below summarises the indicative pipeline of the upcoming energy projects, with targeted blended ROIC of 12%:
Project
Zoti HPPs
Bakhvi 2 HPP
Racha HPPs
Darchi HPP
Wind Tbilisi
Wind Kaspi
Wind (other)
Total
Target cost
per MW,
US$ millions
Target
Commissioning
Gross
generation
capacity (GWh)
1.3
1.3
1.5
1.4
1.2
1.4
1.4
2H21
1H22
1H23
2H22
2H22
2H22
TBD
173
130
168
89
172
211
340
1,283
MWs
46
36
38
19
54
54
99
346
Current
stage
Under construction
Feasibility
Feasibility
Feasibility
Development
Development
Feasibility
Renewable Energy
INCOME STATEMENT HIGHLIGHTS
(GEL thousands, unless otherwise noted)
Revenue
Operating expenses
EBITDA
CASH FLOW HIGHLIGHTS
Cash flow from operating activities
Cash flow used in investing activities
Of which, acquisition of subsidiaries
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 debt
Total equity
Total equity attributable to GCAP
Key highlights
(GEL millions, unless otherwise noted)
Revenue
EBITDA
Capex
FCF
Cash from operations
Net debt
1 Please see definition on page 255.
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FY19
6,458
1,827
8,285
21,676
(5,216)
24,745
15,823
3,256
(100,261)
87,790
63,243
19,245
Dec-19
401,216
69,693
331,523
462,284
196,408
248,497
FY18
4,588
1,945
6,761
27,621
(3,520)
30,862
25,717
5,670
(79,444)
87,735
96,006
28,616
Dec-18
225,343
37,459
187,884
294,833
124,166
159,839
Change
40.8%
-6.1%
22.5%
-21.5%
48.2%
-19.8%
-38.5%
-42.6%
26.2%
0.1%
-34.1%
-32.7%
Change
78.0%
86.1%
76.5%
56.8%
58.2%
55.5%
Key points
• GEL 22 million revaluation gain recorded on hotels and commercial assets.
• Progressing in line with the strategy to develop more than 1,000 hotel rooms across Georgia:
– Gudauri Lodge Hotel was opened in December 2019 – the first in-house branded hotel, adding 121 rooms.
– Kutaisi hotel construction commenced in 1Q19.
– Acquired land in Zugdidi to develop a midscale internationally branded hotel with c.130 rooms by 2023.
– Acquired land in Shovi to develop a 109-room hotel under Amber group brand by 2022.
• Expansion of the commercial real estate portfolio drives gross profit from operating leases up 40.8%.
Income statement highlights
Gross profit from operating leases increased by 40.8% y-o-y in FY19 primarily due to the expansion of the commercial real estate portfolio, supported by
high occupancy levels. Georgia Capital allocated GEL 49.3 million commercial space in the completed residential projects valued at c.10% yield in
USD terms. The commercial portfolio increased by 76.5% to US$ 44.9 million in 2019 (US$ 25.3 million in 2018), while occupancy level and gross income
yield stood at 87.1% (90.1% in 2018) and 9.5% (9.9% in 2018), respectively. New additions to the portfolio will reach stabilised occupancy and income
yield in 2020. Nearly 80% of the total commercial assets portfolio represents office and retail areas and another 20% residential and industrial spaces.
Within the hospitality business, the hotel room utilisation picked up from 44% in 2018 to 54% in 2019 in Ramada Encore hotel, our first hotel launched
in March 2018. In December 2019, Amber Group opened the first in-house branded hotel “Gudauri Lodge Hotel”, which added 121 operational rooms
to the hospitality business portfolio. Amber Group’s investment in the hotel, including the land value, totalls US$ 16.0 million.
In 2019, the business booked revaluation gain of GEL 22 million on hotels and commercial assets (valued at c.10% yield), of which GEL 8 million
represents revaluation gain on under construction Kempinski hotel, expected to open in 4Q20. 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 Dec 2019, total assets amounted to GEL 462.3 million (up 56.8% from 31 December 2018) and was largely concentrated in investment
property. Commercial real estate increased by 76.5% in 2019, mainly due to the allocation of finished commercial properties from Georgia Capital
and construction works performed for hotels under construction. The business continued to build ground for its 1,222 hotel rooms portfolio by
acquiring: an 8,964 sq.m. land plot for a total cash consideration of GEL 7.3 million in Zugdidi, a historical region in western Georgia and 7,500 sq.m.
land plot for a total cash consideration of US$ 0.9 million located in Shovi, Racha – a health resort in the greater Caucasus mountain region.
The business is on track to commission two under construction hotels in 2020: Melikishvili Ramada Hotel in 2Q20 and Kempinski Hotel in 4Q20.
In 2019, Hospitality and Commercial Real Estate issued a 3-year US$ 30 million bonds into the local market with a 7.5% annual coupon rate.
The bonds are backed by rental income stream from commercial properties and the proceeds are used for on-going hotel developments.
Cash flow highlights
The first operational Ramada Encore hotel added GEL 1.9 million to FY19 operating cash flow, while contribution from rent-generating assets
was GEL 6.1 million. The y-o-y decrease in FY19 operating cashflow reflects increased operating expenses due to the expected roll-out of the
under-construction hotels. In 2019, the business spent GEL 101 million on capital expenditures and acquisitions of land plots for further hotel
development. Amber group targets 70%:30% debt to equity leverage ratio at hotels after hotel opening and 50%:50% during construction stage.
2019
37.6
21.7
24.7
100.7
–
(97.0)
3.3
177.2
2018
38.5
27.6
30.9
72.4
–
(73.8)
5.7
91.7
Change
-2.3%
-21.5%
-19.8%
39.1%
NMF
-31.4%
-42.6%
93.2%
Key performance metrics
(GEL millions, unless otherwise noted)
31 December 2019
Net investment
2019 Dividend
ROIC1
MOIC1
IRR1
193.6
–
6.5%
1.3x
12.2%
FINANCIAL REVIEW CONTINUED
Hospitality and Commercial Real Estate
INCOME STATEMENT HIGHLIGHTS
(GEL thousands, unless otherwise noted)
Gross profit from operating leases
Gross profit from hospitality services
Gross real estate profit
Revaluation of commercial property
Operating expenses
Net operating income (NOI)
Profit
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 & debt securities issued
Cash, ending balance
BALANCE SHEET HIGHLIGHTS
Investment property
Land bank
Commercial real estate
Total assets
Borrowings & debt securities issued
Total equity
Key highlights
(GEL millions, unless otherwise noted)
Revenue
Of which, revaluation
NOI
Development capex
Maintenance capex
FCF
Cash from operations
Net debt
1 Please see definition on page 255.
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FINANCIAL REVIEW CONTINUED
Beverages
Wine business
INCOME STATEMENT HIGHLIGHTS
(GEL thousands, unless otherwise noted)
Revenue
Gross profit
Gross profit margin
Operating expenses
EBITDA
Net profit/(loss)
CASH FLOW HIGHLIGHTS
Net cash flows from operating activities
Net cash flows from investing activities
Of which, maintenance capex
Of which, acquisition of subsidiaries
Net cash flows from financing activities
Net proceeds from borrowings
Cash, ending balance
Beer business
INCOME STATEMENT HIGHLIGHTS
Revenue
Gross profit
Gross profit margin
Operating expenses
EBITDA
Net loss
CASH FLOW HIGHLIGHTS
Net cash flows from operating activities
Net cash flows from investing activities
Net cash flows from financing activities
Net proceeds from borrowings
Cash, ending balance
FY19
42,150
18,795
44.6%
(10,064)
8,731
1,017
2,755
(39,196)
(6,278)
(32,918)
33,077
16,525
5,230
43,628
12,204
28.0%
(18,654)
(6,450)
(55,237)
(13,989)
(18,614)
34,285
26,361
2,543
FY18
29,352
14,042
47.8%
(6,891)
7,151
(91)
98
(18,350)
(641)
(21,674)
23,248
24,286
8,380
29,308
10,087
34.4%
(23,841)
(13,754)
(28,475)
(13,846)
(10,043)
12,826
7,984
1,244
Change
43.6%
33.8%
-3.2ppt
46.0%
22.1%
NMF
NMF
NMF
NMF
51.9%
42.3%
-32.0%
-37.6%
48.9%
21.0%
-6.4ppt
-21.8%
53.1%
94.0%
-1.0%
85.3%
NMF
NMF
NMF
Wine business highlights
(GEL millions, unless otherwise noted)
Revenue
EBITDA
Development capex
Maintenance capex
FCF
Cash from operations
Net debt
Beer business highlights
(GEL millions, unless otherwise noted)
Revenue
EBITDA
Development capex
Maintenance capex
FCF
Cash from operations
Net debt
Key performance metrics
(GEL millions, unless otherwise noted)
Net investment
2019 dividend
ROIC, wine business1
ROIC, beer business1
MOIC, wine business1
MOIC, beer business1
IRR, wine business1
IRR, beer business1
FY19
42.2
8.7
32.9
6.3
(36.4)
2.8
43.1
FY19
43.6
(6.5)
18.6
–
(32.6)
(14.0)
86.4
FY18
29.4
7.2
21.7
0.6
(18.3)
0.1
40.5
FY18
29.3
(13.8)
10.0
–
(23.9)
(13.8)
66.8
Change
43.6%
22.1%
51.9%
NMF
-98.9%
NMF
6.4%
Change
48.9%
53.1%
86.0%
NMF
-36.4%
-1.0%
29.3%
31 December 2019
157.2
–
6.2%
-15.5%
1.2x
0.2x
4.8%
–
Wine business
Key points
• Export sales outperforming the strong export market growth in 2019 and driving FY19 revenues up 43.6% y-o-y.
• Outstanding topline growth led to 22.1% y-o-y growth in FY19 EBITDA.
• Acquisition of Alaverdi winery added 244 hectares of vineyards and tripled annual production capacity to 28.4 million wine bottles per annum.
• FY19 operating cash flow at GEL 2.8 million (GEL 0.1 million in FY18), benefiting from decreased reliance on grape purchases.
The wine business demonstrated a robust performance in 2019, which was supported by growth in exports. Strong demand in the Georgia’s export
markets resulted in a 9% y-o-y increase in volume in 2019, with export bottles sold reaching a 14 year high of 93 million. With its well diversified export
portfolio compared to local peer companies, our business increased its wine bottle sales by 46.5% from c.3.1 million bottles in 2018 to c.4.5 million
in 2019 – well above the market growth rate. As a result, revenue increased by 43.6% y-o-y to GEL 42.2 million in 2019. FY19 revenues reflect a
GEL 2.9 million revaluation gain on grapes, up 0.8% y-o-y. Revaluation gain is expected to increase next year during the harvest season in 2H20,
as Alaverdi grapes were already reflected at fair value in the acquisition price in 2019.
The wine business maintained a solid gross profit margin of 44.6% in 2019 (47.8% in 2018) despite the increased purchase prices for grapes.
Management expects to minimise reliance on third party wine materials and manage gross margin levels, as the business benefits from Kindzamaruli
and Alaverdi acquisitions. The business continued to invest in developing new export markets during the year, which led to increased operating costs
in 2019. As a result, FY19 EBITDA was up by 22.1%.
Operating cash flow increased from GEL 0.1 million in 2018 to GEL 2.8 million in 2019, reflecting decreased reliance on purchased grapes. The
cash used in investing activities increased by 114% to GEL 39.2 million in 2019 mainly due to Alaverdi acquisition for the total cash consideration of
GEL 32.9 million (GEL 16 million was a capital allocation from GCAP). In addition to 244 hectares of vineyards, Alaverdi also added sizable existing
wine inventory materials available for immediate sale and 135 hectares of free land available for immediate vineyard development. Following Alaverdi
acquisition on 19 August 2019, the business has three top class wineries across Kakheti’s three wine-making regions with 704 hectares of vineyards.
Starting from 2H19 the business strengthened its management team with a new CEO. Management expects to continue to focus on its strategic
priorities to enter untapped strategic export markets, diversify its product mix by portfolio premiumisation and optimise costs through increased
production capacity.
1 Please see definitions on page 255.
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FINANCIAL REVIEW CONTINUED
Beer business
Key points
• Beer business launched four new brands in 1H19, followed by the launch of Heineken in July 2019.
• Strong beer sales volumes in 3Q19, driving market share growth from 14% in 2018 to 20% in 2019.
• Beer business EBITDA at break-even level in 2H19.
During the first half of 2019, the beer business was mainly focused on launching new brands: in March the business acquired a prominent Georgian
beverages brand – Kazbegi, followed by the launch of Kazbegi beer and lemonade in April. Krusovice, Amstel and a local light beer, Kayaki, three
upper-mainstream segment beer brands, were also fully launched during May. In July 2019, the business achieved a significant milestone and
launched locally brewed Heineken. Starting from 2H19 the beer business benefited from a full scale launch of new brands. Improved product mix
allowed the business to increase beer market share from 14% to 20% in 2019 and to achieve a 58.1% y-o-y growth in 2H19 revenues. The 48.9%
growth in FY19 revenues and negative GEL 6.5 million FY19 EBITDA does not reflect full year potential due to mid-year launches. FY19 revenues
normalised for new brand launches would have been GEL 47.2 million, up 67.9% y-o-y. 2H19 EBITDA was at break-even level, while 2H19 revenues
were up by 39.2% h-o-h to GEL 25.4 million. Operating cash flow was negative GEL 14.0 million in 2019, negatively affected by delays in launching
Heineken brands. As a result, the business booked impairment loss of GEL 25.3 million in non-recurring items under IFRS. Increase in cash used in
investing activities by GEL 8.6 million was mainly driven by acquisition of Kazbegi brand. In 2019, the business obtained borrowings from local banks
to support growth in the HoReCa market, where it achieved leading position. Additionally, Georgia Capital provided GEL 15 million capital to finance
working capital needs.
Pipeline businesses
Attractive service business – Auto Service
Georgia Capital sees strong value creation opportunity in the auto services industry, which is currently a very fragmented market with approximately
GEL 2.8 billion1 annual revenues. The leading player controls c.16% of the market, while the rest of the market is dominated by small, owner-operated
lower-end service shops. The number of vehicles has grown at 7% CAGR over the last seven years, while the vast majority of vehicles in the country
remains largely outdated. The attractive growth rates combined with the expected increase in customer spending due to the stricter regulatory
environment make the auto service business an attractive strategic opportunity. Georgia Capital aims to build a diversified business model with a digital
platform combining different auto-related services: car services and parts, secondary car trading, car insurance and periodic technical inspection (PTI).
The Group’s PTI business became fully operational from March 2019 under the name of Greenway Georgia (GWG), as described in more detail below.
Additionally, the Group acquired an 80% interest in Amboli, at the end of June 2019. Amboli, the second largest player on the market with approximately
1% market share, was valued at 0.7x EV/Sales. The Group paid GEL 3.4 million for the acquisition and also contributed GEL 1.6 million capital into equity
(its pro rata share) to fund the business growth.
PTI Business FY19 Performance (GEL thousands, unless otherwise noted)
Income statement highlights
Revenue
Gross profit
Gross profit margin
Operating expenses
EBITDA
EBITDA margin
Net loss
Cash flow highlights
Net cash flows from operating activities
Net cash flows used in investing activities
Net cash flows from financing activities
Balance sheet highlights
PPE, net and intangible assets
Total assets
Total liabilities
FY19
12,917
8,525
66.0%
(5,263)
3,262
25.3%
(5,156)
2,924
(15,076)
12,394
Change
33.9%
30.1%
29.2%
Dec-19
50,682
53,849
55,215
Dec-18
37,840
41,395
42,721
As part of the Georgia-EU Association Agreement, Georgia started implementation of a mandatory vehicle inspection programme in several phases
starting from January 2018. In July 2018, GWG won a state tender to launch and operate 51 periodic technical inspection lines across Georgia with a
10-year license. Technical inspection prices are set at GEL 60 and GEL 100 for light vehicles and heavy vehicles, respectively. GWG is the only player
on the market with support from an international partner, Applus+, a Spain-headquartered worldwide leader in testing, inspection and certification
services with a market presence in more than 70 countries.
GWG finalised construction of 26 centres (10 locations in the capital city and 16 locations in the regions) and became fully operational from March
2019. Gross profit margin was 66% and EBITDA margin stood at 25% in 2019, both expected to substantially increase on a stabilised basis in 2020.
GWG serviced 342,275 cars (of which, 246,932 were primary checks) in 2019, capturing approximately 36% of current total market. The number
of cars serviced in 2H19 was up 43.9% h-o-h to 201,937 cars. The PTI businesses generated GEL 3 million operating cash flow during the year.
GWG invested GEL 48 million to commence its operations, of which, GEL 5 million was equity capital provided by Georgia Capital and the rest
was financed by borrowings from a local financial institution.
Education – fragmented education market offers attractive opportunity for a scaled player
There are currently c.60,000 learners in private schools in Georgia, representing 10% of the total school education market. Georgia Capital expects
that the private school market in Georgia will double in size over the next five years. The market is currently very fragmented, with no single player
having more than 2% market share. Georgia Capital intends to create a diversified business model combining premium, mid-level and affordable
school segments. The Group aims to implement a partnership model across all schools with the Group holding majority stakes. By 2025 the Group
aims to generate GEL 70,000 million EBITDA with up to 30,000 learners and an additional GEL 185 million gross capital allocation.
In 2019, Georgia Capital acquired majority stakes in three leading schools: British-Georgian Academy (70% stake), the leading school in the
premium segment of the market; Buckswood International School (80% stake), well-positioned in the mid-level segment; and Green School (80-90%
ownership1), a leading player in the affordable education segment. BGA and Buckswood were acquired at a 6.4x EV/EBITDA 2020 and Green School
acquisition multiple was 5.6x EV/EBITDA. We plan to increase maximum capacity of existing learners at all three schools by expanding the existing
campuses and adding new ones in Tbilisi and surrounding areas.
The table below summarises the investments and expected growth pipeline in the education business:
School
BGA
Buckswood
Green School
Total
Total existing and future capital
Segment
allocation from GCAP Debt/equity GCAP ownership
Premium
Mid-level
Affordable
GEL 75 million
GEL 24 million
GEL 21 million
GEL 120 million
50%
50%
50%
70%
80%
80%-90%1
Current
capacity of
learners
Targeted
capacity of
learners
Targeted cost
per learner
800
760
1,250
2,810
3,200 GEL 35,000-40,000
2,980 GEL 13,000-18,000
GEL 6,500-8,500
5,000
11,180
Redberry – A leading platform for investments in the digital services business
On 8 May 2019, Georgia Capital acquired a 60% equity stake in Redberry, a leading Georgian digital marketing agency. Redberry was fully
owned and managed by two young Georgian entrepreneurs who will remain with the business. The total cash consideration for the acquisition
was US$ 3.2 million, of which, US$ 0.4 million was used to acquire the equity stake from the existing shareholders and US$ 2.8 million capital was
injected to fund business growth. To capitalise on the high growth digital sector, the Group plans to further focus on digital start-up developments by:
1) creating digital start-ups focused on Georgia, with small investment sizes of c.US$ 100 thousand per each start-up, and 2) developing digital sales
channels/business lines for Georgian corporates through joint venture partnerships models.
1 The auto service business started selling imported secondary cars, increasing total addressable market by GEL 1 billion from previously estimated GEL 1.8 billion.
1 80% equity stake in the current campus and 90% equity stake in three new schools that will be developed under Green School brand.
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122
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123
FINANCIAL REVIEW CONTINUED
SUPPLEMENTARY FINANCIAL INFORMATION
Number of outstanding shares overview
Below we describe the change in the number of outstanding shares during 2019:
Opening balance at 31 December 2018
Buybacks*
Cancellation of prior year buybacks (held in treasury)
Transfer of treasury shares to management trust
Share compensation awards
Issue of shares for the acquisition of a 13.6% equity stake in GHG
Closing balance at 31 December 2019
# of shares
issued
(1)
Unawarded
shares in trust
(2)
# of outstanding
shares
(1)+(2)
39,384,712
(2,085,014)
(565,361)
–
–
3,435,438
(1,295,154)
(1,409,350)
–
(686,468)
663,168
–
38,089,558
(3,494,364)
(565,361)
(686,468)
663,168
3,435,438
40,169,775
(2,727,804)
37,441,971
* 2.1 million shares bought back under the programme, were cancelled in 2019. 1.4 million shares were repurchased on the market for management trust.
Value creation – reconciliation of Management Income Statement with NAV Statement
The table below summarises the reconciliation of FY19 value creation per Management Income Statement (page 106) with NAV Statement
(column 1. Value creation on page 101):
GEL thousands, unless otherwise noted
Listed portfolio companies
Of which, Georgia Healthcare Group PLC
Of which, Bank of Georgia Group PLC
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 Real Estate
Of which, Beverages
Pipeline businesses
Of which, Auto Service
Of which, other
Per Management Income Statement
Dividend
income (1)
Investment
return (2)
Total (1)+(2)
28,932
3,982
24,950
93,287
93,287
22,000
59,254
12,033
–
–
–
–
–
–
–
(62,869)
(203,109)
140,240
75,021
63,722
52,953
(23,630)
34,399
(5,098)
–
9,918
(15,016)
16,396
17,056
(659)
(33,937)
(199,127)
165,190
168,308
157,009
74,953
35,624
46,432
(5,098)
–
9,918
(15,016)
16,396
17,056
(659)
Per NAV
Statement
(33,937)
(199,127)
165,190
168,308
157,009
74,953
35,624
46,432
(5,098)
–
9,918
(15,016)
16,396
17,056
(659)
Total investment return/total value creation
122,219
12,152
134,371
134,371
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Photo Metekhi church – located on the
bank of river Mtkvari, built in the 12th
century. In front of the Metekhi Church
stands a statue of King Vakhtang Gorgasali
– the founder of Tbilisi.
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Strategic Review Discussion of Results
124
Georgia Capital PLC Annual Report 2019
Georgia Capital PLC Annual Report 2019
125
DIRECTORS’ GOVERNANCE STATEMENT
Irakli Gilauri
Chairman and
Chief Executive Officer
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 our second Governance Statement. The
Board has applied the UK Corporate Governance Code published in 2018
(the “Code”) and, with the exception of the matters in the Compliance
Statement, the Board aims to apply the Code in its entirety.
Committee visited nine of our key businesses last year and engaged directly
with senior management. Kim Bradley began his work as the designated
Non-Executive Director to engage with the workforce. You can read
about all of this in more detail in the Corporate Governance Framework
on page 136. We both also continued our roles with the Group’s now
70.6% owned listed subsidiary’s Georgia Healthcare Group PLC.
The Board is committed to the highest standards of corporate
governance which is embedded in its newly articulated culture and
reported on later in this statement.
We are pleased to report on some key features of the robust governance
structure we have established:
• a complete Committee structure with terms of reference that are
compliant with the 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 our Chairman and CEO
and six Independent Non-Executive Directors; and comprehensive
governance policies.
The Board was fully briefed on the revisions made to the Code during
2018, which applied to the Group from 1 January 2019. The Group
monitors its Code compliance on an ongoing basis and has been
taking appropriate steps to ensure that it continues to comply. Revised
Committee Terms of References and Group Policies, compliant with
the revised Code, were adopted towards the end of 2018 and reviewed
towards the end of 2019.
During this financial year, the Board have worked on ensuring appropriate
stakeholder engagement and ongoing dialogue with shareholders. At the
investor day in June, the Group presented its updated strategy. Earlier
in the year, the Non-Executive Directors held face-to-face meetings
with shareholders on corporate governance matters such as the joint
Chairman/CEO role and the new Remuneration Policy, which were
strongly supported in the 2019 AGM. A key element of our governance
structure is the direct engagement by the Investment Committee, which
comprises all Directors, with our portfolio companies. The Investment
We are particularly pleased that the Board’s structure has been
supported with 94% in favour of Irakli’s re-appointment to the Board.
As we said last year, we remain committed to working with our
management to ensure that our high standards extend beyond the
boardroom and are implemented in the successful delivery of the
Company’s strategic priorities.
Finally, we are delighted to report on the recent addition of Maria Chatti-
Gautier to our Board. Maria strengthens our Board in terms of geographic,
experience and gender diversity, and is already adding value to our lively
boardroom discussions.
Irakli Gilauri
Chairman and
Chief Executive Officer
7 April 2020
David Morrison
Senior Independent
Non-Executive Director
7 April 2020
Combined CEO and Chairman role
We acknowledge that our decision for the roles of Chairman and CEO
to be exercised by one individual is not compliant with Provision 9 of
the 2018 UK Corporate Governance Code. This matter continues to be
reviewed by the Nomination Committee and the Board. On page 131
you will find the results of the Board evaluation we conducted this year.
A feature of this exercise was to determine how the current structure
of combined Chairman/CEO contributes to the effectiveness of the
operation of the Board and more widely to the Company as a whole.
The Board continues to believe that the current structure better serves
our Company and its stakeholders and believes that it should continue.
The basis for this conclusion is summarised on the next page.
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 35 employees). It is principally at the level of the central
management team at which the Board and Investment Committee
provide 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 70.6% 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 operates 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 Group’s NAV is set by the Audit and Valuation Committee.
The Group’s key financial and investor communications metric is
its net asset value as approved by the Audit and Valuation Committee,
a committee of all Independent Non-Executive Directors on which the
Chairman/CEO does not sit. The Report of the Audit and Valuation
Committee on pages 140 to 144 includes their oversight on the adoption
of investment entity accounting on 31 December 2019.
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 Chairman/CEO 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. As part of the regular quarterly meeting schedule of the
Investment Committee, all Directors visit facilities and projects of
the portfolio companies, and meet with one or more of the portfolio
company’s CEO/executive management team which provides direct
and open access.
The Board is almost entirely independent and is highly experienced.
• Other than the CEO, our Board is composed solely of Independent
Non-Executive Directors (five in total and six as of 19 March 2020).
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. The decisions of 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
and Valuation Committee. Previous roles for the other Non-Executive
Directors (as detailed in the biographies later in this section) include:
– career at Goldman Sachs specialising in real estate;
– investment officer at a major investment fund;
– career in banking, investment funds and investor relations;
– membership and experience on a number of UK boards and
qualified accountant; and
– background in private equity and understanding of investment strategies.
The role of the Investment Committee in our Company context is outsized.
The Investment Committee plays the key role 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 GBP 2.5 million). In 2019, as noted in the Investment Committee
report, the Committee’s activity further increased. All Board members
sit on the Investment Committee, but it is chaired by a Non-Executive
Director, not the Chairman/CEO.
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. The structure was supported by shareholders at
the time of the demerger from BGEO Group PLC and the Board notes
that the recent shareholder engagement exercise in 2019, and their
encouragement in the 2019 AGM voting (94.07% approval), shows that
its shareholders understand and support this approach. The Board will
nevertheless keep the approach under regular review to ensure that it
continues to serve our stakeholders.
COMPLIANCE STATEMENT
The Company is subject to the principles and provisions of the UK
Corporate Governance Code 2018 (the Code), a copy of which is
available at www.frc.org.uk. For the year ended 31 December 2019,
the Board considers that it has complied in full with the provisions
of the Code with two exceptions. Provision 9 states that the roles
of chair and chief executive should not be exercised by the same
individual. 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. We set out why we regard the joint
Chairman and Chief Executive position to be appropriate for our
Company and we also explain some of the measures we have put
in place to ensure that no one individual is able to dominate the
Board’s decision making.
Secondly, Provision 32 states that the appointee to chair of the
remuneration committee should have served on a remuneration
committee for at least 12 months. On 16 January 2019 Jyrki Talvitie
was appointed chair of the Remuneration Committee to replace
Bill Huyett who had stepped down as chair. Mr Talvitie was
considered the most suitable candidate and had 10 months’
experience on the Committee (appointed 16 March 2018).
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.
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewGovernance
126
Georgia Capital PLC Annual Report 2019
Georgia Capital PLC Annual Report 2019
127
BOARD OF DIRECTORS
Irakli Gilauri
David Morrison
Kim Bradley
Massimo Gesua’ sive Salvadori
Caroline Brown
Jyrki Talvitie
Maria Chatti-Gautier
Chairman and Chief Executive
Senior Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
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Irakli Gilauri was appointed CEO and Chairman on
24 February 2018. He also serves as a member on
the Nomination and Investment Committees.
Skills and Experience: Irakli 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 Chairman of the Bank from 2015 to
2018, having previously served as CEO of the Bank
since May 2006. Prior, he was an EBRD (European
Bank for Reconstruction and Development) banker.
Mr Gilauri has up to 20 years of experience in
banking, investment and finance. 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.
Education: 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 the Cass Business School of City
University, London, where he obtained his MSc
in Banking and International Finance.
Reasons for appointment: Irakli Gilauri brings
significant insight of local and international strategic
and commercial issues to the Board and has a
distinguished career in corporate banking. 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’s local expertise and business
experience, in working with both Georgia Healthcare
Group PLC and previously BGEO Group PLC,
alongside his strong understanding of the Georgian
political, economic and cultural context is invaluable
to the Board.
David Morrison was appointed as the Senior
Independent Non-Executive Director of the
Company on 24 February 2018. He also serves as
the Chairman of the Company’s Audit and Valuation
Committee and as a member of the Company’s
Investment Committee.
Skills and Experience
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, as well as serving on the
boards of two other conservation trusts he helped
to create. A principal focus of his role for these
charities is now the investment of a portfolio of over
US$125 million in endowment capital. In April 2019,
David Morrison was named as Georgia’s first
Environmental Ombudsman.
Education: 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.
Reasons for appointment: With his background
as a corporate finance and securities lawyer advising
dozens of clients, including a large number of publicly
held companies, David Morrison brings to the Board
vast experience in corporate governance and
compliance as well as a strong understanding of legal
and regulatory issues. His work since 2008 has given
him extensive regional experience, which includes
in depth knowledge of ESG matters in Georgia.
As an experienced Chairman of Audit Committees
of premium listed companies, Mr Morrison has
significant, direct experience of ensuring integrity in
financial reporting and adequate risk management
and internal control procedures. With its significant
focus on financial disclosure and reporting, his career
as a financial and securities lawyer prepared him
well for his audit committee duties.
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.
He is also a member of the Supervisory Board of
JSC Georgia Capital.
Skills and Experience: Mr Bradley served as
an Independent Non-Executive Director of BGEO
Group PLC from December 2013 until May 2018.
He also served as Chairman of its Risk Committee
and as a member of 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 real estate and corporate
areas. 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,
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 services. Mr Bradley serves as a director
of a mental health charity, Gould Farm.
Education: 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.
Reasons for appointment: Kim Bradley has
significant experience of strategic consultancy
working with a number of major investment banks
across Europe as well as a history of performance
in the field of property and real estate investment.
In addition to real estate, Mr Bradley has had
extensive experience in various corporate industries
through corporate distressed debt resolution
including recapitalisation. Mr Bradley’s extensive
experience and strong understanding of these
areas makes him well suited to his role as Chairman
of the Investment Committee and enables him to
make an effective contribution to the oversight and
improvement of corporate value of the Group.
Massimo Gesua’ sive Salvadori was
appointed as an Independent Non-
Executive Director of the Company on
24 February 2018. He also serves as a
member of the Company’s Investment
and Audit and Valuation Committees and
is a member of the Supervisory Board of
JSC Georgia Capital.
Caroline Brown was appointed as an
Independent Non-Executive Director
of the Company on 24 February 2018.
She also serves as a member of the
Investment and Audit and Valuation
Committees and is a member of the
Supervisory Board of JSC Georgia
Capital.
Skills and Experience: 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 and 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.
Education: Dr Gesua’ sive Salvadori, a
native of Venice, obtained an M.Phil. 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.
Reasons for appointment: Massimo
Gesua’ sive Salvadori’s background
in investment and his experience with
international markets and strategy brings
a breadth of knowledge to the Investment
and Audit and Valuation Committees, of
which he is a member, and makes him
an important asset to the Board.
Skills and Experience: 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.
She is a Fellow of the Chartered Institute of
Management Accountants and has over
20 years experience sitting on the boards
of listed companies, and has chaired audit
committees of listed companies for the
past 15 years. 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 IP Group plc. Dr Brown
also serves as a Trustee of the Raspberry
Pi Foundation.
Education: 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.
Reasons for appointment: Caroline
Brown brings a strong understanding
of corporate finance and accounting
practices and is an experienced chair of
audit committees of UK listed companies.
This significant and direct experience,
alongside her accountancy experience
and qualifications, is a valued addition
to the Board and the Audit and
Valuation Committee.
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.
Jyrki Talvitie was appointed as an
Independent Non-Executive Director
of the Company on 24 February 2018.
He also serves as the Chairman of the
Nomination Committee and the
Remuneration Committee and as a
member of the Investment Committee.
He is also a member of the Supervisory
Board of JSC Georgia Capital.
Skills and Experience: Mr Talvitie has
worked in the financial industry for 28
years in banks as well as on both the
buy and sell side of the 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, one of the largest
banks in Russia and previously 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
10 boards of both public and private
companies in Georgia, Finland, Russia,
Kazakhstan and Ukraine.
Education: 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.
Reasons for appointment: Jyrki
Talvitie has spent his career in the financial
industries in the region, including in Georgia,
and has a considerable breadth and variety
of experience in corporate governance
derived from his positions on the boards of
various companies in the region. Mr Talvitie
has a deep understanding of regional
and international strategic issues which,
complemented with his extensive board
experience, is a valued asset to the Board.
Maria Chatti-Gautier was appointed as
an Independent Non-Executive Director
of the Company on 19 March 2020.
She also serves as a member of the
Company’s Investment, Remuneration
and Nomination Committees and is a
member of the Supervisory Board of
JSC Georgia Capital.
Skills and Experience: Ms Chatti-
Gautier is a Senior Investment manager
with over 25 years of experience in private
equity in prominent financial institutions,
and has sat on the Board of Directors of
over 30 companies. She currently serves
as Partner of Trail Management, an
Independent Euro-Chinese Private Equity
investment firm, where she invests in
European midcap companies to develop
them in China. Ms Chatti-Gautier started
her career at Chase Manhattan Bank in
Paris before joining BAII. She spent most
of her career (15 years) at Natixis Private
Equity, before moving to Oddo Private
Equity and Drake Star Partners (previously
known as LDA Jupiter). Her activities
included sourcing, analyzing, managing
and monitoring a large number of
investments and exits. Through her own
consulting firm, Ms Chatti-Gautier has also
advised various investment and fund
raising programmes in Europe, Lebanon
and the MENA region. Ms Chatti-Gautier
currently serves as a board member and
member of the Audit Committee of
Groupe Pizzorno Environnement, a leading
French operator in the waste management
business listed on Euronext. She is also a
director of Buffet Crampon Group, a major
producer of wind musical instruments.
Education: Ms Chatti-Gautier holds an
MBA with major in Finance from Ecole
des Hautes Etudes Commerciales-HEC,
with joint MBA programmes from London
Business School and NYU Stern.
Reasons for appointment: Maria
Chatti-Gautier has extensive experience
in all types of private equity transactions
with a hands-on approach and leadership
role in investment execution, build-up and
exit strategies. Ms Chatti-Gautier’s
background in private equity and
understanding of investment strategies,
alongside her board experience makes
her well suited to her role on the Board
and a valuable asset.
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewGovernance
128
Georgia Capital PLC Annual Report 2019
Georgia Capital PLC Annual Report 2019
129
CORPORATE GOVERNANCE FRAMEWORK
Our Governance Structure
CEO
Executive
management
Investment
Committee
Read more
on page 138
BOARD
Audit and
Valuation
Committee
Read more
on page 140
Nomination
Committee
Remuneration
Committee
Read more
on page 161
Read more
on page 145
Board size, composition, tenure and independence
The Board is comprised of seven Directors, six of whom are Independent
Non-Executive Directors, and one executive Chairman – Irakli Gilauri,
who also acts as the Company CEO.
The responsibilities of the Board can be viewed on page 164.
Each of our Non-Executive Directors occupies, and/or has previously
occupied, senior positions in a broad range of relevant associated
industries, bringing valuable external perspective to the Board’s
deliberations through their experience and insight from other sectors,
enabling them to contribute significantly to decision-making. Some of
these skills include:
Full director biographies can be found here: https://georgiacapital.ge/
governance/board and on page 126.
• Banking, investment and finance sector experience.
• Leadership knowledge.
• Understanding of local and international strategic and
We consider that a diversity of skills, backgrounds, knowledge, experience,
geographic location, nationalities, age and gender is 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.
commercial issues.
Investor market knowledge.
•
• Experience of stakeholder engagement.
• Understanding of governance practices and regulatory framework.
• Familiarity with Georgian political, economic and cultural context.
• Experience of investment execution and exit strategies.
Board appointments are made based on recommendations received
from the Nomination Committee. In making these appointments, the
Nomination Committee ensures that appointments and succession
plans are made based on merit as well as other objective criteria, whilst
ensuring the Board maintains the right balance of skills and knowledge
needed to address its specific needs. Due consideration will also be
given to diversity in the wider sense, and the benefits that stem from
having a diverse Board.
In March 2020, we announced the appointment of Maria Chatti-Gautier.
Following Maria’s appointment, 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. More on the background of
Maria’s appointment is included in the Nomination Committee’s report
on pages 161 to 163.
The relationship between Directors ensures that no individual, or
group of individuals, is able to dominate the decision-making process,
independence of thought is maintained, and no undue reliance is placed
on any individual.
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 impair their judgement.
Our Governance Structure
We understand our responsibility to shareholders and stakeholders.
We are dedicated to delivering shareholder value over the long term and
promoting the success of the Company for the benefit of all shareholders
through the management of the Group’s business.
The Georgia Capital Board is assisted in fulfilling its responsibilities by
four Committees: Investment, Audit and Valuation, 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 Investment
Committee report on page 138, the Audit and Valuation Committee
report on page 140, the Remuneration Committee report on page 145
and the Nomination Committee report on page 161.
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. All decisions are made
through Directors exercising independent objective judgement, and
following open and rigorous challenge.
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.
Each Director also recognises their statutory duty to take into account
and represent the Company’s various stakeholders in its deliberations
and decision-making. You can read more about how Directors had
regard to the factors in section 172(1) of the Companies Act 2006 and
how Directors performed their duties under section 172 on page 68
of the Strategic Report.
In order to ensure that we meet our responsibilities, specific key
decisions have been reserved for approval by the Board.
The key matters reserved for the Board are:
• The Group’s long-term objectives and strategy.
• Shareholder engagement and general meetings.
• Overall corporate governance arrangements including Board and
Committee composition, Committee terms of reference, Directors’
independence and conflicts of interest.
Internal controls, governance and risk management frameworks.
•
• Changes to the corporate or capital structure of the Company.
• Annual report and accounts, and financial and regulatory
announcements.
• Significant changes in accounting policies or practices.
• Annual budgets and financial expenditure.
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 quarterly in Georgia, and meetings are also held at our
London offices, with Directors 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 and
trading updates to the market typically being approved in separate
phone conferences).
• Monitoring of financial performance against budget.
• 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 and Valuation Committee report on accounting issues and
valuations and internal audit.
• Business updates from selected portfolio companies. The entire
Board sits on the Investment Committee, and every meeting reviews
the investment pipeline and takes action as necessary on new
investments or divestments.
In addition, during 2019 the Board spent time discussing culture,
the adoption of investment entity accounting and the various issues
concerning its shareholding in Georgia Healthcare Group PLC that led
to the share exchange offer near the end of the year.
We maintain a corporate calendar which sets out rolling agenda items
that must be considered during the year. This annual schedule of items
ensures that all matters are given due consideration and are reviewed
at the appropriate point in the financial and regulatory cycle.
The Chairman/CEO seeks input from the Non-Executive Directors
ahead of each Board meeting in order to ensure that any matters they
have raised 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 Chairman present at least once
during the year to appraise the Chairman’s performance.
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CORPORATE GOVERNANCE FRAMEWORK CONTINUED
Board activities in 2019
Details of the areas that the Board considered this year are set out below and comprise:
Strategy
• Reviewed the definition of GCAP core values, mission and strategy, in light of the Company’s long-term strategy
and shareholder interests.
The Board’s objectives for 2020:
• Consolidate our recent acquisitions and access additional sources
of capital.
• Continuous review of overall purpose, values and strategy for the Group.
• Monitoring and assessing culture and how this aligns with our
• Discussed the strategy on the Company’s holding in Georgia Healthcare Group PLC leading to the share
purpose, values and strategy.
exchange proposal.
• Discussed the new strategic priorities: 1) Decrease of share of listed assets to 20% in our portfolio over the next
5 years; and 2) Starting to manage the third-party money.
• Agreed business KPI’s.
• Reviewed portfolio company investments.
• Reviewed performance against strategy.
• Regularly reviewed the Georgian and regional political and economic climate.
Governance, assurance
and risk management
• Focus on high level governance issues and developments that may have an effect on the Company.
• Reviewed the culture and began work to create/reinforce the desired culture.
• Board succession, consideration of various additional board candidates leading to appointment in early 2020 of
a new Board member.
• Received reports from different Committees.
• Conducted an internally facilitated Board evaluation looking at Board effectiveness and process.
• Considered external legislative and governance developments.
• Reviewed the Board Diversity policy.
• Considered the updated requirements under the FRC 2018 Corporate Governance Code and impact this would have
on the Company.
• Reviewed and approved governance documents, including terms of reference for the Audit and Valuation Committee,
Remuneration Committee, Nomination Committee and Investment Committee and Group level policies.
Financial Reporting
• Application and implementation of investment entity accounting under IFRS 10.
• Received reports on the financial performance of the Group.
• Approval of establishment of Audit and Valuation Committee.
• On the recommendation of the Audit and Valuation Committee (or its predecessor the Audit Committee),
reviewed and approved financial reporting including approval of Accounts, notice of AGM, half year and full year
announcements and trading updates to the market.
Stakeholders
• Considered the Company’s culture.
• Reviewed and approved share buyback programme.
• Considered duties under s172 reporting.
• Began the Board’s workforce engagement efforts.
Investment matters
• Most work is undertaken by the Investment Committee. See report on pages 138 to 139
Board and Committee meeting attendance
Details of Board and Committee meeting attendance in 2019 are as follows:
Members
Irakli Gilauri
David Morrison*
Kim Bradley*
Massimo Gesua’ Sive Salvadori*
William Huyett**
Caroline Brown*1
Jyrki Talvitie*
Board
11/11
11/11
11/11
11/11
4/4
10/11
11/11
Audit and Valuation
Committee
Nomination
Committee
Remuneration
Committee
Investment
Committee
n/a
11/11
n/a
11/11
N/A
11/11
N/A
2/2
2/2
2/2
2/2
N/A
2/2
2/2
N/A
N/A
4/4
N/A
3/3
n/a
4/4
4/4
4/4
4/4
4/4
1/1
3/4
4/4
Notes:
* Denotes Independent Director.
** Mr Huyett stepped down from the Board on 5 June 2019.
1 Ms Brown was unable to attend one Board and Investment Committee meeting due to a prior commitment, however she provided full comments on the materials discussed
to the Board ahead of the meeting.
For Board and Committee meetings, Directors attendance is expressed as the number of meetings attended out of the number that each Director
was eligible to attend.
• Our purpose is to help Georgia to succeed by creating multiple private
companies/institutions, which will have a positive impact on Georgia’s
development. In order to create such institutions, we will need to
further develop our leaders so that they become future entrepreneurs
of Georgia.
Board Strategic review
The Board has a responsibility for the overall purpose, values and strategy
of the Company and the related issues are discussed during each Board
meeting. During these discussions, gaps were identified. This led to a
more in-depth discussion on the Company strategy in October.
The Board believe that there are three features of success that will allow
the Company to capitalise on the fast-growing Georgian economy: access
to capital, access to management and strong corporate governance.
Purpose
The Company’s purpose is to provide investors with an opportunity
to invest in the fast growing Georgian economy and to give access to
attractive private deals with long-term growth potential to develop into
viable independent businesses.
Culture
In 2019, the Board has given additional focus towards developing,
monitoring and assessing corporate culture and thinking about the ways in
which our culture might serve as a long-term differentiator, both in terms of
strategy and of recruitment and retention. We are proud of the culture that
we have within Georgia Capital and recognise it is important to articulate
this and drive it and ensure that it permeates the entire business.
Helping Georgia to succeed is at the heart of Georgia Capital, and
during the year the Board looked closely at our mission, vision and
values and how we could reinforce this in shaping the Company’s
long-term strategy. The Board is of the view that this will benefit all
of the Company’s stakeholders.
As part of the Board’s discussion on our culture, three core desired
values have been identified which are driven by, and serve to
complement, our strategic and operational needs: being entrepreneurial;
having a learning mindset; and maintaining the highest standard of ethics.
The Board has overseen and contributed to the work in this area.
Values
Being entrepreneurial:
We believe our current culture is entrepreneurial in nature, and this is
something that is grounded in our ability to see and seize opportunities
and to develop business strategies whilst remaining disciplined
and rational. All of our portfolio companies have been founded or
substantially developed by entrepreneurs, and this is at the core of what
we do. Our objective moving forward is to empower our people, continue
to develop this spirit and pursue execution excellence in our businesses.
Having a learning mindset:
We believe we are developing a learner mindset as part of our wider
culture, however, we recognise that we need to improve the ways in which
we communicate and give and provide feedback and help our people
to develop. We are approaching this by looking at ways we can mentor
and coach people throughout the organisation, and we aim to create an
environment where independent thinking and curiosity are encouraged.
Maintaining the highest standard of ethics:
This has been an aspect of our culture that we have maintained since
our inception, and it is a priority of ours to ensure this stays this way.
In order to ensure we maintain a high level of ethics, we will draw on
principles of transparency and accountability and seek to maintain
the highest standards of corporate governance.
Creating a culture relies on the active and continued participation
and leadership of our Board of Directors and this vision can then be
communicated through executive management and onward to the wider
businesses. 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.
Going forward, the Board will monitor and assess the culture of
the Group by holding meetings with members of management and
reviewing employee feedback, including through different workshops
and off-site meetings. The Non-Executive Directors meet regularly with
the Company’s portfolio businesses, adopting a proactive approach to
communication, which allows the culture to spread.
We recognise that the Board will have to continue to play an important
role in shaping, defining and communicating our culture. While we have
made important progress in 2019 in defining our mission, vision and
values, we recognise that there is more to do in 2020.
Evaluation of Board’s performance
This year, the Board conducted its first formal effectiveness evaluation
since the demerger in 2018. The primary focus of the evaluation was to
conduct a comprehensive review of the Board’s composition, expertise,
interaction, management, key decision-making processes and meeting
focus and prioritisation. The Board reviewed its key decision-making
processes during the year, particularly relating to investment decisions
and the decision to adopt IFRS 10 accounting for the Company. The
Board also assessed its culture and engagement with stakeholders in
line with the 2018 Code. Evaluations were also conducted to review the
performance of the Committees, and Directors were asked to review
their own performance.
The formal evaluation was conducted with reference to the guidance
contained in the FRC Guidance on Board effectiveness. The evaluation
process consisted of a questionnaire for all Directors to complete, and
allowed Directors to provide an open response to some of the questions
to provide further insight on some of the addressed topics, which was
then followed by a report disclosing the process, outcomes and actions
taken from the data.
The outcomes of the evaluation were positive overall, and discussed by
the Board during their December 2019 meeting, including a number of
actions that were agreed to be taken forward.
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Stakeholder engagement
Our Directors understand the importance of effective engagement with
stakeholders to gain an understanding of the issues that relate to each
stakeholder so that the Board can appropriately consider these views
and their concerns when having Board discussions and making Board
decisions.
Over the year, the Board restructured the meeting agendas to take
account of each of the provisions in s172, and focused on long-term
value generation opportunities, taking into account political and
macroeconomic circumstances and stakeholder considerations.
Stakeholders’ considerations are sought out and then incorporated into
our discussions and decisions.
The table on page 134 sets out our key relationships with stakeholders
and how we have engaged with them over the financial year. The table
also shows examples of how we have considered our stakeholders when
making key decisions and how this has influenced certain decisions.
More information about how the directors have discharged their duty
under s.172 of the Companies Act 2006 is available in the Strategic Report,
on pages 2 to 123.
CORPORATE GOVERNANCE FRAMEWORK CONTINUED
The main findings from the evaluation and key focus areas are set out below:
Area of focus
Findings in 2019
Focus for 2020
Management
of meetings
• Discussions are balanced following the reorganisation
• Continued discipline in looking at new investments
of meeting structure in recent month.
and exit opportunities.
• Management presentations on the day following the
• More discipline with time management in relation to
Board meeting in Tbilisi are very helpful.
timing of papers.
Board responsibilities
and effectiveness
Board composition
and dynamics
• The structure of agendas and papers to the Board and
Committees have been reviewed, particularly to assist
Directors and ensure they meet their responsibilities
under section 172 of the Companies Act 2006.
• The Board and its members provide significant value
to the Company and its strategy.
• Consistently strong agreement across Directors that
the Board is sufficiently involved in major challenges
faced by the Company.
• Continued improvement of the monitoring of culture
and behaviours and how this aligns with strategy.
• Developing Directors refresher training on matters
linked to corporate governance.
• Supporting management and development of key
personnel within the management team.
• Strong meeting dynamics, with critical and constructive
discussions where Directors feel free to express their
opinions and perspectives.
• The Board has a very good diversity of experience
and perhaps most importantly, a breadth and diversity
of how members think and look at our businesses.
• The model of appointing a potential Board member
as an advisor as part of the selection process was
considered to be very helpful.
• To focus on succession planning and diversifying the
Board’s knowledge, in particular providing further
private equity expertise at the Board level. This is not
necessarily about industry experts but also ensuring
the Board members are continuously improving their
private equity or similar knowledge.
• The composition of the Nomination and Remuneration
Committees to be reviewed during 2020.
Individual performance
Alongside the Board and Committee evaluations, Directors were also
invited to assess their individual performance in their role as Director,
using a 3-point scoring system. Directors were asked to rate their
performance in a number of areas, including their preparation before
meetings, the quality and value of contributions and the success of
their relationships with fellow Board members. They were also invited
to suggest areas they would like additional training on or areas where
they would want additional support.
The process for evaluating the Chairman’s performance
Given his role as Chairman/CEO, the main forum for reviewing Irakli
Gilauri’s performance was at the Remuneration Committee. However,
the full Board met once in 2019 and once in early 2020 to consider the
Remuneration Committee’s recommendations and Irakli’s performance
as Board Chairman. The Board endorsed the recommendations of
Remuneration Committee as to Irakli’s compensation. It also reached
consensus on his performance as Chairman as reflected in the
favourable Board self-evaluation and the decision to recommend
the maintenance of the current combined role of Chairman/CEO
as discussed above.
Succession planning: Board appointments
and senior management
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 is 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 and, typically, a period of service in a board advisory role.
More detail on the role and performance of the Nomination Committee
is on pages 161 to 163.
Non-Executive Directors’ terms of appointment
On appointment, our Non-Executive Directors are provided with a letter
which 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 are sufficiently able to dedicate
the amount of time necessary to contribute effectively to the Board.
The Letters of Appointment for our Non-Executive Directors are available
for inspection at our Company’s registered office address during normal
business hours.
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. Despite our Non-Executive Directors holding external
directorships and other external positions, the Board believe they still
have sufficient time to devote to their duties as a Director of the Company.
In order to form a view of this, we conduct an annual review of individual
Director’s conflicts, which is recorded in the Conflicts of Interest Register,
and as part of the review, we also consider other appointments held by
each Director.
Shareholder and stakeholder engagement
Shareholder engagement
The revised Code has reinforced and expanded on the long-standing
requirements of the UK Companies Act for directors to remain mindful
of their duties to consider the interests of key stakeholders. The Board
recognises the impact that effective engagement with our stakeholders
has on our business, and its contribution to the long term success of the
Company. The Company has established a comprehensive shareholder
engagement programme and encourages an open and transparent
dialogue with existing and potential shareholders.
The Board has a responsibility to ensure the delivery of the Group’s
strategic objectives whilst:
• Maintaining an understanding of the views of shareholders.
• Seeking regular engagement with major shareholders in order
to understand their views.
• Generating value for shareholders and contributing to wider society.
The Chairman has overall responsibility for ensuring that the Board
understands the views of major stakeholders. The 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.
The Board’s primary contact with institutional shareholders is through
the Chairman/CEO, CFO, 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 Committees’
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
for shareholders.
During the year, the Board took several key decisions relevant to
shareholders including continuing to pursue the share buyback
programme as the Board is of the opinion that the share price remained
significantly undervalued. The Board also approved the further
investment in GHG, increasing the Group’s stake in GHG from 57%
to 70.6% on 18 December 2019 following the completion of a share
exchange facility, whereby GCAP issued 3.4 million new shares in
exchange for a 13.6% equity stake in GHG.
Over the course of 2019, members of the Board and management
met with approximately 200 institutional investors and analysts, and
participated in more than 20 investor conferences and road shows.
Throughout the year, our Directors and management met with
shareholders in Georgia, the United Kingdom, Europe and the United
States. We also held our annual investor day where shareholders were
invited to Tbilisi to discuss the business with the Group’s management
and the Board, and to visit the facilities of selected portfolio companies.
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.
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CORPORATE GOVERNANCE FRAMEWORK CONTINUED
Key stakeholders
Activities undertaken throughout the year
Investors
Types of engagement:
• Meetings with NEDS
• Meetings with Chairman/CEO
• Meetings and calls with advisor to the CEO
• Investor relations team
• The London Stock Exchange announcements
• Investor day
• Investor roadshows
• Corporate website with investor section
• AGM
• Half yearly results and quarterly trading updates
• SID as intermediary
• Annual Report
How the Board engages with investors:
During the year, we updated our strategy to consider the changes in our portfolio
that will add value for investors by accessing attractive deals. We shared the
updated strategy with investors and they were very supportive of the changes.
In June 2019, Georgia Capital hosted an investor day in Tbilisi, which was open
to all investors and analysts. This investor day provided the opportunity for
investors and analysts to receive an update on: Georgia Capital strategy from
the Chairman/CEO; Georgia Capital performance from the Chief Financial
Officer; an investment appraisal from the Chief Investment Officer; Georgian
macro-economic outlook from our Chief Economist; and a summary of the
five-year vision and strategy for each business from the CEO of each portfolio
company. All of the investors and analysts also had an opportunity to meet
informally with Board members and raise matters of interest. The company was
pleased to host approximately 40 investors and analysts at the event and has
ensured that the views expressed by the investors have been fed back to the
Board. Investors and analysts visited different sites of our businesses together
with key management personnel at Georgia Capital and our portfolio companies.
Further to this, a number of investor meetings took place over the year.
We will engage with shareholders through the Company’s forthcoming Annual
General Meeting to be held in June 2020 but will also continue to communicate
with shareholders on important developments throughout the year. Our
half-yearly results and quarterly trading updates are supported by a combination
of presentations and telephone briefing, as was the announcement of our annual
results in February 2019.
Our UK General Counsel and our Company Secretary also have ongoing
dialogue with the shareholders’ advisory group and proxy voting agencies.
How this stakeholder group influenced the
Board/Committee agenda and decision making
• The Board receives feedback from
investors at our investor days and during
meetings about how they view Georgia
Capital within the wider market, and
raise matters of interest which are then
discussed at the Board meetings.
• In 2019, we discussed in meetings, and
on calls with individual shareholders, the
joint Chairman/CEO role, to confirm that
we still had the shareholders support;
and we contacted shareholders by
letter and also presented on and took
into account, feedback on the new
Remuneration Policy in early 2019,
ahead of its implementation.
• We hold regular meetings with the
Group’s existing bondholders and
actively engage with potential lenders
to discuss our funding strategy. The
Chairman/CEO, Senior Independent
Director and members of the Board
make themselves available to meet with
institutional investors when requested.
• Our comprehensive investor website is
updated and reviewed on a regular basis
to ensure that information, including
matters relating to sustainability, are up
to date.
How this stakeholder group influenced the
Board/Committee agenda and decision making
• Employee surveys are conducted across
the portfolio companies.
• The Board decided to appoint Kim
Bradley as the designated Non-Executive
Director of workforce engagement and he
shares employee views with the Board.
• Management have been instructed to
ensure that proposals to the Board and
Investment Committee are made in line
with stakeholders interests.
• The Board is currently undertaking
a review of culture and it is one of the
focus points for the year 2020.
• The Nomination Committee will look at
succession planning and ensuring a
diverse pipeline in the future.
• Through the work of the Investment
Committee and Kim Bradley, the
Non-Executive Director with responsibility
for workforce engagement, the Board
has been able to take account of the
views of the workforce across all of its
portfolio companies and reflect elements
of this in its statements on culture and
take account of relevant elements in the
Board decision making.
• Please see pages 136 to 137 for further
details on workforce engagement.
• Board agenda from time to time
considers Governmental issues that
influence the wider Georgian market,
which can influence key investment
decisions.
• Investments are made in local
businesses that will be beneficial
to the Georgian economy.
• The Board sees long term benefit to the
Company and Georgian society through
its investments in the education sector
during 2019.
• Investments in the auto service business
help support the Georgian government
in its efforts to improve vehicle safety.
Key stakeholders
Activities undertaken throughout the year
Employees
Types of engagement:
• Nominated NED
• Regular town halls
• Offsite and on site meetings
• Feedback systems, e.g. employee satisfaction surveys at our businesses
How the Board engages with employees:
Kim Bradley was appointed as the designated Non-Executive Director for
workforce engagement. The Board is encouraged to engage with employees
outside of formal channels and workforce engagement included visits to
construction sites and portfolio company offices. Details of these visits are
fed back to the Board so they are aware of any issues or feedback.
We believe that communicating with our employees is vital and we provide
information in a number of ways, including via managers, presentations,
email, intranet and regular off-site meetings. We communicate 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.
Wider
community
and
environment
Types of engagement:
• Investments to support diversified economy
• Engagement with local communities
• Education
• Corporate website
• Volunteering
How the Board engages with the wider community:
The Group considers the interests of its main stakeholders when developing the
strategy and the processes to improve its operations.
Investing in local businesses helps us to diversify and modernise the Georgian
economy, and this can be seen in the development of our different portfolio
companies. Our healthcare business is driving the modernisation and improvement
of healthcare in the country. Our water and energy businesses are involved in
infrastructure programmes and ongoing structural market reforms, such as the
improvement of wastewater treatment and clean energy. Our automobile
inspection business contributes to overall cleaner air and improved vehicle safety.
The Group believes that educating young people is extremely important for the
development of the community as a whole. Georgia Capital is investing in schools
to give more learners access to high-quality education and facilities, and by
investing GEL 40 million, secured three high-quality partners across affordable,
mid-level and premium private schools during 2019. The formation of our flagship
pilot programme GEA GCAP Entrepreneurship Academy, will allow us to engage
more with the next generation of Georgian leaders and contribute to our mission
of helping Georgia to succeed.
As part of our sponsorship and charitable activities, the Group is conserving
nature, promoting and enhancing access to education, and supporting people
with disabilities and special needs. See pages 81 to 83 in the Resources and
Responsibilities section for more detail.
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CORPORATE GOVERNANCE FRAMEWORK CONTINUED
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 164 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 and Valuation Committee).
A review of the Company’s risk management approach is further
discussed in the Strategic Report on pages 70 to 75.
For detail on the management and mitigation of each principal risk see
pages 75 to 79.
The Group’s viability statement is detailed on pages 73 to 74.
Please refer to pages 140 to 144 for further detail in relation to the role
of the Audit and Valuation Committee.
The Group’s governance structure for risk management is illustrated
on pages 70 to 75.
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.
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 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 has appointed Link Company Matters Limited to act as
Company Secretary to Georgia Capital PLC. Link Company Matters
Limited is one of the UK’s largest professional services secretarial teams.
Directors
In line with the Code’s recommendations, Maria Chatti-Gautier will
stand for election at the AGM in 2020, being the first AGM following her
appointment to the Board. The Board has set out in its Notice of Annual
General Meeting the qualifications of each Director and support for
election or re-election as applicable.
Workforce engagement
In December 2018, Kim Bradley was appointed as the designated
Non-Executive Director for employee engagement and consequently
spent time in Georgia during the first half of 2019, involved in workforce
engagement. All of the other Non-Executive Directors are also encouraged
to engage with employees outside of formal channels. As mentioned
elsewhere, the full Board, through the Investment Committee, regularly
visits different sites and offices of portfolio companies. At the time of
most regular Board meetings, dinners with second level Group and
portfolio companies management are organised so that they allow for
informal exchange. The Senior Independent Director also spends time
outside of Board meetings and meets informally with various staff.
Given that Georgia Capital is a relatively small holding company with a
diverse number of portfolio companies, the initial discussions in early
2019 focused on ensuring that the various companies were taking
concrete steps to encourage employee feedback and discussion
with their respective leadership teams.
In addition, our initial discussions concluded that given the relative
independence of the portfolio companies, the steps and tools used
to encourage employee engagement would be developed within the
companies as opposed to a “top down” initiative directed by Georgia
Capital. As part of this process, Kim Bradley, in his role as the Non-
Executive Director responsible for engagement with the workforce, meets
regularly with the management teams of the various portfolio companies
to develop an oversight of the engagement activities that occur across
the Group. For this reason, we have included the employees in the
portfolio companies in our definition of workforce for the purpose of
workforce engagement.
The following is a brief summary of employee engagement activities
undertaken at Georgia Capital and in our respective businesses:
Georgia Capital: As our people are our main asset, we invest a lot
to help engage and motivate our staff. The Company has a small head
office (c.35 people) and we encourage an open door policy – staff can
approach management at any time with any concern. The matter of
workforce engagement will be something that the Board will continue
to focus on in 2020.
In 2019, we organised several events engaging staff such as:
• Offsite event for all staff where management introduced our strategy
and staff had the opportunity to ask questions.
• Town hall meeting about future plans.
• Training for middle management in Giving Feedback, where they
practiced giving real time feedback to each other.
• Georgia Capital awareness event for students and graduates
where all Georgia Capital staff attended and had opportunity to ask
(and answer) questions; another similar event was a meeting with
Georgians living abroad.
• With the help of an independent consultant, we collected upward
•
feedback for top management.
In the scope of performance management – exchanged upward,
downward and peer feedbacks.
Our P&C Insurance business, Aldagi recently created an online
platform, where employees can share their ideas on any matter.
To encourage open communication, Aldagi maintains an internal
educational platform called Aldagi Talks, where employees have opportunity
to give speeches and share their ideas, initiatives and considerations.
Our P&C Insurance business gathers employee feedback through annual
employee engagement surveys to further develop the system and improve
policies and procedures. During 2019, Aldagi created its new Mission
and Vision and employees were actively involved in this process.
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 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 2020 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 256 for further Shareholder Information and pages 133 to 135
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 a whistleblowing system,
including an anonymous helpline, under its Whistleblowing Policy.
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 85.
In 2019, the Human Capital Development Department of the Water
Utility business (GGU) undertook a number of initiatives to improve
employee engagement. Teambuilding events were organised for five
different departments. Moreover, various workshops for middle level
management were held to discuss challenges and other important
issues facing the company and to plan future steps and actions.
Approximately 40 employees successfully completed a three-month
skill development programme to increase teamwork, employee
satisfaction and motivation, and the awareness of corporate culture.
Our Housing Development and Hospitality and Commercial
Real Estate businesses, m2, organised two staff meetings where all
employees were present. The first was during the summer offsite meeting,
where staff were informed about ongoing changes in organisational
structure and future plans from CEOs. In addition, the results of the
employee satisfaction survey conducted in June 2019 were presented
by m2’s HR Manager. In March, the business conducted 360-degree
assessments of middle and top managers. The results were shared with
top management by the CEO, and with middle management by their own
managers and HR. In November 2019, a town hall meeting was held.
All employees were given detailed information about structural changes
and plans for newly formed companies. Employees have also completed
a survey about the effectiveness of staff meetings held during 2019.
Our Healthcare business, Georgia Healthcare Group PLC (“GHG”),
has established practices and initiates new projects every year, to develop
their corporate culture, increase employee engagement and encourage
a practice of open dialogue. Regular dialogue with the workforce
is promoted through organised town halls, off-site meetings, and
encouraging the practice of open communication across all employment
levels. This is further fostered through annual and quarterly Performance
Review Sessions that allow dual feedback between managers and
employees. During 2019, GHG conducted three employee satisfaction
surveys, measuring criteria such as employee engagement in strategy
setting, day-to-day operations, salary satisfaction and employee loyalty
level. In June 2019, 150 of GHG’s managers met with their company
Chairman, Bill Huyett, who gave a “Leadership Talk” and engaged in
open dialogue with the employees.
People development in the Company and our portfolio companies is one
of our key priorities in fulfilling our purpose of helping Georgia succeed.
Employees are incentivised though rewarding and recognising their
achievements. For example, in our Global Beer Georgia business,
we achieve this by sending thank you letters to employees, and the
Spot Recognition Bonus.
We hope that our efforts to embed our culture, and supporting the
independence of our portfolio companies in encouraging the workforce
in their respective business, will continue to initiate productivity in our
workforce as a whole.
The above reflects that the Board has regard of employee interests, and
as set out elsewhere in this report, takes account of those interests in its
decision making.
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INVESTMENT COMMITTEE REPORT
Key activities
The Investment Committee’s role is to provide oversight of investment
activity and challenge management where appropriate. As reported
elsewhere in this Annual Report on page 125, an important part of
this process is the visits to portfolio companies and the meetings with
senior management that take place throughout the year. The Investment
Committee considers this is fundamental to it gaining real insight into
the operations and fundamental to the Board’s approach to corporate
governance.
During 2019, the Investment Committee considered the following
investments;
• The buyout of the 40% minority stake in a luxury hotel by m2.
• Acquisition of the Kazbegi beer brand and commercial assets.
• Acquisition of 80% of the Amboli LLC a distributor of car parts.
• Acquisition of 60% of Redberry LLC, a digital marketing agency.
• Acquisition of 70% of British-Georgian Academy LLC.
• Acquisition of 80% interest in Buckswood International School –
Tbilisi LLC.
• Acquisition of 80% interest in Green School LLC.
• Acquisition of 100% of Alaverdi Ltd, a winery.
• Acquisition of 100% of Hydrolea Ltd, an owner and operator of three
hydro power plants.
In December 2019, the Investment Committee undertook an evaluation
of its effectiveness. The effectiveness evaluation concluded that
overall the Investment Committee was performing effectively and its
composition, being all the members of the Board, remained appropriate.
In particular, having an Independent Director chair the Investment
Committee continued to be an effective and important element of the
Company’s corporate governance framework.
We expect 2020 to be another exciting and busy year for Georgia
Capital. This will bring with it challenges for the Investment Committee
and a priority therefore will be to ensure that the Investment Committee’s
processes remain rigorous, appropriate and agile.
I look forward to reporting to you next year on how the Investment
Committee continues to develop and the areas of work that it has
focused on.
Priorities for 2020
• Ongoing in-depth review of portfolio businesses and investment
monitoring meetings that will complement the Investment
Committee’s oversight of annual business.
• Focus on operational execution.
• Focus on how investments are performing against the basis on which
• Acquisition of 100% of Qartli Wind Farm, the only operational wind
approval given.
farm in Georgia.
• Ensuring portfolio monitoring and review metrics remain valid and
• Acquisition of 50% interest in four leading restaurants by the Group’s
hospitality business to partner with the owner, a famous Georgian
chef, embracing the business’s focus on a unique Georgian culinary
in its existing and upcoming hotels.
appropriate.
• Monitoring of how the Investment Committee ensures Directors’
duties under section 172 of the Companies Act 2006 are addressed.
The strategic move into education and expansion of the motor
vehicle business were both considered in detail and challenged by
the Investment Committee. This process of course extends beyond
the financial rationale – the Investment Committee will always take a
long-term view and in particular ensure there is a clear and cogent exit
strategy. In the Strategic Report (page 68), you will find a description
of how the Directors discharge their duties under section 172 of the
Companies Act 2006 when making decisions such as these. It is
also worth noting that at each of its quarterly meetings in Tbilisi, the
Investment Committee receives a detailed update on the regional and
Georgian economy and the prevailing political climate. This information
is critical to the Investment Committee’s decision making process.
INDEPENDENT AND
OBJECTIVE REVIEW
AND CHALLENGE
OF THE GROUP’S
INVESTMENTS
Kim Bradley
Chairman of the
Investment Committee
Dear shareholders
I am delighted to report on the work of the Investment Committee
during 2019. The Investment Committee was established to provide
an independent and objective review of investment opportunities and
performance, within the scope of its term of reference.
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.
During 2019, the Investment Committee took on a much more active
role, reflecting the high level of excellent opportunities being generated
not only by Georgia Capital’s management team but also directly by the
portfolio companies. The Investment Committee is a key part of Georgia
Capital’s corporate governance framework – all Directors are members
of the Investment Committee, which is chaired by me, an Independent
Non-Executive Director, and not the Chairman/CEO. Maria Chatti-Gautier
was appointed to the Board of Directors on 19 March 2020 and joined
the Investment Committee on the same date.
The Investment Committee plays the key role 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 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.
Kim Bradley
Chairman of the Investment Committee
7 April 2020
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
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 Transaction1;
• assessing the risks and rewards and general attractiveness and
suitability of proposed Major Transactions1;
• 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; and
•
• ensuring that management has the appropriate plans and controls
in place, with the necessary resources and capability to manage the
investment risk framework.
1 A “Major Transaction” is an investment opportunity, acquisition or disposal which is in
excess of GBP 2.5 million.
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Georgia Capital PLC Annual Report 2019
141
AUDIT AND VALUATION COMMITTEE REPORT
COMMITMENT TO
COMPREHENSIVE
AND TRANSPARENT
REPORTING
David Morrison
Chairman of the Audit
and Valuation Committee
Dear Shareholders,
As Chairman of the Audit and Valuation Committee (the “Committee”),
I am pleased to present the Committee’s report for Georgia Capital for
the year ended 31 December 2019. For the entire financial year, the
Committee was known as the Audit Committee. However, effective
from 31 December 2019, the role of the Audit Committee was
expanded to cover the additional governance processes required as
we adopt investment entity accounting in accordance with IFRS 10.
These additional responsibilities are focused principally on oversight of
valuation policies and procedures which the Committee approved and
recommended to the Board and are contained in its Terms of Reference
(https://georgiacapital.ge/governance/cgf/terms). Particularly
important in this regard are the policies and procedures developed for
valuing our private portfolio companies.
The adoption of investment entity accounting was the major area of focus
for the Committee during the second half of the year. The Committee
provided oversight of the transition and further information on this is
provided below.
Otherwise, the Committee’s primary functions were unchanged from
last year and included a review of the integrity of the Company’s financial
statements and of the performance and effectiveness of the Company’s
external auditor. The Committee also undertook its first review of its own
effectiveness. Particular areas of focus during 2019 included:
• valuation of private portfolio companies;
• accounting treatment of infrastructure assets; and
•
the use and presentation of Alternative Performance Measures.
The Committee has also overseen the development of the Internal Audit
function and is pleased to note that each late stage portfolio company
now has its own internal audit capability reporting to Georgia Capital’s
Internal Auditor, with a full internal audit plan in place for 2020. Internal
Audit has also contributed substantially to the due diligence process
undertaken by the Company’s investment team on new investments.
Finally, in the weeks prior to the publication of this report, we began
considering the impact of the COVID-19 crisis on our business and our
financial reporting. While it is too early to make a judgment about the final
lasting effects of the crisis, we have endeavored to ensure that the new
risks we face have been properly considered and reflected in our reporting.
David Morrison
Chairman of the Audit and Valuation Committee
7 April 2020
Introduction
This report describes the functioning and activities of the Committee
during the reporting period, including an overview of the key areas of
activity and principal topics covered at each meeting of the Committee.
Key purposes and responsibilities
On behalf of the Board, the Committee monitors the integrity of the
Company’s annual report and oversees conduct in financial reporting,
valuation process, internal control and risk management and Internal
Audit. It also supervises the work of our external auditor.
The 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 Committee’s Terms of
Reference outline its primary roles and responsibilities. As mentioned
previously, these were updated with effect from 31 December 2019.
Composition and operations of Committee
The Committee members are David Morrison (Chairman), Dr Caroline
Brown and Massimo Gesua’ sive Salvadori, all of whom are Independent
Non-Executive Directors. For the purposes of the Code and Disclosure,
Guidance and Transparency Rule 7.1, the Board is satisfied that
all members of the Committee have recent and relevant financial
experience and as a whole has competence relevant to the sector in
which the Company operates. A finance and securities lawyer whose
practice for more than 25 years included a focus on financial reporting,
Mr Morrison has both chaired and sat on audit committees of three
premium listed companies over the last 10 years. Massimo Gesua’
sive Salvadori’s experience of valuations is of particular benefit to the
Committee as it assumes its oversight role in this regard. Dr Caroline
Brown is a Fellow of the Chartered Institute of Management Accountants
and is also chair of the committee of another premium listed company.
More detailed biographies of the Committee members are set out on
pages 126 and 127.
The Audit and Valuation Committee held 11 meetings during the year,
and the meeting attendance during the year can be seen on page 130.
The Company Secretary is Secretary to the Committee and attends
all meetings. Meetings are also attended by: Chief Financial Officer,
Head of Technical Accounting and Head of Internal Audit. In addition,
representatives of Ernst & Young LLP (EY), the Company’s external
auditors are invited to attend several meetings each year. On some
occasions, invitations to attend are extended to other members of the
Board and management where necessary, to provide a deeper level of
insight into key issues and developments. The Committee also holds
at least one meeting during each year with the external auditor and the
Head of Internal Audit without management present to allow discussion
of any issues of concern in more detail.
The 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.
Mr Morrison will be available at the AGM to respond to any questions
from shareholders that may be raised on the Committee’s activities.
Activities of the Committee in 2019
The table below sets out the Committee activity during 2019.
Area of focus
Core activities
Financial reporting • Oversight of the Company’s change in accounting basis from consolidation to fair value measurement (in accordance
with IFRS 10)
• Review of the use, presentation and clarity of APMs
• Review the appropriateness and disclosure of accounting policies and practices
• Review the annual report and accounts content and advise the Board on whether the annual report was fair, balanced
and understandable
• Review of the Company’s annual and interim financial statements and quarterly trading updates relating to the Company’s
financial performance, including a review of the significant financial reporting policies and judgements contained in them
• Review of valuation of portfolio companies
• Review of valuation of investment properties and infrastructure assets
• Review and recommendation to the Board its approval of the Going Concern and Viability statements
Valuation
• Ensured that the Company has a Valuation Policy, which is approved by the Board
• Ensured that the Valuation Policy complies with IFRS 13, Fair Value Measurement, and with the obligations within any
agreements in place, legislation, regulations, guidance and other policies of the Company
• Reviewed half-yearly and annual valuations of the Company’s portfolio investments prepared and presented to it by
the management and monitored the compliance with the Valuation Policy and IFRS 13
• Considered the extent of valuation disclosure in the Company’s annual and interim reports
Risk and control
environment
• Reviewed and assessed the effectiveness of GCAP internal controls and risk management processes
• Reviewed the results of risk identification and assessment work performed by management
• Reviewed the Board’s approach to assessing the Company’s long-term viability
• Reviewed reports from the external auditor where they have looked at internal controls as part of the annual audit process
• Reviewed the Company’s Principal Risks and Uncertainties statement included in the annual report
• Regular monitoring of the internal and external environment to ensure that any new or emerging risk is identified in a timely
manner and responded to appropriately. As a result of the principal risks assessment, no new risks relating to the Company
and the portfolio businesses have been identified.
Internal Audit
• Reviewed reports of internal audits and monitored action points and follow up actions arising from audit visits
• Approval of 2020 audit plan
• Monitored and reviewed the effectiveness of the Company’s Internal Audit function
• Approved the annual budget for the Internal Audit function
External audit
• Monitored the effectiveness and performance of EY
• Reviewed the objectivity and independence of the external auditor
• Reviewed and made recommendations to the Board on the appointment/terms of engagement and remuneration of the
external auditor
• Reviewed 2019 Audit Plan including the approach, scope and risk assessments of external audit
• Agreement on terms of the external auditor’s engagement and fees
• Policy and approval of non-audit fees
Governance
• Reviewed governance processes in place to oversee valuation of portfolio companies
• Approved amended Terms of Reference to reflect the Audit Committee’s new status as the Audit and Valuation Committee
• Committee effectiveness evaluation
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AUDIT AND VALUATION COMMITTEE REPORT CONTINUED
Key activities during the year:
Business developments
The Committee considered the financial implications of a number of
business developments, namely the implications of new pipeline projects.
The finance team worked intensively, under the supervision of the
Committee, in considering the suitability of the accounting policies
which have been adopted, ensuring that key reporting estimates and
judgements were appropriate, and ensuring that the external auditors
were afforded timely and full access.
Financial reporting
A principal responsibility of the Committee is to consider the significant
areas of complexity, management of judgement and estimation that
have been applied in the preparation of the financial statements. This
includes ensuring that the Annual Report and Accounts, taken as a
whole, are fair, balanced and understandable, and that they comply
with disclosure requirements.
Throughout the year the Committee received detailed reporting from the
external auditor in respect of key areas of audit focus and these were,
in some instances, discussed without management present. As well
as these, regular reports were received from the CFO on the financials
and internal controls and where appropriate, reports and feedback
from internal and external advisors were presented to the Committee
to enhance the quality of our reporting.
Using our own independent knowledge of the Group, but also taking
into account the external auditor’s assessment of risk, the Committee
has where necessary, challenged the actions, estimates and judgements
of management in relation to the preparation of the financial statements.
When considering financial reporting, the Committee assesses
compliance with relevant accounting standards, regulations and
governance codes.
The significant accounting measures and financial judgements
considered by the Committee in relation to the financial statements
are outlined below:
Key matters considered
during the year
Adoption and Evaluation
of IFRS 10 criteria
for investment entity
classification
How the Committee addressed the matter
The Company meets investment entity definition in accordance with IFRS 10 from 31 December 2019 and as a result,
the accounting basis was changed from consolidation to fair value measurement effective on that date. The background
to this is that under IFRS 10 a parent entity that meets the definition of an “investment entity” does not consolidate certain
subsidiaries but rather measures those investments at fair value. Management has for some time been increasingly viewing
itself as an investment entity and has been providing alternative performance measures based on its statement of net asset
value. The final step which triggered the company becoming an investment entity under IFRS 10 was the creation of the
valuation process included in the Terms of Reference of the new Audit and Valuation Committee and the creation of that
Committee on 31 December 2019.
The Committee received regular updates from management and external auditors about meeting the investment entity
definition and the adoption of investment entity basis accounting in accordance with IFRS 10. The Committee is satisfied
with management’s judgement applied in the assessment of investment entity status under IFRS 10, further described on
page 212 in Note 4 to the financial statement.
Portfolio company fair
value estimation and
disclosure
Reviewed half-yearly and annual valuations of the Company’s portfolio investments prepared and presented to it by
management. The Committee considered and challenged whether management followed appropriate valuation standards
as reflected in the Valuation Policy and used appropriate judgement. The Committee also considered the methods used to
account for significant or unusual valuations where different approaches are possible.
Going concern and
viability
Revenue recognition
Valuation of investment
property portfolio
The Committee considered the management’s assessment of the Company’s ability to continue as a going concern and its
long-term viability taking into consideration the expected impact of the COVID-19 crisis. The Committee reviewed and
challenged the inputs and assumptions made during the assessment and ensured that disclosures in Annual Report and
Accounts are appropriate.
The Audit and Valuation 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.
Considered the reports of management, prepared based on the third-party valuation and the view of the external auditors.
Alternative performance
measures
At the start of the financial year the Committee reviewed the alternative performance measures used by the Company.
Throughout the year the Committee considered the prominence of the APMs (this was also flagged by EY).
The 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 Committee has challenged management and is satisfied that these are appropriate.
Reviewed management’s paper setting out the rationale for and impact of the proposed change in accounting policy and
considered the external auditor’s views. It was decided that the capitalisation under IAS 23 was inappropriate in light of
IFRIC March 2019 paper and implemented the change in accounting policy in 1H19.
Reviewed management’s paper setting out the rationale for and impact of the proposed change in accounting policy and
considered the external auditor’s views.
Capitalisation of
borrowing costs on
residential apartments
Change in accounting
policy for infrastructure
assets
Risk management and internal controls
One of the delegated responsibilities of the Committee is to review the
effectiveness of the Company’s internal financial control systems and
risk management and to ensure that where areas of improvement are
identified, there are the correct processes in place to effectively take
action to address these areas.
The Committee assists the Board in fulfilling its responsibility to review
the adequacy and effectiveness of the controls over financial reporting
and risk. Further information on risk management and internal controls
can be found on pages 70 to 75.
need to respond to changes in the Group’s business and the external
environment. During the year, internal audit provided assurance across
a range of areas, including capital expenditures in capital intensive
businesses, procurement cycle, management of insurance claims and
revenue recognition under IFRS 15. We also considered the quality of
the reporting by Internal Audit to the 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. More information on the activities of Internal Audit can be
found on page 72.
The Committee is supported by a number of sources of internal
assurance within the Group in order to discharge its responsibilities.
As part of the regular reporting from the Chief Financial Officer and
the finance team regarding the operating performance of the portfolio
companies, the strength of the internal control environment is considered.
Management also provide updates on how risks, for example bribery and
information security, are managed within particular business areas, and
updates are presented to the Board or the Committee as appropriate.
Further, during the year, the Internal Audit function assisted management
to perform certain risk identification and assessment activities at the
private portfolio companies, the results of which were presented and
discussed at the Committee meeting.
The Committee continued, on behalf of the Board, to oversee the Internal
Audit function, which serves as the Group’s independent assurance over
the adequacy and effectiveness of the systems and processes of risk
management and control across the Group. The Committee monitors the
scope, extent and effectiveness of the Group’s Internal Audit function. We
review, approve and oversee the Internal Audit Plan, which is designed
using a risk-based approach aligned with the overall strategy of the Group.
Throughout the year, we received regular reports from Internal Audit
on the progress of the Internal Audit Plan and on the audits themselves,
including 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.
With respect to external assurance, throughout the year, the Committee
received and reviewed regular interim reports from the external auditors,
EY, which include the external auditor’s observations on risk management
and internal financial controls identified as part of its audit.
External audit
Oversight of the relationship between Georgia Capital and the external
auditors, EY, is one of the Committee’s key responsibilities. 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 judgements;
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; and
recommended the appointment, re-appointment or removal,
as applicable, of the external auditor.
Audit tender
EY was appointed by the Board as the Group statutory auditor in 2018,
following a competitive tender process, and re-appointed by shareholders
at the 2019 AGM. The audit tender process was described in detail in
last year’s report. Following the successfully completed tender for the
provision of external audit services last year, the Group will be required
to put the external audit contract out to tender no later than 2028.
Following the tender last year, Richard Addison has since stepped
down from his role as lead partner and was replaced by John Flaherty
in September 2019.
The processes described above ensure that the effectiveness of the
controls is reviewed on an ongoing basis, and we are pleased to report
that no significant weaknesses in our risk management processes or
internal controls were identified this year.
Auditor effectiveness
We have an established framework for assessing the effectiveness of
the external audit process. This includes:
Internal Audit effectiveness
As noted above, the Committee continued, on behalf of the Board,
to oversee the Internal Audit function, monitoring the scope, extent
and effectiveness of the Group’s Internal Audit function and reviewing,
approving and overseeing the Internal Audit Plan.
The Head of Internal Audit has direct access to the Committee and
the opportunity to discuss matters with the 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.
We reviewed the effectiveness of the Internal Audit department by
considering progress against the agreed plan, taking into account the
•
• 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
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 2019 Transparency Report and the annual FRC
Audit Quality Inspection Report of EY.
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AUDIT AND VALUATION COMMITTEE REPORT CONTINUED
DIRECTORS’ REMUNERATION REPORT
During the year, an assessment of the effectiveness of the external
auditor was conducted through the use of a questionnaire completed
by all Committee members and also the Chief Financial Officer and
members of the finance team and the Company Secretary. The
questionnaire addressed a number of issues including:
•
the quality of the auditors’ involvement and their understanding
of the Company;
• co-ordination between the London and Tbilisi offices;
• governance and independence;
• audit scope, planning and execution; and
• quality of the challenge to management and the Committee from EY.
Feedback was positive overall, and areas in which EY could improve
were identified. The result of the assessment was discussed in
September 2019 and the Committee Chairman met with the new audit
lead partner to discuss the results of the evaluation.
Auditor independence
The Committee has the responsibility of developing, implementing and
monitoring 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.
This is supported by the Company’s Non-Audit Services Policy.
The Committee has undertaken a formal assessment of EY’s
independence, which included a review of: 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 the value of
non-audit services provided by EY. EY have confirmed that they believe
they remained independent throughout the year, within the meaning of
the regulations on this matter and in accordance with their professional
standards. In the Group’s internal evaluation of the services of EY, some
of the highest scores were received in relation to EY’s maintenance of its
independence and their discussion of its internal processes for ensuring
independence with the Committee.
Non-Audit Services Policy
In order to safeguard the external auditor’s independence and objectivity,
our policy on the provision of non-audit services by our external auditors
aligns with the current EU Statutory Audit regime and recent amendments
to the UK Corporate Governance Code. Any work other than for audit
or review of interim statements to be undertaken by the external auditor
now requires authorisation by the Committee, except in very narrow
circumstances. The Group’s Non-Audit Policy Services is available on
our website at: https://georgiacapital.ge/governance/cgf/policies.
The ratio of non-audit fees to audit fees for 2019 is below 1:1. Nearly
all of the non-audit fees relate to interim review of financial statements.
As indicated in Note 26 of the audited IFRS Financial Statements for
2019, the total fees paid to EY for the year ended 31 December 2019
was GEL 5.2 million.
Compliance
During 2019, the Company complied with The Statutory Audit Services
for Large Companies Market Investigation (Mandatory Use of Competitive
Tender Processes and Audit Committee Responsibilities) Order 2014.
Whistleblowing, conflicts of interest, anti-bribery and
anti-corruption and data protection
The Company is committed to the highest standard of integrity and
ethics. The Committee conducts an annual review of the Company’s
policies, and it is the responsibility of the Committee to ensure that there
is a robust governance framework and effective procedures are in place.
This included a review of the Whistleblowing Policy. Under the new
UK Corporate Governance Code effective from 2019, it is now the
responsibility of the Board to have oversight of whistleblowing within
the Company and accordingly, following its review of the Policy the
Committee made an appropriate recommendation to the Board.
The 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 Board continues to monitor and note potential conflicts of interest,
and recommends to the Board to consider whether these should
be authorised.
The 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 2019.
Fair, balanced and understandable reporting
The Committee reviewed the 2019 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.
In making this assessment, we satisfied 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 2019 Annual Report and Accounts
and directly reviewed the overall messages and tone of the Annual
Report with the CEO and CFO; and
• we 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
An internal review was facilitated by the Company Secretary, in reviewing
the Committee’s performance over the financial year. The effectiveness
evaluation concluded that overall the Committee was performing
effectively and its composition remained appropriate. During the year,
the Committee changed the structure of some of it’s meeting in order
to enhance the effectiveness of Committee meetings.
Continuing education and training
The entire Board received training on the current UK Corporate
Governance Code, and on proposed changes that could impact
the work of the Committee.
Priorities for 2020
Our priorities for 2020 include,among others, continued focus on:
• monitoring the successful implementation of investment entity basis
•
accounting in accordance with IFRS 10;
the review of portfolio company valuations and monitoring
compliance with the Group’s valuation policy;
• ensuring continued integrity and balance in the Group’s
financial reporting; and
• new and emerging risks, including the Group’s response to the
coronavirus pandemic.
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 the Directors’
Remuneration Report for the year ended 31 December 2019.
where possible, calls and face-to-face meetings. Their feedback was
taken into account ahead of finalising the Policy. We are grateful for their
engagement and the support shown for the Policy at the AGM.
The Remuneration Committee was strongly encouraged that the
new Directors’ Remuneration Policy received 99% approval by
our shareholders at our AGM in May 2019. Similarly, the Directors’
Remuneration Report also received 99% approval.
Directors’ Remuneration Policy implemented
Shaping, consulting on and implementing the new Directors’ Remuneration
Policy (the “Policy”) was the Remuneration Committee’s priority in the first
months of 2019. The Policy focuses on alignment between the Executive
Directors and our shareholders. In particular, the Executive Director’s
salary and performance-based remuneration is paid in shares which vest
over several years. There is no cash salary or cash bonus and no LTIP.
This remuneration structure has been designed to foster and reward
long-term strategic performance.
The Policy is in tune with relevant guidance including:
• Shareholding guidelines with an equivalent of 200% of salary, also to
be maintained for two years post-employment;
• Malus and clawback provisions with strengthened prescribed triggers
consistent with the UK best practice; and
• Pension contribution by the Company the same as for Group
employees, although our CEO, Irakli Gilauri, has waived his pension
entitlement.
Furthermore, there was a 35% reduction in salary for the CEO compared
to that of our predecessor BGEO Group PLC.
A summary of the Policy is on pages 156 to 160 of this Remuneration
Report and the full text of the Policy is available on the website at
https://georgiacapital.ge/governance/cgf/policies.
Shareholder engagement
In early 2019, the Remuneration Committee (including myself) and the
Senior Independent Director engaged extensively with our investors
on the proposed new Policy through letters to our shareholders, and,
Workforce engagement
We are also mindful of the value of workforce engagement. Employees
were able to raise matters relating to the workforce through the
designated Non-Executive Director, Kim Bradley, who is also a member
of the Remuneration Committee; further details of this can be found on
page 136.
Addressing the factors in provision 40 of the new UK Corporate
Governance Code (the “Code”)
The Remuneration Committee considered the requirements of the
new Code in determining the new remuneration structure and Policy,
taking each of the factors of provision 40 of the Code in turn:
• Clarity: remuneration arrangements are transparent and competitive.
The Remuneration Committee set out the rationale and the full Policy
last year: this year, we summarise the Policy in this report so that
main features are clear.
• Simplicity: the rational is simple, focusing the Executive Director
and senior management on sustainable, long-term performance
of the Company by remunerating mostly in deferred shares.
• Risk: by its nature, setting all of the CEO’s remuneration in shares
which are deferred by up to six years from the start of the work year,
the structure drives the CEO and senior management to mitigate
reputational, behavioural and undue strategic risks as the outcome
of such would be likely to affect the share price over the years.
The new Policy also introduced a minimum shareholding and
post-employment shareholding requirements.
• Predictability: the range of possible values was set out in the Policy
including the impact of share price appreciation and depreciation
even though such disclosure was voluntary, to aid predictability.
Weighted KPIs have been used in this year’s performance review.
• Proportionality: outcomes reward performance proportionately
by reference to performance targets and, furthermore, to allow
appropriate adjustment, the entire “bonus” is discretionary.
For further considerations on proportionality, see section
“CEO Pay and Comparators” on page 151.
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DIRECTORS’ REMUNERATION REPORT CONTINUED
• Alignment to culture: the entire remuneration in deferred shares
rather than cash promotes alignment with culture and the long-term
success of the Company, supported by the inclusion of initiating
cultural change as one of the CEO’s performance KPIs.
Pay for performance
An important decision for the Remuneration Committee was determination
of the discretionary performance-based remuneration (in deferred shares)
for our CEO and sole Executive Director, Irakli Gilauri, in respect of his
performance over 2019.
This year, to aid transparency in decision making, the Remuneration
Committee disclosed weighting against each KPI.
The CEO’s KPIs were selected based on our framework of value creation
as well as setting up the Group for long-term growth. The first six KPIs and
targets, to which 90/100 weighting was attributed are therefore completely
aligned with strategy. The Group also considers softer KPIs (weighting
10/100) important, such as active mentoring of the management team,
continued personal development and initiating cultural change; as setting
standards, encouraging development and leading by example correlate
with the Group’s responsibilities and its future.
The Remuneration Committee considered Mr Gilauri’s performance
against the ambitious financial targets chosen, as well as the strategic
non-financial targets and KPIs that shape the cultural growth of our
Group, and awarded Mr Gilauri 50% of the maximum opportunity.
The performance-based remuneration is entirely discretionary, although
based upon the CEO’s performance measures. It will vest on a phased
basis with a total vesting and holding period of five years. The rationale
and performance metrics are further explained later in this report.
The Remuneration Policy operated as intended in terms of the
Company performance and quantum.
Pension contributions
In 2019, the Remuneration Committee also reviewed the changes to the
pension provision following the new Georgian state pension legislation.
This implementation has been group-wide in Georgia; the Group, the
employee and the Georgian Government each contribute an amount
equivalent up to 2% (up to a ceiling) of the employee’s remuneration.
As above, our current Executive Director, Irakli Gilauri, has waived the
pension contribution from the Company and further, is not receiving
a payment in lieu of pension contribution.
Approach to workforce remuneration
There is some variation to workforce remuneration between portfolio
companies. The general approach taken to compensation is: (i) base
salary, (ii) cash bonus determined by direct managers based on
individual performance, (iii) health insurance, and (iv) other varying
benefits.
The pension provision in Georgia is the same across the Group,
as above. At the top levels in portfolio companies, compensation
may include shares or phantom shares.
In 2019, the Remuneration Committee reviewed the employees
remuneration structures in the portfolio companies. It considered the
addition of benefits for some companies, such as accident insurance,
transportation and communication benefits. The Remuneration
Committee also compared benefits and salary banding within
and across the portfolio companies.
Other Remuneration Committee activities in 2019
The Remuneration Committee decided the bonus for senior management
for the work year 2018 (in early 2019) and for work year 2019 (in early
2020), including the number of discretionary deferred shares, which vest
over several years. Senior management is defined as the top executives
in the Georgian holding company.
The Remuneration Committee has also reviewed and recommended
the updated Terms of Reference of the Remuneration Committee and
updated the Executive Incentive Plan to align it with the new Policy.
On a final note, we would like to thank our shareholders for their
strong support on remuneration matters at the 2019 AGM, as we also
believe the structure, package and approach to remuneration is right
for our Group.
Jyrki Talvitie
Chairman of the Remuneration Committee
7 April 2020
What’s in this report
This Directors’ Remuneration Report discloses the amounts earned and other information relating to the year ended 31 December 2019.
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.
The Directors’ Remuneration Policy was approved by shareholders in a binding vote at the 2019 AGM and took formal effect from the date
of approval and will apply until the 2022 AGM, at which time we will be required to submit our Directors’ Remuneration Policy for approval
by shareholders. A summary of our Directors’ Remuneration Policy can be found on pages 156 to 160. The full policy is set out in the
2018 Annual Report on pages 140 to 147 which is available at https://georgiacapital.ge/ir/annual-reports and on our website at
https://georgiacapital.ge/governance/cgf/policies.
The Annual Report on Remuneration (set out on pages 145 to 160), which includes the Annual Statement by the Chairman of the Remuneration
Committee, will be subject to an advisory vote at the 2020 AGM.
The Remuneration Committee and its Advisers
The Remuneration Committee is principally responsible to the Board for establishing a remuneration policy for the Executive Directors, the Chairman
and designated members of the Executive Management team that rewards fairly and responsibly, and is designed to support the Company’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 reviewed in December
2019 and are available on our website: https://georgiacapital.ge/governance/cgf/terms.
The Remuneration Committee is comprised of three Independent Non-Executive Directors: Jyrki Talvitie who serves as Chairman, Kim Bradley
and Maria Chatti-Gautier who joined the Remuneration Committee on 19 March 2020. Bill Huyett stepped down as Chairman of the Remuneration
Committee in January 2019, and as a member of the Remuneration Committee and the Board in June 2019. At the date of appointment as Chairman,
Mr Talvitie had 10 months’ experience on a remuneration committee: the Company has explained against the Code provision in the Governance
Statement on page 125 on this matter. The members’ attendance during 2019 is shown in the Board and Committee meetings attendance table
on page 130.
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.
The Remuneration Committee received additional advice on compliance from Baker & McKenzie LLP, the Company’s legal advisers.
The Remuneration Committee is of the view that the advice received from Baker & McKenzie LLP is objective and independent.
To aid in formulating the new Policy, the Company engaged a specialised remuneration consultant, Willis Towers Watson (WTW), to conduct an
independent review of the Company’s previous 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 advisers
appointed following a competitive tender process who have no other relationship with the Company. WTW’s fees are typically charged on an hourly
basis with estimates for work agreed in advance. During 2019, WTW was paid £13,800 for this work for the Remuneration Committee.
Shareholder context
The Directors’ Remuneration Policy applicable to this section of the Annual Report on Remuneration was approved by shareholders at our AGM
on 22 May 2019 (the 2019 Policy). The Directors Remuneration Policy received the following votes from shareholders.
Resolution
Votes for
%
Votes against
% Total votes cast
Votes withheld
Approval of the Directors’ Remuneration Policy
28,900,823
98.89
325,227
1.11
29,226,050
2,309,274
Set out below are the shareholder voting figures for the Directors’ Remuneration Report (including the Annual Statement of the Chairman of the
Remuneration Committee) presented at our 2019 AGM.
Resolution
Votes for
%
Votes against
% Total votes cast
Votes withheld
Approval of the Directors’ Remuneration Report
29,932,096
98.77
371,362
1.23
30,303,458
1,231,866
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DIRECTORS’ REMUNERATION REPORT CONTINUED
Directors’ remuneration
Single total figure of remuneration for the Executive Director (audited)
The table below sets out the remuneration earned by Georgia Capital PLC’s sole Executive Director, Irakli Gilauri, during 2019, in respect of his
employment for the year ended 31 December 2019. 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 fixed share
price as described in footnotes 2 and 3 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 158.
2019
2018
Cash salary
(US$)1
Deferred share
salary (US$)2
Total salary
compensation
(US$)
Discretionary
deferred shares
(US$)3
Taxable benefits
(US$)4
Pension
benefits4
Total
(US$)
–
–
2,730,000
2,730,000
1,060,000
1,615,562
1,615,562
2,451,400
–
–
–
–
3,790,000
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. 200,000 deferred salary shares were
awarded for the work year 2019 and 118,356 deferred salary shares were awarded for the work year 2018 (i.e. 200,000 annual salary pro-rated since the listing on 29 May 2018).
The change from a part to full work year explains the change in salary received from 2018 to 2019. To discharge the UK tax and employee National Insurance Contributions
arising upon the grant of the salary shares Georgia Capital PLC and the Executive Director agreed to waive his entitlement to such number of the salary shares as needed for
the payment of the Executive Director’s UK tax and employee National Insurance Contributions by the Company. Under this arrangement, the Executive Director waived his
entitlement to 9,186 deferred salary shares with respect to work year 2019 and 4,200 shares with respect to work year 2018. The value of US$2,730,000 for the work year 2019
and US$1,615,562 for the work year 2018 is calculated by reference to the share price as the date of the Remuneration Committee meeting at which salary was determined,
12 July 2018, being US$13.65 a share (the official share price of GBP 10.324 converted into US 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 PLC shares underlying nil-cost options granted in respect of bonus award for the year.
For 2019, awards were granted over 100,000 shares. The value is calculated by reference to the share price on 29 January 2020, which the last available price as the date of
the Remuneration Committee meeting which determined the discretionary deferred share award, 30 January 2020, being US$10.60 a share (the official share price of GBP 8.15
converted into US Dollars using an exchange rate of 1.3 being the official exchange rate published by the Bank of England on the same date). 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$14.42 a share (the official share price of GBP 11.14 converted into US Dollars
using an exchange rate of 1.2942, being the official exchange rate published by the Bank of England on the same date). Discretionary deferred shares vest 25% in each of the
second, third, fourth and fifth years following the end of the work year and 2019 award is subject to a further holding period of a year.
4 There are no taxable benefits or pension benefits for 2019 and 2018. Mr Gilauri has agreed for all pension contributions to be waived. Mr Gilauri was reimbursed for reasonable
business expenses, on the provision of valid receipts. No money or other assets are received or receivable by Mr Gilauri in respect of a period of more than one financial year.
5 The number of shares awarded pursuant to the deferred share salary and discretionary deferred share remuneration is fixed on grant. No discretion has been exercised as a
result of share price appreciation or depreciation. Discretionary deferred shares are subject to one-year targets and the Company does not operate a LTIP. No amounts were
recovered or withheld in 2019. No dividend equivalents have been received.
Alternative remuneration table showing the Executive Director’s 2018 and 2019 remuneration discounted for time value of money (unaudited)
For investor information, the alternative table below sets out the share remuneration earned by Irakli Gilauri in 2018 and 2019 as per the previous
table (Single total figure of remuneration for the Executive Director) but taking into account the time value of money discounted at 15%, given that
both the salary shares and discretionary deferred shares vest over a number of years. Further, the Executive Director may forfeit the shares on
cessation of employment in certain circumstances.
2019
2018
Deferred
share salary
(US$)
Discretionary
deferred shares
(US$)
Total salary and
discretionary
deferred shares
remuneration
(US$)
1,590,845
657,634
2,248,480
941,579
1,520,050
2,462,629
In a change from last year, we are reporting our weighting of the KPIs so that the award outcome is more transparent (although ultimately, as will
be clear from this year’s award, the Remuneration Committee retains discretion). The overall financial to non-financial KPIs ratio is 60:40 (the Group
is young and non-financial strategic targets are also key) and the individual KPI weightings are shown in the table below, which sets out the target
for Mr Gilauri’s 2019 KPIs as well as a summary of the Remuneration Committee’s assessment of his performance against them. More details on
performance is provided below the table.
Key Performance Indicator
Weight/100
2019 Target
Performance and Remuneration
Committee Evaluation
Award & Weighted
Result
Financial Targets
NAV growth as per business plan
40
Generate cash at GCAP level
as well as at private portfolio
companies
Expense Ratio
10
10
Strategic Targets
Active and disciplined pursuit of
new investment opportunities
17.5
17.5%+ growth focused principally
on private portfolio companies
(stretch target is 20% growth)
65% growth
Fell short –
39.8% growth
Largely achieved – 21% value
creation in private portfolio
80% (32)
40% (4)
80% (8)
2% management fee expenses
as a % of market cap
Target exceeded –
1.8%
Pursuit in line with strategy: good
deal flow, building an investment
process with disciplined capital
allocation
Discipline pursuit of pipeline
deals with 11 completed
92% (16)
New business areas entered
Targeted exceeded
Achieve strategic priorities
of portfolio companies
12.5
Key targets for portfolio companies (all
as published in investor presentations)
Target met
Intangible Targets
Active mentoring and development
of management team including
successors
Initiate Cultural Change
10
Active mentoring and development of
senior executives; help develop of their
business and soft skills
Support the board in defining the
corporate culture and initiating cultural
change, including leading by example
Targets met, see below
for details
Continued personal development
Continued self-development
Total Performance Assessment
72% (9)
80% (8)
77/100
Comments on individual KPIs
Financial targets
• NAV grew by 35.3% with a very healthy 21% value added in the private portfolio. The combined negative growth of our two public portfolio
companies offset this result and produced overall growth of 5.7%.
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 2019, and his discretionary compensation as a percentage of maximum opportunity.
• Cashflow generation targets at the aggregate portfolio level was not met, although the target was met at the Company level.
• At 1.8%, the expense ratio was well within our target maximum, as good cost discipline was maintained.
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
2019
4,066,962
3,790,000
85
50
Basis for determining Mr Gilauri’s discretionary deferred share compensation in respect of 2019
Mr Gilauri’s KPIs included financial targets, strategic targets and non-tangible components. The financial and strategic elements largely track
the Group’s KPIs as he is expected to deliver on the Group’s strategy. The non-tangible targets take into account factors such as leadership and
mentoring, corporate culture and personal development. The Remuneration Committee’s practice is to set ambitious financial targets, and would
normally expect to award 70% of the maximum available for meeting the target, depending on the circumstances, including business and economic
developments during the year. For strategic and non-tangible targets, measurement is more difficult, but here again we have high expectations of
Mr Gilauri and would typically plan to award 70% of the maximum available for meeting these targets. The range above a 70% award is reserved for
performance that exceeds the target or is truly exceptional.
Strategic targets
• A large number of investment opportunities were screened with financial and strategic rigour, and Mr Gilauri led the team in pursuing an extraordinary
number of investment opportunities that passed through this initial screening, leading to number of very promising new investments and 11 deals
completed. (This KPI is a key non-financial driver in building up this young Group.)
• Key targets for portfolio companies met as above.
Intangible targets
• Mr Gilauri aided in developing our executives into “internal entrepreneurs” in line with the Company’s purpose, both by directly and actively
monitoring senior executives, and by encouraging management participation in coaching and training. Mr Gilauri lead the Board in considering
the culture we want and how our current culture measures up against our vision, and initiating cultural change (including leading by example on
the new values). He continued his personal development and is supportive of the Board on planning for succession on all levels.
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DIRECTORS’ REMUNERATION REPORT CONTINUED
As evident from the above, the Remuneration Committee was highly satisfied with Mr Gilauri’s performance and the overall assessment suggested
an award of 77% of the maximum. Notwithstanding this, both Mr Gilauri and the Remuneration Committee agreed that the poor performance of
the public portfolio in 2019 should be taken into consideration (even though the CEO had limited influence over this). The Remuneration Committee
had originally set the figure at a somewhat higher amount, but after detailed discussion with the CEO his award was set at 50% of the maximum
opportunity.
Percentage change in remuneration of CEO
The following table sets out details of the percentage change in the remuneration awarded to the CEO between 2018 and 2019, compared with the
average percentage change in the per capita remuneration awarded to the employees at the holding company’s level only (c.35 employees in total)
as a whole between 2018 and 2019. We considered comparison against these employees to be the most appropriate given the Company’s status
as an investment entity under IFRS 10. See the single total figure of remuneration table on page 147 for an explanation of deferred share salary,
taxable benefits and discretionary deferred remuneration of Mr Gilauri.
Total deferred share salary1
Taxable benefits
Total bonus (discretionary deferred share remuneration, in the case of Mr Gilauri, and deferred
discretionary share remuneration plus cash bonus, in the case of other employees of the Group)
Percentage change
for the CEO between
2018 and 2019
0%
0%
-52.6%
Average percentage change
for the Group’s employees as
a whole (excluding Mr Gilauri)
between 2018 and 2019
0%
24.4%
-3.1%
Note:
1 For the work year 2018, the CEO’s deferred share salary of 200,000 shares was pro-rated since the listing on 29 May 2018. For the purpose of this disclosure the award was
scaled up to the full year. The same approach is applied for the deferred share salary of other senior managers.
Details of fixed and discretionary deferred share remuneration granted during 2019
The table below sets out details of the nil-cost options over GCAP shares which have been granted to Mr Gilauri in 2019 in respect of 2018 work year.
Please note that the information presented in this section is for the 2018 financial year.
Number of underlying shares and basis
on which award was made
Deferred share salary
Discretionary deferred share remuneration
118,356 granted on the basis described in the table
under the old BGEO 2017 policy available at https://
georgiacapital.ge/ir/annual-reports as amended
in accordance with the circular to shareholders
available at https://georgiacapital.ge/ir/listing-
materials.
170,000 granted on the basis described in the
table under the old BGEO 2017 policy available
at https://georgiacapital.ge/ir/annual-
reports as amended in accordance with the
circular to shareholders available at https://
georgiacapital.ge/ir/listing-materials.
Type of interest
Nil-cost option
Cost to Group (as reflected in accounts)
US$ 1,615,5621
Nil-cost option
US$ 2,451,4002
Face value
Percentage of award achievable if minimum
performance achieved
Exercise price
Vesting period
Performance measures
US$ 1,615,5621
Cash payments equal to the dividends paid on
the underlying shares will be made upon vesting
(if applicable).
US$ 2,451,4002
Cash payments equal to the dividends paid on
the underlying shares will be made upon vesting
(if applicable).
100% of the award will be receivable, since the award
is part of the Executive Director’s salary for 2018 and
accordingly is not subject to performance measures
or targets over the vesting period.
Nil. The options form part of the Executive Director’s
salary under the Policy and so no payment is
required upon exercise.
100% of the award will be receivable, since the
award is based on 2018 performance (and is not
LTIP award) and accordingly is not subject to
performance measures or targets over the
vesting period.
Nil. The options make up the entirety of the
Executive Director’s performance-based
remuneration and so no payment is required
upon exercise.
20% in each of 2020, 2021, 2022, 2023 and 2024.
25% in each of 2020, 2021, 2022 and 2023.
None. See section (1) of the
BGEO 2017 Policy available at
https://georgiacapital.ge/ir/annual-reports
as amended in accordance with the circular to
shareholders available at https://georgiacapital.
ge/ir/listing-materials.
See section (2) of the
BGEO 2017 Policy available at
https://georgiacapital.ge/ir/annual-reports
as amended in accordance with the circular
to shareholders available at https://
georgiacapital.ge/ir/listing-materials.
Notes:
1 Deferred share salary. The value is calculated as described in Note 2 to the table of single total figure of remuneration to the Executive Director. The terms and conditions
applying to deferred share salary for 2018 are described in section (1) of the BGEO 2017 Policy available at https://georgiacapital.ge/ir/annual-reports as amended
in accordance with the circular to shareholders available at https://georgiacapital.ge/ir/listing-materials.
2 Discretionary deferred share remuneration. The value is calculated as described in Note 3 to the table of single total figure of remuneration to the Executive Director.
The means of determining the number of shares underlying this award and the terms and conditions are described in section (2) of the BGEO 2017 Policy available at
https://georgiacapital.ge/ir/annual-reports as amended in accordance with the circular to shareholders available at https://georgiacapital.ge/ir/listing-materials.
CEO pay and comparators
It is noted that the Group has less than 250 UK employees and therefore is not required to disclose ratios of the CEO pay against the UK pay (and
indeed given it has less than 20 UK employees, to do so would be distortionary). The Remuneration Committee also noted the 35% decrease in salary
from our predecessor, BGEO Group PLC. The delayed receipt of the salary and the bonus (in shares vesting across several years) means that the time
value of money and also the risk of salary and bonus not vesting (due to malus but also to shares lapsing in the event of early termination under certain
circumstances) were factored. We also presented the overall package (without factoring in the time value or money or risk of lapse) in face-to-face
meetings with investors when engaging on the new Policy.
Single total figure of remuneration for Non-Executive Directors (audited)
During 2019, the Board reviewed the Investment Committee Chairman’s time commitment, responsibilities and technical skills required to make
a valuable contribution to the Investment Committee and the Board. The Investment Committee plays key role in making decisions on portfolio
investments and exits, and 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
and in considering the commercial terms of major transactions and is pivotal to the Company. Given the responsibilities of the role and the level of
time commitment from Kim Bradley in his position as Investment Committee Chairman, including the time spent with the portfolio companies to
understand their businesses, the Board decided a commensurate increase in fees for the Chairman of Investment Committee, which took effect
from 1 August 2019.
The table below sets out the remuneration received by each Non-Executive Director in 2019 and 2018.
David Morrison
Massimo Gesua’ sive Salvadori
Kim Bradley
William Huyett
Caroline Brown
Jyrki Talvitie
Total
Georgia Capital PLC fees (US$)
JSC Georgia Capital fees (US$)
Total fees (US$)
2019
77,526
61,977
65,730
25,585
61,977
63,994
356,789
2018
47,560
51,122
37,427
51,122
51,122
48,688
287,041
2019
124,100
94,973
108,903
39,444
94,973
94,957
2018
76,061
79,365
60,958
79,365
79,365
76,123
557,350
451,237
2019
201,626
156,950
174,633
65,029
156,950
158,951
914,139
2018
123,621
130,487
98,385
130,487
130,487
124,811
738,278
Notes:
1 The Company has been publicly listed since 29 May 2018. David Morrison and Kim Bradley waived their fees until 21 May 2018 as they were remunerated as BGEO Group PLC
directors until that date. BGEO Group PLC fees are not included in 2018 fees in the above table as fees in this report are for Georgia Capital PLC and its Group entities only.
Other Non-Executive Directors were only remunerated from March 2018 when appointed. Hence, 2018 was not a complete year for fee payment, unlike 2019. The increase in
Investment Committee Chair fees is explained above the table. Together these matters explain the difference between 2018 and 2019 fees.
2 William Huyett stepped down as Chairman of the Remuneration Committee on 16 January 2019 but remained as a member of the Remuneration Committee. On 5 June 2019
William Huyett resigned from the Board of Directors of Georgia Capital PLC and the Supervisory Board of JSC Georgia Capital and their associated committees.
3 Jyrki Talvitie, stepped up from being a member of the Remuneration Committee of the Company and of the Supervisory Board, to Chairman of the respective Remuneration
Committees on 16 January 2019.
Payments to former Directors and for loss of office
No payments were made to former Directors or for loss of office during the year ended 31 December 2019.
Total Shareholder Return
The following graph compares the Total Shareholder Return (TSR) of Georgia Capital PLC with the companies comprising the FTSE All Share Index
and FTSE Small Cap Index for the period from 29 May 2018 until 31 December 2019. Georgia Capital PLC has been a member of the FTSE All Share
Index since its premium listing in 29 May 2018.
120
115
110
105
100
95
90
85
80
Jun 18
Aug 18
Oct 18
Dec18
Feb 19
Apr 19
Jun 19
Aug 19
Oct 19
Dec 19
Georgia Capital
FTSE All Share
FTSE Small Cap
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DIRECTORS’ REMUNERATION REPORT CONTINUED
Relative importance of spend on pay
The following table shows the Georgia Capital’s actual spend on pay at the holding company’s level only (c.35 employees in total) between 2018
and 2019. We considered comparison against these employees to be the most appropriate given the Company’s status as an investment entity
under IFRS 10.
Year ended 31 December 2018 (US$ 000)
Year ended 31 December 2019 (US$ 000)
Percentage change
Remuneration paid
to all employees
of the Group
Distribution to
shareholders by
way of buy-back
11,456
9,580
-16.4%
17,850
27,133
52.0%
Notes:
1 Remuneration for the year 2018 was scaled up to a full year from the listing date on 29 May 2018 for comparison reasons.
2 Decrease in total remuneration paid to the holding company’s employees was driven by currency depreciation and decrease in discretionary compensation.
3 The Company did not make any other significant distributions during 2019.
Share ownership requirement (audited)
Executive Directors are required to build over five years and maintain a shareholding equivalent to 200% of base salary. Mr Gilauri already holds
above this requirement as at 31 December 2019 – see table and Note 2 below. In accordance with the Policy, beneficially owned shares as well as
unvested (net of tax) and vested deferred share salary and discretionary deferred shares count towards the requirement, noting that such unvested
and vested shares are not subject to performance conditions after their grant.
Directors’ interests in shares (audited)
The following table sets forth the respective holdings of GCAP shares of each Director as at 31 December 2018 and 2019.
As at 31 December 2018
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)
Total number of
interests in GCAP
shares
Number of
GCAP shares
held directly
As at 31 December 2019
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
7,950
—
18,246
N/A
11,699
412,515
1,004,939
N/A
N/A
N/A
500
43,457
5,762
13,739
721,141
500
53,252
5,762
N/A
—
N/A
—
N/A
N/A
N/A
Total number
of interests in
GCAP shares
18,246
—
N/A
—
N/A
13,739
579,005
1,300,146
N/A
N/A
N/A
500
53,252
5,762
Number of GCAP
shares held
directly
7,950
—
11,699
592,424
500
43,457
5,762
Kim Bradley
Caroline Brown
Massimo
Gesua’ sive
Salvadori
Irakli Gilauri
William Huyett
David Morrison
Jyrki Talvitie
Notes:
1 As at 31 December 2019, WI Huyett Revocable Trust, a Person Closely Associated (PCA) of Mr Huyett, also held 6,500 GCAP shares. Mr Huyett stepped down from the Board in
June 2019.
2 As at 31 December 2019, Mr Gilauri’s vested and unvested shareholding was 1,300,146 GCAP shares, representing approximately 3.2% of the Company’s share capital. In 2020,
Mr Gilauri received awards of 200,000 salary deferred shares for the 2019 work year, out of which 9,186 shares were waived by Mr Gilauri to discharge the UK tax and employee
National Insurance Contributions. This will be reported in the 2020 Annual Report and Accounts and is not included in the table above, which is at 31 December 2019. None of
Mr. Gilauri’s connected persons have any interest in the shares of the Company.
In June 2019, Mr Gilauri exercised options in respect of 117,665 GCAP shares, of which 23,533 were withheld to satisfy tax liabilities. The net gain of these options was
US$ 1,276,430.
3
The Remuneration Policy focuses on base salary in deferred salary shares and discretionary compensation in discretionary deferred shares.
The long vesting periods naturally result in the Executive Director, Irakli Gilauri, building up large holdings of unvested nil-cost options. 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,
the 2019 Policy introduced formal guidelines on shareholding and on post-employment shareholding. As at 31 December 2019, Mr Gilauri met
the shareholding requirement.
Under the Directors’ Remuneration Policy, the Group does not require Non-Executive Directors to hold a specified number of shares in GCAP.
Notwithstanding this, some Non-Executive Directors have chosen to become shareholders. The Chairman and Non-Executive Directors are not
awarded incentive shares and are not subject to a shareholding requirement.
There have been no changes in the Directors’ interests in shares in the Company between the end of the financial year and 7 April 2020, with
exception of Irakli Gilauri who as at 7 April 2020 holds total of 1,490,960 vested and unvested shares.
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 2019.
As at 31 December 2019
Kim Bradley
Irakli Gilauri
David Morrison
Number of GHG
shares held
directly
10,687
231,566
65,583
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.
Remuneration Committee effectiveness review
An internal review of the effectiveness of the Remuneration Committee was facilitated by the Company Secretary. The evaluation concluded
that overall the Remuneration Committee was performing effectively. However, the Remuneration Committee had concluded that it would be
necessary to replace Bill Huyett, who ceased to be a member of the Remuneration Committee in June 2019 when he stood down from the Board.
The Remuneration Committee was therefore pleased that Maria Chatti-Gautier who was appointed to the Board on 19 March 2020 and would be
joining the Remuneration Committee.
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DIRECTORS’ REMUNERATION REPORT CONTINUED
Implementation of Remuneration Policy for 2020
Details of how the Policy will be implemented for the 2020 financial year are set out below.
The 2020 KPIs were selected based on our framework of value creation as presented below:
For Irakli Gilauri
2020 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 157.
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.
2020 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 by the Remuneration Committee for the work year and the performance of the Group
during the work year. If Mr Gilauri is awarded discretionary deferred shares with respect to 2020 work year, the award
will vest 25% in January of each of 2022, 2023, 2024 and 2025. 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 2020, 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 has set the 2020 KPIs for the CEO. However, given the emergence of the coronavirus, the Remuneration Committee will
keep the KPIs under review. While the below KPIs constitute current strategy and are achievable on a business as normal basis, the current situation
gives us a reason to believe that we may need to adjust KPIs and/or targets in order to take into account the impact of coronavirus. Our priority will
be to safeguard the long-term success of the business; so accordingly, KPIs may also be adjusted to correspond with appropriate priorities.
• Performance targets:
– NAV per share growth
– Achieving budgets of GCAP and portfolio companies, including cash flow generation
– Expense Ratio
– Broaden access to capital including active seeking of price discovery of assets held
– Disciplined pursuit of investment opportunities
– Progress towards achieving mid-to-long term strategic priorities in portfolio companies
• Developmental targets:
– Active mentoring and development of management including successor(s)
– Continue personal development
– Introduction of succession planning process across the GCAP and portfolio companies
Due to the potential impact on our commercial interests, the targets are sensitive and appropriate detail will be disclosed in the 2020 Remuneration
Report following the completion of the financial year. KPIs and targets will be reviewed and may be revised by the Remuneration Committee
throughout the year and by the Board as appropriate, subject to the terms of the Policy, in particular given the impact of, and appropriate response
to and adjustments arising from, circumstances resulting from coronavirus, as above.
#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
Talent pipeline in the
portfolio companies
and holding company
Aggregate quality
and volume of deals
reviewed
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 2020. Non-Executive Directors’ fees are determined by the Board.
Component
Purpose and link to strategy
Operation
Opportunity
Base cash fee
The fee for the Board is competitive enough
to attract and retain individuals.
Cash payment
on quarterly
basis.
The amount of remuneration may be reviewed from time to
time by the Board.
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 the PLC fees
is GBP 750,000, which is consistent with the current limit in
the PLC’s Articles of Association.
Cash Fee for
each Committee
membership
Additional fee to compensate for additional
time spent discharging Committee duties.
Cash payment
on quarterly
basis.
The amount of remuneration for the membership maybe
reviewed from time to time by the Board. The Chairman
does not receive a Committee fee.
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DIRECTORS’ REMUNERATION REPORT CONTINUED
Directors’ Remuneration Policy
The Remuneration Policy was approved at the AGM on 22 May 2019 and took effect from that date. It is intended that approval of the Policy will be
sought at three-year intervals, unless amendments to the Policy are required, in which case further shareholder approval will be sought; no changes
are proposed for 2020. The full Policy is available at: https://georgiacapital.ge/governance/cgf/policies.
Pension
Purpose and link to strategy
The Group complies with pension requirements set by the Georgian Government.
The tables in this section provide a summary of the Directors’ Remuneration Policy.
The same arrangement applies to employees across the Group in Georgia.
Remuneration Policy table for Executive Directors
Deferred share salary
Purpose and link to strategy
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.
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.
Operation
Performance measures
The level of base salary for an Executive Director is fixed in his or her service
agreement(s). 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
with no cash salary.
N/A
Deferred share salary is awarded annually in the form of nil-cost options in respect
of the work year and 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 also receives cash payments equal to the dividends paid on the
underlying shares between the date the award was made and the vesting date.
Lapse provisions (natural malus) are built into the deferred share salary. Extended
malus and clawback provisions do not apply to the deferred share salary as the
awards attach to salary already earned.
Discretionary deferred shares
Purpose and link to strategy
To motivate and reward an Executive Director that meets or exceeds the KPIs set
for him or her by the Remuneration Committee for the relevant period.
Opportunity
The maximum number of discretionary deferred shares that may
be awarded in respect of the previous work year for Mr Gilauri is
capped at 200,000 shares (i.e. 100% of deferred share salary).
Performance-based remuneration is solely in the form of deferred shares (no cash),
designed to closely align the interests of an Executive Director with shareholders,
avoid inappropriate risk taking for short-term gain and encourage long-term
commitment to the Group.
For an Executive Director (other than Mr Gilauri), the maximum
opportunity in respect of the previous work year is 100% of
total salary.
Operation
Performance measures
Performance-based remuneration is 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. The Remuneration Committee
will determine annually the number of shares to be awarded based on the
Executive Director’s achievement of the KPIs set for the work year and the
performance of the Group during that year.
KPIs for the Executive Director are set towards the beginning
of each work year and reflect the 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.
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.
If appropriate, where a strategic change or change in business
circumstances has made one or more of the KPIs an inaccurate
gauge of the Executive Director’s performance, the Remuneration
Committee may decide to base its assessment on alternative
measures.
At vesting, the Executive Director also 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.
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.
Extended malus and clawback, in addition to lapse provisions (natural malus) apply.
Opportunity
In line with current Georgian legislation, the Executive Director and
Group each contribute 2% of total remuneration from the Group,
and the Georgian Government may contribute a further small
amount (0-2% depending on income levels). Pension contributions
will only increase above this level if mandated by Georgian
legislation or if mandated by any other applicable legislation.
Operation
Performance measures
Pension provision will be in line with Georgian pension legislation, which may
change from time to time. There is no provision for the recovery or withholding
of pension payments.
N/A
Benefits
Purpose and link to strategy
Non-cash benefits are in line with Georgian market practice and are designed
to be sufficient to attract and retain high-calibre talent.
Opportunity
There is no prescribed maximum on the value of benefits payable
to an Executive Director. 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.
Operation
Performance measures
Benefits consist of: life insurance; health 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.
N/A
Other benefits may be provided from time to time if considered reasonable and
appropriate.
Shareholding guidelines
Purpose and link to strategy
To ensure Executive Directors build and hold a significant shareholding in the Group over the long term and to align Executive Directors’ interests with
those of shareholders.
To ensure departing Executive Directors make long-term decisions and maintain an interest in the ongoing success of the Group post-employment.
Operation
Executive Directors are required to build and then maintain a shareholding equivalent to 200% of salary. such amount to be built up within a five-year
period from appointment as an Executive Director (the “Required Shareholding”).
All beneficially owned shares, as well as unvested (net of tax) and vested deferred share salary and discretionary deferred shares count towards the
Required Shareholding (as such awards are not subject to any performance conditions after grant).
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 its discretion in the Group’s next Remuneration Report. It should be emphasised
that there is no present intention to use this discretion.
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DIRECTORS’ REMUNERATION REPORT CONTINUED
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.
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. For more information please see the “Termination of the JSC Georgia Capital service agreement” in the
Remuneration Policy available at: https://georgiacapital.ge/governance/cgf/policies.
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 2020 under the proposed Policy at five different performance levels. The below is an extract from the 2019 Policy.
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 US 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 2020 work year will be reported in the 2020 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%.
Remuneration Policy table for Chairman and Non-Executive Directors
Base fees
Purpose and link to strategy
To attract and retain high performing Non-Executive Directors with the requisite
skills, knowledge, experience, independence and other attributes to add value
to the Group.
Opportunity
The maximum aggregate Georgia Capital PLC fees for all
Non-Executive Directors which may be paid under the 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.
Operation
Performance measures
All fees are paid in cash on a quarterly basis. The fee of the Chairman will be
determined by the Remuneration Committee. Fees for Non-Executive Directors
will be determined by the Board.
N/A
Fees may be reviewed from time to time by the above, taking 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
Purpose and link to strategy
Opportunity
Compensate for additional time spent discharging Committee duties.
The Chairman does not receive Committee fees.
Operation
Cash payment on a quarterly basis.
Performance measures
N/A
The amount of remuneration for Committee membership is reviewed as above.
Service agreements and policy on payments for loss of office
Mr Gilauri is the sole Executive Director of the Group. Mr Gilauri has a service contract effective from 29 May 2018 with Georgia Capital PLC for an
indefinite term (subject to re-election at the AGM) which is terminable by either party on four months’ notice unless for cause where notice is 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 the Company with immediate effect and by the Executive on not less than three months’ notice unless for cause where notice is served by the
Group shall have immediate effect.
For information on our policy on payments for loss of office, please see our full Policy at https://georgiacapital.ge/governance/cgf/policies.
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DIRECTORS’ REMUNERATION REPORT CONTINUED
NOMINATION COMMITTEE REPORT
Letters 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 serious 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 Non-Executive 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.
The service agreements and letters of appointment are available for
inspection at the Company’s registered office.
Signed on behalf of the Remuneration Committee
Jyrki Talvitie
Chairman of the Remuneration Committee
7 April 2020
DEVELOPING AND
RECRUITING THE
TALENT PIPELINE
FOR A UNIQUE
GROUP
Jyrki Talvitie
Chairman of the
Nomination Committee
Dear Shareholders,
I am delighted to present the Company’s Nomination Committee Report.
The Nomination Committee’s principal responsibility is to lead the process
for appointing Directors to the Board and in respect of senior management
positions. In last year’s report, I explained that the Nomination Committee
had focused primarily on ensuring the Board and its Committees were
suitably resourced to facilitate the successful delivery of the Company’s
strategic and financial objectives. The Company is only in its second year
of operation since its demerger from BGEO Group PLC and continues
to evolve. The continuous development of our business, together with
ensuring that the combination of the roles of Chairman and CEO continues
to be the best structure for the Company, will be key areas of focus for
the Nomination Committee going forward.
Bill Huyett stepped down from the Board in June 2019, and the
Nomination Committee concluded that in the context of succession
planning and future appointments, considering the skills and experience
available to the Board and possible gaps, the Board would benefit from
more experience of private equity. Alongside other matters, including
diversity, the Nomination Committee will take this into consideration.
The Nomination Committee has adopted a model of identifying potential
candidates and working with them over a period of time by inviting them
to Board meetings and introducing them to senior management. This
enables both the Board – and the candidates – to establish suitability and
fit. As a result of the adoption of this process, the Nomination Committee
was able to recommend that the Board appoint Maria Chatti-Gautier
and you can read more about Maria’s background and experience
on page 127.
The Committee is satisfied that the overall size and composition of
the Board is appropriate for the Group and that it comprises the right
combination of skills, experience and knowledge. The Committee
is also satisfied that we have in place strong leaders across our
portfolio companies.
The Nomination Committee also reviewed the composition of each of
the Board Committees and considered the results of the effectiveness
evaluation undertaken by each of them. The Nomination Committee
concluded that the composition of the Audit and Valuation Committee
continues to be appropriate. Later in this report there is a summary of
the results of the effectiveness evaluation of this Committee as a result
of which the size and composition of the Nomination Committee has
been reduced and will now comprise myself as Chairman, Irakli Gilauri,
Kim Bradley and Maria Chatti-Gautier. Maria has also joined the
Remuneration Committee.
The Investment Committee will continue to comprise all Board members
and therefore Maria joined that Committee on her appointment as a Director.
In 2020, we will continue to focus on Board composition and succession
planning at both the Board and senior management level, and oversee
the ongoing development of a diverse pipeline for succession.
I invite you to read more on the activities we have undertaken during
2019 in the following report.
Jyrki Talvitie
Chairman of the Nomination Committee
7 April 2020
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NOMINATION COMMITTEE REPORT CONTINUED
The Role of the Nomination Committee
The role of the Nomination Committee is to help ensure 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 Board’s diversity policy.
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:
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.
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 CEO be elected at the 2019 AGM.
•
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 of candidates to fill Board vacancies as and when they arise;
• giving full consideration to succession planning for Directors, including
•
the Chairman-CEO and other senior management, 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, and ensuring plans are in place for senior
management succession, with a view to ensuring the continued
ability of the Company to compete effectively in the marketplace; and
• making recommendations to the Board concerning the re-election
by shareholders of Directors under the annual re-election provisions
of the 2018 UK Corporate Governance Code (the “Code”), 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 a review of its Terms of Reference
in December 2018 and agreed upon the necessary revisions to ensure
the responsibilities of the Committee were aligned with the Code.
A further review was carried out in December 2019. The full Terms of
Reference of the Nomination Committee can be found on our website
here: https://georgiacapital.ge/governance/cgf/terms.
Composition and meeting attendance
The composition of the Nomination Committee and the members’ meeting
attendance for the year 2019 are set out in the Board and Committee
meeting attendance table on page 130, and the skills and experience
each member contributes can be found on pages 126 to 127. For the
duration of 2019, the Nomination Committee consisted of all members of
the Board, the majority of which are Independent Non-Executive Directors.
Role of the Chairman of the Board
The Nomination Committee has revisited the decision to combine the
roles of Chairman and CEO. The Senior Independent Director also met
with the Non-Executive Directors without the Chairman/CEO present
to assess the effectiveness of the Chairman/CEO. Notwithstanding
that this combined role is not compliant with Provision 9 of the Code,
the Nomination Committee and the Board continue to believe that the
current structure better serves our Company and recommend that it
should continue. Shareholders were supportive of this structure in 2019
and we believe that this continues to be the case. The basis for this
conclusion, and our shareholder engagement on this matter, is set
out in the Directors’ Governance Statement on page 124.
Inclusion and diversity
Our Board embraces diversity in all its forms and the Board understands
the importance of developing a diverse pipeline for succession to senior
management and the Board.
The Nomination Committee and Board recognise the role that diversity
has in promoting balanced decision making which aligns with our values
and strategy, and 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 Parker Review regarding ethnic diversity, and the Hampton-Alexander
Review regarding gender diversity, which are primarily aimed at FTSE
350 companies. Following Maria’s appointment, just under 30% of
the Board is female. Whilst the Nomination Committee will continue to
examine ways in which we can become an increasingly diverse Board,
we are also working to improve female representation at senior leadership
positions, and this year following a number of promotions, our female
representation has now increased to two women and three men in
executive management positions. You can view our gender diversity
statistics on page 85.
Having taken into account the results of the Nomination Committee’s
effectiveness evaluation exercise, the Nomination Committee considered
that it would be more effective if it reduced its membership to three
Independent Non-Executive Directors, and the Chairman-CEO.
Accordingly, following the Board’s approval of this change, the
Nomination Committee now comprises me as Chairman, Kim Bradley,
Maria Chatti-Gautier and Irakli Gilauri.
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 2020. As part of our review of the
Company’s Diversity Policy, we will ensure that the policy is reviewed in
light of the recommendations of both the Parker Review and the Hampton-
Alexander Review and consider whether it will become appropriate to
adopt targets in the future to promote an inclusive and diverse culture.
Succession planning and talent development
Succession planning at the Board and senior management level will
continue to be a primary focus of the Nomination Committee throughout
2020. In 2019, appropriate opportunities were created to develop high-
performing individuals and to build diversity in senior roles across the
business. As a result of this, we have a fantastic talent pool of employees
within Georgia Capital PLC. We firmly believe that focusing on their
development is the best way to ensure a healthy and diverse pipeline
of future leaders of the Company.
In addition, the Company is embarking on an exciting initiative, called
the Entrepreneurship Academy, to help develop future business leaders.
The aim is to develop the entrepreneurial business leaders that Georgia
Capital will require as it grows.
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 our
investments operate. All of our Directors participated in ongoing site visits,
development sessions and presentations. The UK General Counsel and
Group Company Secretary provide briefings as appropriate on regulatory
and governance developments.
Each Director, upon appointment, receives a tailored induction to the
Company and its various investments 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 that year would not provide sufficient value for the
Board and the Company. Accordingly, an evaluation of the effectiveness
of the Board and its Committees was first carried out in 2019.
An internal review was facilitated by the Company Secretary. The evaluation
concluded that overall the Nomination Committee was performing effectively
and the Directors identified areas of focus for 2020 which include:
• succession planning;
• diversifying knowledge of the Board, particularly in private equity
•
expertise; and
the composition of the Nomination Committee, as it was considered
that the current arrangement whereby all Directors are members of
the Nomination Committee might not be the most effective as the
Group grows.
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STATEMENT OF DIRECTORS’ RESPONSIBILITIES
DIRECTORS’ REPORT
The Directors are responsible for preparing the Annual Report and the
consolidated and stand-alone Financial Statements and the Directors’
Remuneration Report, in accordance with applicable law and regulations.
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.
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 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.
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;
• present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information;
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.
• provide additional disclosures when compliance with the specific
By order of the Board
requirements in IFRS are insufficient to enable users to understand
the impact of particular transactions, other events and conditions
on the entity’s financial position and financial performance; 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.
Irakli Gilauri
Chairman and CEO
7 April 2020
The Directors present their Annual Report and the audited consolidated
financial statements for the year ended 31 December 2019.
Strategic Report
The Strategic Report on pages 2 to 123 was approved by the Board
of Directors on 7 April 2020 and signed on its behalf by Irakli Gilauri,
Chairman and Chief Executive Officer.
Management Report
This Directors’ Report together with the Strategic Report on pages
2 to 123 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 and Valuation Committee Report
Remuneration Committee Report
Summary of 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 123
Page 73
Page 73
Pages 70 to 75
Pages 75 to 79
Pages 124 to 125
Pages 126 to 127
Pages 161 to 163
Pages 140 to 144
Pages 145 to 160
Pages 156 to 160
Pages 138 to 139
Pages 88 to 89
Pages 83 to 86
Pages 86 to 89
Note 24 on pages
233 to 234
Note 30 on pages
241 to 244
Articles of Association
Georgia Capital PLC (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 Company’s
Articles of Association are available on our website:
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 page 233 of this
Annual Report. As at the date of this Annual Report there was a single
class of 40,169,775 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
22 May 2019 for the Company to purchase up to 5,671,823 shares
(14.99%) of Georgia Capital’s shares as at 3 April 2019. This authority
will expire at the conclusion of the Company’s AGM in 2020 or, if earlier,
the close of business on 22 June 2020.
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. During 2019,
2,085,014 shares representing 5.5% of the issued share capital as
at 31 December 2018 were bought back for US$27.1 million. Since
commencement of the share buyback programme 3,336,843 shares
were repurchased, of which 2,650,375 shares were cancelled and
686,468 shares were transferred from treasury to JSC Georgia Capital
Executive Equity Compensation Trust. No repurchased shares are held
in treasury as at the date of this Annual Report.
On 23 December 2019, 3,435,438 new ordinary shares in the Company
were allotted pursuant to the offer made by the Company to shareholders
of Georgia Healthcare Group PLC announced on 18 November 2019,
which closed for acceptances on 17 December 2019. Following this
allotment, the total number of ordinary shares in issue was 40,169,775.
The offer was for an exchange of Georgia Healthcare Group PLC shares.
The share exchange ratio was set at 0.192:1 share in the Company for
every 5.22 shares in Georgia Healthcare Group PLC. This ratio is equal
to the average Georgia Healthcare Group PLC/Georgia Capital PLC ratio
for the 30 days prior to 18 December 2019 based on the closing prices.
A renewal of the authority to make market purchases will be sought
from shareholders at each AGM of the Company. 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.
At a General Meeting of the Company on 22 May 2019, the Directors
were given the power a) to allot shares up to a maximum nominal
amount of GBP 131,282.37 (representing 13,128,237 ordinary shares)
representing approximately one third of the Company’s issued share
capital as at 3 April 2019, and b) to allot equity securities up to an
aggregate nominal amount of GBP 131,282.37, in connection with an
offer by way of a rights issue: (i) to holders of 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
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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 2020 AGM (or, if earlier, at the close of business on
22 August 2020) 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.
There are no restrictions on transfers of shares other than:
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 LSE will not exceed 10% of Georgia Capital’s
ordinary share capital over any ten-year period.
• 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;
• pursuant to the Company’s Securities Dealing Policy and Code,
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.
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 608.9 million.
The Company’s profit after taxation for the year was GEL 604.3 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.
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.
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 2019. 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 was put to
the shareholders for approval at the 2019 AGM and remuneration is
determined in accordance with that Policy. The fees paid to the Non-
Executive Directors in 2019 pursuant to their letters of appointment are
shown on page 151. The fees paid to our sole Executive Director in 2019
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 2019 are shown on page 153 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 page 251 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.
Political donations
The Company did not make any political donations or expenditure
during 2019. Authority to make political donations and incur political
expenditure will be put to shareholder vote at the 2020 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: 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 2019:
Shareholder
As of 31 December 2019
Number of
voting rights
% of voting
rights
M&G Investment Management Ltd
Schroder Investment Management Ltd
LGM Investments Ltd
Consilium Investment Management LLC
Norges Bank Investment Management
3,024,486
1,829,704
1,366,764
1,358,787
1,253,083
7.53%
4.55%
3.40%
3.38%
3.12%
Source: Georgeson, Computershare
From the period 1 January 2020 up to and including 7 April 2020,
there have been no further notifications to the Company in respect
of interest in voting rights.
It should be noted that these holdings may have changed since
the Company was notified. However, notification of any change
is not required until the next notifiable threshold is crossed.
The respective regulatory filings by shareholders are available on
GCAP’s website: https://georgiacapital.ge/ir/news/regulatory-
announcements and the London Stock Exchange website:
www.londonstockexchange.com.
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.
A copy of the Relationship Agreement is available to view at the
Company’s registered office.
Presence outside of Georgia
We have our Company office in London: see page 256.
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 83 to 86.
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INDEPENDENT AUDITOR’S REPORT
Post balance sheet events
On 25 February 2020, Georgia Capital acquired the remaining 34.4%
equity stake in Georgian Renewable Power Company (GRPC). The total
consideration for the buyout was $13.8million, of which US$ 11.8 million
represents total equity contributions received from RP Global, as well as
an additional consideration for RP Global’s technical assistance during
the last six years. An additional deferred adjustable consideration of up
to US$ 4.5 million was agreed to be payable if actual market electricity
sales prices are higher during 2023-2025 than the Group’s current
internal forecasts are higher during 2023-2025 than the Group’s current
internal forecasts.
As at 3 April 2020, fair value of listed equity investments has declined
by 39.5% (to GEL 621,991) compared to 31 December 2019 in light
of COVID-19 pandemic impact on stock markets. The fair value of our
unquoted portfolio investments may have increased or decreased since
31 December 2019. The valuations depend on market multiples and
outlook and the direct exposure to the impact of COVID-19 of each
particular portfolio investment.
Statement of disclosure of information to the auditor
We, the Directors 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.
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 (see Note 19 on page 232);
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 165 to 168 was approved by the
Board of Directors on 7 April 2020 and signed on its behalf:
By order of the Board
Link Company Matters Limited
Company Secretary
7 April 2020
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 2019 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 2019
Consolidated income statement for the year ended
31 December 2019
Consolidated statement of comprehensive income for the year ended
31 December 2019
Separate statement of financial position as at 31 December 2019
Separate statement of changes in equity for the year ended
31 December 2019
Separate statement of cash flows for the year ended 31 December 2019
Consolidated statement of changes in equity for the year ended
31 December 2019
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 2019
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 75 to 79 that describe the principal risks and explain how they are being managed or mitigated;
the directors’ confirmation set out on page 73 to 74 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 73 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 73 to 74 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 matter
• Change in basis of accounting – meet the requirements of the IFRS 10 Consolidated financial statements (IFRS 10) Investment
Entity consolidation exception.
• Valuation of unquoted investments.
• Valuation of investment properties.
• Risk of fraud in recognition of revenue across the different businesses within the Group.
• Going concern basis used in preparation of the Annual Report and Accounts.
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Audit scope
The Company determined that it met the Investment Entity criteria under IFRS 10 on 31 December 2019. Due to the change
in accounting basis, portfolio investments are no longer consolidated but instead accounted for at fair value at 31 December 2019
as required by IFRS 10. A full Consolidated income statement and the Consolidated statement of cash flows have been presented
in the Group financial statements as the Company met the criteria of an Investment Entity on 31 December 2019 only.
The parent company indirectly holds a portfolio of quoted and unquoted investments through a single direct subsidiary,
which is also an Investment Entity under IFRS 10.
• Since the Consolidated income statement and the Consolidated statement of cash flows are presented in the Group
financial statements, we performed an audit of the complete financial information of 8 components and audit procedures
on specific balances for a further 3 components.
• The components where we performed full or specific audit procedures accounted for 97% of EBITDA, adjusted for
non-recurring items, 95% of Revenue and 106% of Profit before tax and non-recurring items.
• Our audit sample covered 100% of the investment portfolio.
Materiality
• Overall Group materiality of GEL 17.5 million represents 1% of net assets (2018: GEL 3.1 million which represents 5% of
profit before tax and non-recurring items).
• Specific materiality of GEL 5.5 million, which represents 2% of EBITDA, adjusted for non-recurring items, at 31 December
2019 is applied to the income statement accounts, excluding the gain from change in Investment Entity status.
• We changed the basis for materiality in 2019 due to the change in basis of accounting as a result of the Company meeting
the IFRS 10 Investment Entity criteria.
Key audit matters
Key audit matters are those matters that, in our professional judgment, 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.
Key observations communicated to
the Audit and Valuation Committee
On the basis of our consideration
and audit procedures performed,
we are satisfied that the technical
requirements of IFRS 10 have
been met and that the Company
has established policies and
process that allows substantially
all the portfolio investments to be
measured and reported on a fair
value basis.
We have also confirmed with
the Company’s internal legal
team (who had itself received
confirmation from the Company’s
external legal advisers) there is no
impediment to this change. under
the Company’s listing status.
Risk
Our response to the risk
(New in 2019) Change in basis of accounting –
meet the requirements of the IFRS 10 Investment
Entity consolidation exception
Refer to the Audit and Valuation Committee Report
(page 140); Accounting policies (pages 197 and 198);
and Note 4 to the Consolidated Financial Statements
(pages 212 and 213)
The Company determined that it met the Investment
Entity criteria under IFRS 10 on 31 December 2019
and accordingly prospectively applied the exception
to consolidation. The Company deconsolidated all of
its subsidiaries and instead recognised them at their
fair value as at 31 December 2019. The difference
between the net assets of the deconsolidated
subsidiaries and their fair value was recognised as a
gain from the change in Investment Entity status in the
Consolidated income statement. The investment in the
single direct subsidiary, previously measured at cost,
was remeasured at fair value and the difference was
recorded in the Company’s income statement.
In accordance with IFRS 10, an Investment Entity is
an entity that:
a) obtains funds from one or more investors
for the purpose of providing those investor(s)
with investment management services;
b) commits to its investor(s) that its business purpose
is to invest funds solely for returns from capital
appreciation, investment income, or both; and
c) measures and evaluates the performance of
substantially all of its investments on a fair value basis.
There is a substantial level of judgment applied by
management in assessing whether the Company meets
the Investment Entity criteria under IFRS 10 and at what
point in time the Company became an Investment Entity.
Our procedures were performed by the primary audit team.
With the assistance of our internal valuation specialists
and IFRS subject matter experts, we:
• examined the Company’s assessment whether it
meets the Investment Entity criteria under IFRS 10;
• assessed whether the Company has substantially all
the features of an Investment Entity evident in practice
by considering its policies and practices related to fair
value measurement and reporting, in particular:
– obtained evidence of internal management reporting
to corroborate the fact that management measures
and evaluates performance of substantially all of its
investments on a fair value basis;
– inquired of the members of the Audit and Valuation
Committee and executive management to confirm
that they measure and monitor fair value;
– undertook a detailed review of the Company’s
valuation policy and rulebook with a focus on risk
management and control and compliance with IPEV
guidelines and IFRS 13;
– assessed the quality and robustness of valuations
produced by management by auditing the fair
valuation of the water utility business, the biggest
private investment, in advance of the year end;
received confirmation from the Company’s internal
legal team (who had itself received confirmation
from the Company’s external legal advisers) that
the adoption of IFRS 10 investment entity basis of
accounting by the Company is compatible with the
Company’s listing as a commercial company pursuant
to Chapter 6 of the UK Listing Rules;
•
• considered whether the Board’s approval of the valuation
policy, rulebook and the updated terms of reference of
the Audit and Valuation Committee on 31 December
2019 was the trigger point which meant that the
Company met the last criteria under IFRS 10, which
requires an Investment Entity to measure and evaluate
the performance of substantially all of its investments
on a fair value basis, and became an Investment Entity.
Key observations communicated to
the Audit and Valuation Committee
Reasonable inputs to the
valuations were used and
the valuation of the unquoted
investments is within a
reasonable range of fair values.
All valuations are in accordance
with IFRS and the IPEV
guidelines.
We are satisfied that the
disclosures in the financial
statements are in accordance
with IFRS.
Risk
Our response to the risk
(New in 2019) Valuation of unquoted investments
(GEL 1.224 million, 2018: n/a)
Our procedures were performed by the primary audit team,
including our valuation specialists.
Refer to the Audit and Valuation Committee Report
(page 140); Accounting policies (pages 199 and 200);
and Note 31 to the Consolidated Financial Statements
(pages 246 to 250)
The investment portfolio comprises 11 unquoted
businesses. The fair value of the investment portfolio
forms the basis of valuation of the single direct
subsidiary presented under the account Equity
investments at fair value in the Consolidated and
Separate statement of financial position.
The Company adopts a valuation methodology based
on the International Private Equity and Venture Capital
Valuation 2018 (IPEV) guidelines, in conformity with
IFRS 13 – Fair value measurements (IFRS 13). Owing to
the unquoted and illiquid nature of these investments,
the assessment of fair valuation is subjective and
requires a number of significant and complex
judgments to be made by management.
•
Our procedures extended to testing 100% of the related
balance.
We obtained an understanding of management’s processes
and controls for determining the fair valuation of unquoted
investments.
With the assistance of our valuation specialists, we:
• compared management’s valuation methodology to
IFRS and the IPEV guidelines. We sought explanations
from management where there were judgments applied
in its application of the guidelines and assessed their
appropriateness.
formed an independent range for the key assumptions
used in the valuation of unquoted investments, with
reference to the relevant industry and market valuation
considerations. We derived a range of fair values for
each investment using our assumptions and other
qualitative risk factors. We compared these ranges
with management’s assumptions.
There is the risk that inaccurate judgments made in
the assessment of fair value, in particular in respect
of the selection of an appropriate valuation method,
determination of peer group and applicable earnings
multiples, calculation of discount rates and the
estimation of future maintainable earnings, could lead
to the incorrect valuation of the unquoted investment
portfolio. In turn, this could materially misstate
the value of equity investments at fair value in the
Consolidated and Separate statement of financial
position, the gain from change in investment entity
status in the Consolidated and Separate income
statement and the net asset value per share.
There is also the risk that management may influence
the significant judgments and estimations in respect
of unquoted investment valuations in order to meet
market expectations of the overall net asset value of
the Group.
• corroborated key inputs in the valuation models, such
as earnings and net debt to source data, which in most
instances was subject to full scope audit by component
teams.
• also performed the following procedures on key
judgments made by management in the calculation
of fair value:
– assessed the suitability of the comparable
companies used in the calculation of the earnings
multiples;
– for recently acquired companies, assessed whether
any significant changes occurred from the acquisition
to the reporting date, also considered other factors
that would warrant change in valuation of such
investments as compared to the recent purchase
price;
– challenged management on the selection of
weighting applied to earnings multiples of the
comparable companies by independently
estimating our own range of multiples;
– evaluated the appropriateness of discount rates by
performing corroborative calculations; and
– with the assistance of component teams, discussed
with local management the key assumptions applied
to calculate future cash flows and terminal value and
corroborated this to supporting documentation.
We checked the mathematical accuracy of the
valuation models.
We recalculated the result of the deemed disposal
of portfolio investments impacting the consolidated and
Company’s income statement.
We assessed the disclosures against the requirements
of IFRS 10 and IFRS 13.
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INDEPENDENT AUDITOR’S REPORT CONTINUED
Risk
Our response to the risk
Valuation of investment properties
(Net book value of investment properties
of GEL 185 million, 2018: GEL 151 million).
Refer to the Audit and Valuation Committee Report
(page 140); Accounting policies (pages 199 and 203);
and Note 12 to the Consolidated Financial Statements
(page 225)
The Group applied a fair value model for measurement
of investment properties until the change in basis
of accounting on 31 December 2019. Investment
properties were revalued as at 31 October 2019 and
the revaluation result was recorded in the consolidated
income statement. The valuation of investment
properties also links to the valuation of unquoted
investments risk, as the hospitality and commercial
real estate business, which holds the vast majority of
investment property, is valued at the net asset value.
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.
There is also the risk that management may influence
the significant judgments and estimations in respect
of investment property valuations in order to
achieve investment property and the hospitality and
commercial real estate business valuation targets.
The risk has remained consistent with the prior year.
Our procedures were performed by the primary audit
team and component teams, including our real estate
valuation specialists.
• We performed a walkthrough of the investment
property valuation process and assessed the design
and implementation of key controls.
• We used a risk-based approach based on market
movements to select properties for review by our real
estate specialists and selected a sample representing
96% of the net fair value movement and 84% of the fair
value of the investment property at the valuation date.
• We conducted analytical procedures on the properties
not included in the sample reviewed in detail by our real
estate specialists by comparing the value of each
property by reference to our understanding of the
Georgia real estate market and external market data.
• We engaged our London based 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;
– considering real estate market movements and
property-specific events between the investment
property valuation date and year end.
• We analysed whether there were any indications that
the value of properties newly acquired in 2019 has
changed significantly since the acquisition date.
• We assessed the appropriate recognition of the
results of the valuations in accordance with IAS 40
Investment Property.
Key observations communicated to
the Audit and Valuation Committee
Based on the results of our audit
procedures, we concluded that
the valuations of investment
properties are, in all material
respects, within a reasonable
range.
Risk
Our response to the risk
Key observations communicated to
the Audit and Valuation Committee
Risk of fraud in the recognition of revenue
across the different businesses within the Group
(GEL 1,473 million, 2018: GEL 1,283 million)
Refer to the Audit and Valuation Committee Report
(page 140); Accounting policies (pages 206 to 208);
and Note 25 of the Consolidated Financial Statements
(pages 235 to 238)
• Of the primary audit team in all full and specific scope
components.
• Overall response
• We obtained an understanding of the different revenue
streams and revenue models covering all material
businesses: healthcare, commercial real estate and
hospitality, housing development, water utility, P&C
insurance and beverages;
On the basis of our audit
performed we are satisfied that
revenue has been recognised
and measured in accordance
with the Group’s accounting
policy and IFRS 15 Revenue
from contracts with customers,
where relevant.
The consolidated revenue is presented in the
Consolidated income statement in 2019 as the
change in accounting basis only took place on
31 December 2019.
Investors’ and analysts’ expectations of the Group
and its separate portfolio investments could result
in pressure on management to overstate revenue.
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.
The risk has neither increased nor decreased in the
current year.
• 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 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.
• 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; and
• We performed other substantive analytical procedures
on the water utility business designed to identify
unusual trends.
• Our response to the fraud risk
• 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; and
• 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.
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175
INDEPENDENT AUDITOR’S REPORT CONTINUED
Key observations communicated to
the Audit and Valuation Committee
Based on the results of our audit
procedures, we concluded that
there is no material uncertainty
related to the Company’s ability
to continue as a going concern.
We assessed whether the
disclosures were fair, balanced
and understandable by
comparing the disclosure to the
knowledge gained during the
audit.
The going concern and viability
forecasts, including stress-testing
scenarios, are consistent with the
results of our audit procedures.
Risk
Our response to the risk
(New in 2019) Going concern basis used in
preparation of the Annual Report and Accounts
Refer to the Audit and Valuation Committee Report
(page 140); Strategic Report (page 73) and Note 2 to
the Consolidated Financial Statements.
The Company’s Annual Report and Accounts are
prepared on the going concern basis of accounting.
This basis is dependent on a number of factors,
including the sufficiency and credit quality of the
Group’s cash and liquid funds and the future capital
inflows from portfolio investments. An important factor
is that there are no legal guarantees or constructive
commitments in place for the Company to fund losses
or activities at portfolio companies’ level.
The COVID-19 pandemic is of an unprecedented scale
and has severely impacted the global economy and
businesses across all industries. There is a significant
degree of uncertainty about the further spread of the
virus and the state of the world economy.
The Company’s cash and liquid funds comprise cash
at banks, listed debt securities and loans issued to
portfolio investments. The outbreak of COVID-19 has
resulted in some companies suspending dividend
payments and may affect the ability of portfolio
investments to make capital distributions and pay back
loans due. This in turn would affect the Company’s
ability to make capital allocations to its portfolio
investments and service its debt.
In light of COVID-19 pandemic the audit partner and other
senior members of the audit team spent significant amount
of time performing the following procedures.
• We obtained the base case cash flow and liquidity
forecasts covering the full viability assessment period
until 31 December 2022 and the single worst case
scenario prepared by management and assessed the
appropriateness of the inputs and key assumptions
used in the forecasts.
• We assessed the credit quality and liquidity of the
underlying cash and liquid funds at 31 December 2019
with reference to the business model and the financial
position of the counterparties in case of loans granted
to the portfolio investments and the credit ratings of
debt securities.
• We performed an independent stress testing to assess
whether the liquidity headroom calculations are
reasonable.
• We verified that the Company has not provided any
material guarantees to its portfolio investments and
there are no legal and constructive obligations to fund
losses or activities at portfolio companies’ level.
• We screened the local media and public
announcements made by the Government of Georgia
to assess the severity of COVID-19 pandemic in the
country and the Government’s ability and intentions to
support the local economy.
• We considered the financial position of Bank of Georgia
and the COVID-19 related disclosures presented in its
annual report for the year ended 31 December 2019,
given that Bank of Georgia is the largest quoted
investment in the Company’s portfolio and also a
depository of the majority of the Company’s cash.
• We assessed the adequacy of going concern and
viability disclosures.
This year we have included three new Key Audit Matters: change in basis of accounting – meet the requirements of the IFRS 10 Investment Entity
consolidation exception, Valuation of unquoted investments and Going concern basis used in preparation of the Annual Report and Accounts.
The Company had to meet specific Investment Entity criteria under IFRS 10 which require a certain level of judgment. Given a significant level of
estimation uncertainty involved in the valuation of unquoted investments, this was our new focus area in 2019. We also spent significant amount of
time assessing the Company’s ability to continue as a going concern in light of COVID-19 pandemic.
In the prior year, our auditor’s report included Key Audit Matters in relation to the 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 and valuation
of infrastructure assets. In the current year, the first two risks have been removed due to the change in accounting basis whereby subsidiaries are not
consolidated and accounted for at fair value at 31 December 2019. In advance of the change in accounting basis, the Group changed accounting policy
of infrastructure assets from revaluation model to cost accounting. As such the risk of valuation of infrastructure assets is no longer relevant in 2019.
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,
the organisation of the group and changes in the business environment when assessing the level of work to be performed at each entity.
The parent company indirectly holds a portfolio of quoted and unquoted investments through a single direct subsidiary, which is also an Investment
Entity under IFRS 10. The fair value of the investment portfolio forms the basis of the value of the single direct subsidiary presented as one line item in
the Consolidated statement of financial position. All audit work performed in respect to the audit of the Consolidated statement of financial position,
including the valuation of the underlying portfolio investments, was undertaken by the Primary audit team.
The Consolidated income statement and the Consolidated statement of cash flows have been presented in the Group financial statements as the
Company met the IFRS 10 Investment Entity criteria and changed the basis of accounting on 31 December 2019 only. In scoping the audit of the
Consolidated income statement and the Consolidated statement of cash flows, we reflect the Group’s structure (holding companies, the pharmacy
and distribution business, hospitals, clinics, the medical insurance business, the housing development business, the hospitality and commercial real
estate business, the water utility business, the renewable energy business, the property and casualty insurance business, the beverages business,
the education business, the auto service and the digital services businesses). 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 11 components covering entities within the United Kingdom and Georgia, which represent the principal business
units within the Group. Audit procedures over the selected components also contributed to our audit of the valuation of the underlying portfolio
investments as five unquoted businesses were valued using earnings based multiple.
Of the 11 components selected, we performed an audit of the complete financial information of 8 components (“full scope components”) which
were selected based on their size or risk characteristics. For another 3 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 2019 the remaining components not subject to full or specific group
scoping mainly represent certain entities within the beverages, auto service, water utility, education and digital segments which are not significant
individually or in the aggregate. Of the remaining components, the largest represents less than 1% of the Group EBITDA, adjusted for non-recurring
items and only 1% of the Group’s revenue.
The table below illustrates the coverage obtained from the work we performed:
2019
2018
No.
Revenue
Profit4
Total
Assets5
Adjusted
EBITDA6
No.
Revenue
Profit4
Total
Assets
84%
6%
90%
10%
Full scope1
Specific scope2
Full and Specific scope coverage
Remaining components3
Total reporting components
8
3
11
11
89%
6%
95%
5%
100%
105%
1%
106%
-6%
100%
80%
10%
90%
10%
88%
9%
97%
3%
100%
100%
7
2
9
9
85%
10%
95%
5%
125%
30%
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.
4. Profit before non-recurring items and tax and the gain from the change in Investment Entity status. The coverage of 105% by full scope components represents 3 full scope
components having a positive contribution of 195% offset by 1 full scope component having a negative contribution of 70%.
5. Total assets on 31 December 2019 before change in Investment Entity status.
6. EBITDA, adjusted for non-recurring items.
Changes from the prior year
In 2019, JSC Georgian Renewable Power Co was included as a specific scope component due to the amount of capital expenditure and damage
made to the hydro power plant due to flooding in July. Also in 2018 the healthcare business as a whole was designated as a full scope component,
whereas in 2019 we have assigned full scope to the hospitals business, specific scope to the clinics business and other procedures scope to the
diagnostics business.
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 six full scope
components and the three 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
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INDEPENDENT AUDITOR’S REPORT CONTINUED
undertaken. The Senior Statutory Auditor is based in the United Kingdom, but since Group management and operations reside in Georgia, the
primary audit team operates as an integrated team including members from the United Kingdom and Georgia. During the current year’s audit cycle,
visits were undertaken by the primary audit team to the component teams in Georgia. We completed our visits before the travel restrictions related
to COVID-19 outbreak were put in place. The Senior Statutory Auditor visited Georgia twice for three days during the current year’s audit and there
was regular interaction between team members in the UK and Georgia.
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.
We determined materiality for the Group to be GEL 17.5 million (2018: GEL 3.1 million), which is 1% of net assets (2018: 5% of profit before tax
and non-recurring items). Upon meeting the requirements of the IFRS 10 Investment Entity consolidation exception and the consequential change in
accounting basis on 31 December 2019, it was no longer appropriate to calculate 2019 materiality using a performance-based measure. We believe
that total equity provides us with an appropriate basis for audit materiality as NAV is a key published performance measure and is a key metric used
by management in assessing and reporting on the overall performance of the Group.
Since the change in the basis of accounting took place on 31 December 2019, the Group presents full Consolidated income statement and the
Consolidated statement of cash flows for 2019. We have set a materiality of GEL 5.5m representing 2% of the Group’s EBITDA, adjusted for non-
recurring items, of GEL 273 million for the audit of the Consolidated income statement accounts, excluding the gain from change in Investment Entity
status, which reflects our understanding that an amount less than our NAV based materiality would influence the economic decisions of users of the
financial statements.
We calculated materiality during the planning stage of the audit based on EBITDA, adjusted for non-recurring items, as the Group was loss making
at interim period, and then during the course of our audit and in light of the change in accounting basis on 31 December 2019, we reassessed initial
materiality based on 31 December 2019 net asset value, and adjusted our audit procedures accordingly.
We determined materiality for the parent company to be GEL 17.5 million (2018: GEL 27.6 million), which is 1% (2018: 2%) of net assets. We have reduced
the percentage in 2019 due to the change in basis of accounting.
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% (2018: 50%) of our planning materiality, namely GEL 8.77 million (2018: GEL 1.54 million). We set performance materiality at this
percentage due to the judgmental nature of the valuations in the Consolidated statement of financial position, to ensure that total uncorrected and
undetected audit differences in all accounts did not exceed our materiality of GEL 17.5 million.
For the audit of the Consolidated income statement we set a lower performance materiality equal to 50% of the EBITDA, adjusted for non-recurring
items, based on planning materiality of GEL 2.7 million. We set the lower performance materiality at this percentage based on factors including the
history of misstatements, our ability to assess the likelihood of misstatements and the effectiveness of the internal control environment.
Audit work at component locations for the purpose of obtaining audit coverage over significant income statement accounts is undertaken based on
a percentage of total lower 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 0.55m to GEL 2.05m (2018: GEL 0.38m to GEL 1.16m).
Reporting threshold
An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit and Valuation Committee that we would report to them all uncorrected audit differences in excess of GEL 0.88 million
(2018: GEL 0.15 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.
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:
• Strategic report set out on pages 2 to 123;
• Governance section, including Directors’ Governance Statement, Board of Directors, Corporate Governance Framework, Investment Committee
Report, Audit and Valuation Committee Report, Director’s Remuneration Report, Nomination Committee Report, Statement of Directors’
Responsibilities and Directors’ Report, set out on pages 124 to 168; and
Additional information, including Abbreviations, Glossary and Shareholder information, set out on pages 253 to 256.
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 164 – the statement given by the directors that they consider the annual report and financial
statements taken as a whole is fair, balanced and understandable and provides 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 and Valuation Committee reporting set out on page 140 – the section describing the work of the Audit and Valuation Committee does not
appropriately address matters communicated by us to the Audit and Valuation Committee; or
• Directors’ statement of compliance with the UK Corporate Governance Code set out on page 124 – 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 164, 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. 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.
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INDEPENDENT AUDITOR’S REPORT CONTINUED
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI)
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 and Valuation 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.
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/auditors responsibilities. 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.
• The period of total uninterrupted engagement including previous renewals and reappointments is 2 years, covering the year ending
31 December 2018 to 31 December 2019.
Assets
Cash and cash equivalents
Amounts due from credit institutions
Marketable securities
Accounts receivable
Insurance premiums receivable
Inventories
Investment properties
Prepayments
Income tax assets
Property and equipment
Goodwill
Intangible assets
Other assets
Equity investments at fair value
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
• The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent company and we remain
Total equity attributable to shareholders
independent of the Group and the parent company in conducting the audit.
• The audit opinion is consistent with the additional report to the Audit and Valuation 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.
John Flaherty (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
7 April 2020
of Georgia Capital PLC
Non-controlling interests
Total equity
Total liabilities and equity
Notes
31 December
2019
31 December
2018
(restated)*
1 January
2018
(restated)*
7
8
9
10
11
12
17
13
15
15
16
9
22
18
17
21
19
20
16
24
1,243
–
–
–
–
–
–
234
–
–
–
–
–
1,758,197
–
256,930
40,299
71,824
170,228
57,801
276,230
151,232
117,909
2,405
1,573,624
142,095
51,471
251,462
457,495
–
346,239
38,141
31,907
21,507
30,855
76,713
159,989
87,760
1,374
551,339
21,935
5,143
69,870
1,153
1,148,584
1,759,674
3,621,005
2,592,509
–
–
–
–
–
–
7,653
–
7,653
143,114
68,207
1,119
62,345
764,355
916,401
235,771
–
42,987
46,403
860
73,489
650,734
77,835
63,206
619,029
2,191,312
1,574,543
1,320
108,863
–
–
1,641,838
1,293
–
(118)
415,164
684,349
1,752,021
1,100,688
–
329,005
10,000
466,187
–
171,076
76,354
723,617
294,349
1,752,021
1,429,693
1,017,966
1,759,674
3,621,005
2,592,509
Notes:
1 The maintenance and integrity of the Georgia Capital PLC web site 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 United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The accompanying notes on pages 188 to 252 are an integral part of these consolidated financial statements.
* Certain amounts do not correspond to the 2018 consolidated financial statements as they reflect the adjustments made for changes in accounting policy as described in Note 3.
The financial statements on page 179 to 252 were approved by the Board of Directors on 7 April 2020 and signed on its behalf by:
Irakli Gilauri
Chief Executive Officer
Georgia Capital PLC
Registered No. 10852406
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181
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI)
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
Net gains from investment securities measured at FVPL
Net realised gains from investment securities measured at FVOCI
Interest income at EIR method
Interest expense
Net operating income before non-recurring items
Net non-recurring items
Gain from change in investment entity status
Profit before income tax expense
Income tax expense
Profit for the year
Total profit/(loss) attributable to:
– shareholders of Georgia Capital PLC
– non-controlling interests
Earnings/(loss) per share:
– basic
– diluted
Notes
2019
1,473,437
(883,024)
25
26
26
27
27
9
28
3
17
24
590,413
(177,000)
(116,911)
(11,464)
(11,474)
(1,078)
(317,927)
272,486
357
24,953
(110,075)
(41,663)
1,654
1,187
30,672
(150,370)
29,201
(9,130)
588,828
608,899
(4,633)
604,266
569,262
35,004
604,266
16.4478
16.0932
2018
(restated)*
1,282,995
(789,884)
493,111
(137,068)
(107,526)
(11,225)
(10,610)
(2,179)
(268,608)
224,503
247
23,875
(66,449)
(37,546)
–
–
23,275
(96,895)
71,010
(41,251)
–
29,759
(3,606)
26,153
(254)
26,407
26,153
(0.0069)
(0.0069)
* Certain amounts do not correspond to the 2018 consolidated financial statements as they reflect the adjustments made for changes in accounting policy described in Note 3.
The accompanying notes on pages 188 to 252 are an integral part of these consolidated financial statements.
Profit for the year
Other comprehensive income
Other comprehensive income/(loss) to be reclassified to profit or loss in subsequent periods:
Income from currency translation differences
Changes in the fair value of debt instruments at FVOCI
Realised gain on financial assets measured at FVOCI reclassified to the consolidated income
statement
Change in allowance for expected credit losses on investments in debt instruments measured at
FVOCI
Reclassification of other reserves to PL due to Change in investment entity status
Net other comprehensive income to be reclassified to profit or loss in subsequent periods
Other comprehensive income/(loss) not to be reclassified to profit or loss in subsequent periods:
Revaluation of property and equipment
Changes in fair value of equity instruments designated at FVOCI
Reclassification of other reserves to retained earnings due to Change in investment entity status
13
24
Net other comprehensive income/(loss) not to be reclassified to profit or loss in
subsequent periods
Other comprehensive income/(loss) for the year, net of tax
Total comprehensive income/(loss) for the year
Total comprehensive income/(loss) attributable to:
– shareholders of Georgia Capital PLC
– non-controlling interests
Notes
2019
2018
(restated)*
604,266
26,153
9,964
2,694
(1,187)
(172)
(26,866)
(15,567)
3,474
140,441
108,265
252,180
236,613
840,879
804,036
36,843
840,879
9,246
(1,207)
–
117
–
8,156
–
(248,505)
–
(248,505)
(240,349)
(214,196)
(241,579)
27,383
(214,196)
* Certain amounts do not correspond to the 2018 consolidated financial statements as they reflect the adjustments made for changes in accounting policy as described in Note 3.
The accompanying notes on pages 188 to 252 are an integral part of these consolidated financial statements.
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183
171,254
197,222
844,663
297,565
1,142,228
31 December 2018 (restated)*
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2018 (THOUSANDS OF GEORGIAN LARI)
Attributable to shareholders of Georgia Capital
31 December 2017
Share
capital
Additional
paid-in
capital
10,000
466,187
Effect of adoption of IFRS 9
Effect of change in accounting policy (Note 3, (a))*
Effect of change in accounting policy (Note 3, (b))*
–
–
–
–
–
–
1 January 2018 (restated)*
10,000
466,187
(Loss)/Profit for the year (restated)*
Other comprehensive (loss)/income for the year
Total comprehensive loss
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
–
(Note 24)
(1,654,244)
(600,525)
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
Dividends paid by subsidiaries***
Other purchases of treasury shares (Note 24)
Contributions under share-based payment plan
–
–
–
–
–
–
–
–
25,865
–
–
–
–
–
–
(19,370)
Treasury
Shares
Other
reserves
Retained
earnings
Non-
controlling
interests
Total
Total
Equity
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(41)
(77)
192
(370)
–
(10,808)
(3,450)
(106,610)
(10,616)
(3,820)
(106,610)
(3,216)
–
–
(13,832)
(3,820)
(106,610)
171,076
76,354
723,617
294,349
1,017,966
–
(241,325)
(241,325)
577,913
(1,644,011)
(254)
–
(254)
(2,298)
–
(254)
(241,325)
(241,579)
704,984
–
26,407
976
27,383
–
–
26,153
(240,349)
(214,196)
704,984
–
1,644,011
610,758
–
–
–
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)
Attributable to shareholders of Georgia Capital
Additional
paid-in
capital
Treasury
Shares
Other
reserves
Retained
earnings
Non-
controlling
interests
Total
Total
Equity
–
(118)
415,164
684,349 1,100,688
329,005 1,429,693
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
Issue of share capital (Note 24)***
Increase in equity arising from share-based
payments (Note 29)
Transaction costs recognised directly in equity
(Note 24)***
Dilution of interests in subsidiaries
Increase in share capital of subsidiaries
Acquisition/sale of non-controlling interests in
existing subsidiaries***
Acquisition of additional interest in existing
subsidiaries by non-controlling shareholders
Non-controlling interests arising on acquisition of
subsidiary (Note 5)
Dividends paid by subsidiaries **
Cancellation of own shares
Purchase of treasury shares
Change in investment entity status (Note 3)
Share
capital
1,293
–
–
–
113
–
–
–
–
–
–
–
–
(86)
–
–
–
–
–
112,743
–
(5,888)
–
–
–
–
–
–
–
2,008
–
31 December 2019
1,320
108,863
–
–
–
–
–
–
–
–
–
–
–
–
86
(106)
138
–
–
234,774
234,774
–
25,148
–
5,040
–
(46,512)
(1,932)
–
–
–
(134,962)
(496,720)
569,262
–
569,262
–
569,262
234,774
804,036
112,856
35,004
1,839
36,843
–
604,266
236,613
840,879
112,856
–
–
–
–
–
–
25,148
6,585
31,733
(5,888)
5,040
–
–
(5,040)
6,215
(5,888)
–
6,215
(46,512)
(92,354)
(138,866)
(1,932)
749
(1,183)
–
(89)
–
–
388,316
–
(89)
–
(133,060)
(108,266)
6,976
(11,170)
–
–
(277,809)
6,976
(11,259)
–
(133,060)
(386,075)
– 1,641,838 1,752,021
– 1,752,021
31 December 2018 (restated)*
1,293
–
(118)
415,164
684,349
1,100,688
329,005
1,429,693
* Certain amounts do not correspond to the 2018 consolidated financial statements as they reflect the adjustments made for changes in accounting policy described in Note 3
((a) borrowing costs and (b) infrastructure assets).
** The minority shareholder of the Group in JSC Georgian Renewable Power Company contributed GEL 23,348 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.
**** 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.
The accompanying notes on pages 188 to 252 are an integral part of these consolidated financial statements.
* Certain amounts do not correspond to the 2018 consolidated financial statements as they reflect the adjustments made for changes in accounting policy described in Note 3
((a) borrowing costs and (b) infrastructure assets).
** During 2019, Georgia Healthcare Group PLC, Group’s subsidiary, announced dividend out of which GEL 2,873 was paid dividends to its minority shareholders. In addition,
JSC GEPHA, a subsidiary of the Group’s healthcare business, paid dividend to its minority shareholders in the amount of GEL 8,297.
*** On 18 November 2019, the Company announced a share exchange facility for GHG shareholders. Under the exchange facility, GHG shareholder’s had the opportunity to
exchange GHG shares for shares in GCAP in the ratio of 1:0.192. The facility closed on 18 December 2019, as a result of which GCAP exchanged 17,892,911 existing GHG shares
for 3,435,438 newly issued GCAP shares. Group’s interest in GHG increased to 70.6%. Acquisition of non-controlling interest in existing subsidiaries is mostly attributable to GHG
share exchange transaction.
The accompanying notes on pages 188 to 252 are an integral part of these consolidated financial statements.
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185
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI)
SEPARATE STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI)
Cash flows from operating activities
Revenue received
Cost of goods sold paid
General, administrative and operating expenses paid
Salaries and other employee benefits paid
Net other income received/(expense paid)
Interest received
Net change in operating assets and liabilities
Net cash flows from operating activities before income tax
Income tax paid
Net Cash flow from operating activities
Net withdrawals of amounts due from credit institutions
Loans repaid/(issued)
Acquisition of subsidiaries, net of cash acquired
Repayment of remaining holdback amounts from previous year acquisitions
Purchase of marketable securities
Proceeds from sale and redemption of marketable securities
Purchase of investments in associates
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
Change in investment entity status
Net cash flows used in investing activities
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
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
Cash payments for principal portion of lease liability
Cash payments for interest portion of the lease liability
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 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
Notes
2019
2018
1,386,928
(896,818)
(111,162)
(150,122)
7,207
23,363
977
1,196,852
(818,201)
(110,616)
(108,376)
(13,701)
22,291
(2,324)
260,373
(4,082)
256,291
(16,240)
114,654
(160,348)
(5,876)
(81,970)
125,534
(10,822)
860
(13,430)
11,162
(283,402)
(28,740)
24,953
(248,735)
(572,400)
660,400
(416,682)
247,053
(106,713)
(75,428)
(11,405)
(148,790)
(60,461)
6,215
(1,615)
(1,106)
(21,087)
(6,665)
63,716
(3,294)
–
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
–
(590,182)
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
(255,687)
(138,149)
256,930
–
–
1,243
346,239
48,840
–
256,930
5
2
12
12
3
19
19
19
19
24
24
24
24
14
14
7
7
The accompanying notes on pages 188 to 252 are an integral part of these consolidated financial statements.
Assets
Cash and cash equivalents
Prepayments
Equity investments at fair value
Total assets
Liabilities
Other liabilities
Total liabilities
Equity
Share capital
Additional paid-in capital
Treasury shares
Retained earnings
Net profit/(loss) for the year
Total equity
Total liabilities and equity
Notes
31 December
2019
31 December
2018
2
16
24
1,243
234
1,758,197
3,581
90
1,377,083
1,759,674
1,380,754
7,653
7,653
591
591
1,320
108,863
–
1,327,327
314,511
1,293
–
(41)
1,395,861
(16,950)
1,752,021
1,380,163
1,759,674
1,380,754
Equity investments at fair value is represented by direct investment in JSC Georgia Capital. As at 31 December 2019, investment in JSC Georgia
Capital is measured at fair value (2018: at deemed cost determined as quoting price of the company as at listing date adjusted for subsequent
capital reductions).
The parent company distributable reserves as at 31 December 2019 were GEL 1,320,092 (31 December 2018: 1,378,911).
The parent company has taken advantage of the exemption in Companies’ Act 2006 section 408 not to disclose a separate income statement.
The financial statements on page 179 to 252 were approved by the Board of Directors on 7 April 2020 and signed on its behalf by:
Irakli Gilauri
Chief Executive Officer
Georgia Capital PLC
Registered No. 10852406
The accompanying notes on pages 188 to 252 are an integral part of these consolidated financial statements.
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187
SEPARATE STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI)
SEPARATE STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI)
Additional
paid-in
capital
Treasury
shares
Retained
earnings
1 January 2018
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
Income for the year
Increase in equity arising from share-based payments
Issue of share capital (Note 24)
Transaction costs recognised directly in equity (Note 24)
Cancellation of shares
Purchase of treasury shares
Share
capital
172
–
–
1,644,011
(1,642,718)
(172)
–
1,293
–
–
113
–
(86)
–
–
–
–
–
–
–
–
–
–
–
112,743
(5,888)
–
2,008
31 December 2019
1,320
108,863
3
(16,950)
277
(202,460)
1,642,718
–
(44,677)
Total
175
(16,950)
277
1,441,551
–
(172)
(44,718)
1,378,911
1,380,163
314,511
535
–
–
–
(52,119)
314,511
535
112,856
(5,888)
–
(50,156)
1,641,838
1,752,021
–
–
–
–
–
–
(41)
(41)
–
–
–
–
86
(45)
–
Interest income received
Salaries and other employee benefits paid
General, administrative and operating expenses paid
Net other expense paid
Cash flows from operating activities
Capital redemption from subsidiary
Cash flows from investing activities
Cash flows from financing activities
Purchase of treasury shares
Transaction costs incurred in relation to share issuance
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
Notes
24
24
2019
14
(1,332)
(4,393)
(208)
(5,919)
80,389
80,389
(75,428)
(1,108)
(76,536)
(272)
(2,338)
3,581
1,243
2018
38
(810)
(1,443)
(14,063)
(16,278)
64,468
64,468
(44,718)
–
(44,718)
109
3,581
–
3,581
The accompanying notes on pages 188 to 252 are an integral part of these consolidated financial statements.
The accompanying notes on pages 188 to 252 are an integral part of these consolidated financial statements.
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189
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019 (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. The Group principally operates in utility and renewable energy, property and casualty insurance,
housing development, hospitality and commercial real estate – property construction and development, wine and beer production, education, digital,
auto service businesses through privately held subsidiaries and healthcare, pharmaceutical and medical insurance business through London Stock
Exchange premium-listed Georgian Healthcare Group PLC. In addition to its subsidiaries, the Group has a 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.
Georgia Capital’s registered legal address is 84 Brook Street, London W1K 5EH, England, United Kingdom.
As at 31 December 2019 and 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
31 December
2019
31 December
2018
8%
5%
87%
100%
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 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 2019 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 financial assets measured at fair value and investments in
subsidiaries held at fair value through profit or loss (FVPL).
The financial statements are presented in thousands of Georgian Lari (GEL), except per-share amounts and unless otherwise indicated.
Investment Entity Status
On 31 December 2019 Georgia Capital concluded that it met the definition of investment entity as defined in IFRS 10 Consolidated Financial
Statements. As per IFRS 10 an investment entity is an entity that:
a) obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services;
b) commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and
c) measures and evaluates the performance of substantially all of its investments on a fair value basis.
2. Basis of Preparation continued
Basis of Consolidation (Policy Applied up to 31 December 2019)
Starting from 31 December 2019, Georgia Capital’s status has been changed to investment entity. As the result, it measures investments in subsidiaries
at fair value rather than consolidating them. Investments in subsidiaries are measured at fair value through profit or loss in accordance with IFRS 9.
The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at 31 December 2019. 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; and
• 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.
Subsidiaries and Associates
The total amount of investment in subsidiaries in the Company’s separate statement of financial position up to 31 December 2019 was GEL 1,758,197
(as at 31 December 2018: 1,377,083) represented by direct investment in JSC Georgia Capital. As at 31 December 2019, investment in JSC Georgia
Capital (Note 31) is measured at fair value (2018: at deemed cost determined as quoting price of the company as at listing date adjusted for subsequent
capital reductions). The consolidated financial statements up to 31 December 2019 include the following subsidiaries and associates:
According to IFRS 10, an investment entity shall not consolidate its subsidiaries or apply IFRS 3 when it obtains control of another entity.
Instead, an investment entity shall measure an investment in a subsidiary at fair value through profit or loss in accordance with IFRS 9.
Proportion of voting rights and
ordinary share capital held
Georgia Capital PLC holds a single investment in JSC Georgia Capital (an investment entity on its own), which holds a portfolio of investments, both
meet the definition of investment entity and Georgia Capital PLC measures its investment in JSC Georgia Capital at fair value through profit or loss.
Given the above, these financial statements consolidate the Group’s subsidiaries up to 31 December 2019. As of that date, the subsidiaries have been
de-consolidated, and recognised as investments in subsidiaries at their fair value as at 31 December 2019.
Further details on financial impact of change in investment entity status and underlying significant judgements are provided in Notes 3, 4 and 31,
respectively.
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.
Subsidiaries
31 December 2019
Country of
incorporation
Address
Industry
Date of
incorporation
Date of
acquisition
JSC Georgia Capital
JSC Georgia Real Estate
(formerly JSC m2 Real Estate)
m2 Group, LLC
(formerly m2 Residential, LLC)
m2 Development, LLC
Optima ISANI, LLC
Tamarashvili 13, LLC
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 Chavchavadze LLC
100.00%
100.00%
Georgia
Georgia
Kazbegi street 3-5, Tbilisi Georgia
Kazbegi street 15, Tbilisi Georgia
Investment
Real estate
6/8/2015
27/9/2006
100.00%
Georgia
Kazbegi street 15, Tbilisi Georgia
Real estate
17/8/2015
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Kazbegi street 15, Tbilisi Georgia
14 a Moscow ave., Tbilisi
13 Tamarashvili Str., Tbilisi, 0179
10 Givi Kartozia st., Tbilisi
3 Maro Makashvili st., Tbilisi
25 Kazbegi Ave., Tbilisi, 0160
6 Tamarashvili Str., Tbilisi, 0177
71 Vaja Pshavela Ave., 0186
1 Marshal Gelovani ave., Tbilisi
2 Mikheil Shavishvili st, Tbilisi
50 I. Chavchavadze Ave., Tbilisi
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
12/12/2019
25/7/2014
3/11/2011
6/7/2015
23/7/2015
21/5/2013
21/5/2013
21/5/2013
15/9/2015
15/9/2015
5/9/2016
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewFinancial Statements 190
Georgia Capital PLC Annual Report 2019
Georgia Capital PLC Annual Report 2019
191
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
Address
Industry
Date of
incorporation
Date of
acquisition
Subsidiaries
31 December 2019
Country of
incorporation
Address
Industry
Date of
incorporation
Date of
acquisition
2. Basis of Preparation continued
Subsidiaries and Associates continued
Proportion of voting rights and
ordinary share capital held
2. Basis of Preparation continued
Subsidiaries and Associates continued
Proportion of voting rights and
ordinary share capital held
Subsidiaries
Land, LLC
31 December 2019
Country of
incorporation
100.00%
Georgia
Optima, LLC (formerly m2
100.00%
Georgia
Between university and
Kavtaradze st., Tbilisi
Kazbegi street 15, Tbilisi Georgia
Real estate
3/10/2014
Real estate
3/8/2016
–
–
at Vake, LLC)
BK Construction, LLC
BK Production, LLC
Georgia Real Estate Management
Group, LLC (formerly m2 Hospitality,
LLC)
Amber Group, LLC
Kakheti Wine and Spa, LLC
Gudauri Lodge, LLC (formerly m2
at Gudauri, LLC)
100.00%
100.00%
100.00%
Georgia 80 Aghmashenebeli ave., Tbilisi, 0102
Georgia 80 Aghmashenebeli ave., Tbilisi, 0102
Kazbegi street 15, Tbilisi Georgia
Georgia
Construction
Construction
Real estate
18/5/2017
27/6/2019
17/8/2015
2/6/2017
–
–
100.00%
100.00%
100.00%
Georgia
Kazbegi street 15, Tbilisi Georgia
Georgia 80 Aghmashenebeli ave., Tbilisi, 0102
Georgia 80 Aghmashenebeli ave., Tbilisi, 0102
Hospitality
Hospitality
Hospitality
10/12/2019
23/04/2018
24/04/2018
–
–
–
m2 Mtatsminda, LLC (former Kass
100.00%
Georgia
22 Zaal Dumbadze st., Tbilisi
Hospitality
16/10/2014 26/12/2017
1, LLC)
m2 Svaneti, LLC
m2 Hatsvali, LLC
m2 Resort,LLC
JSC Litera
Georgia Property Management
Group, LLC (formerly m2 Commercial
Assets, LLC)
100.00%
100.00%
100.00%
50.00%
100.00%
Georgia 80 Aghmashenebeli ave., Tbilisi, 0102
Georgia 80 Aghmashenebeli ave., Tbilisi, 0102
Georgia 80 Aghmashenebeli ave., Tbilisi, 0102
Georgia 80 Aghmashenebeli ave., Tbilisi, 0102
Kazbegi street 15, Tbilisi Georgia
Georgia
Hospitality
Hospitality
Hospitality
Hospitality
Property
management
14/11/2018
17/4/2019
11/2/2019
4/12/2019
4/10/2018
–
–
–
–
–
Vere Real Estate, LLC
Caucasus Autohouse, LLC
Georgia Hotels Management Group,
100.00%
100.00%
100.00%
Georgia 80 Aghmashenebeli ave., Tbilisi, 0102
Georgia 29 Ilia chavchavadze Ave., Tbilisi, 0105
Kazbegi street 15, Tbilisi Georgia
Georgia
Real estate
Real estate
Real estate
4/3/2010
29/3/2011
16/12/2019
6/8/2018
–
–
LLC
m2, LLC
m2 Kutaisi, LLC
m2 at Melikishvili, LLC
m2 Zugdidi, LLC
Georgia Hospitality Management
Group, LLC
100.00%
100.00%
100.00%
100.00%
100.00%
Georgia 29 Ilia chavchavadze Ave., Tbilisi, 0105
10 Melikishvili ave., Tbilisi
Georgia
Georgia
10 Melikishvili ave., Tbilisi
Georgia 80 Aghmashenebeli ave., Tbilisi, 0102
Kazbegi street 3-5, Tbilisi Georgia
Georgia
JSC Georgian Renewable Power
65.59%
Georgia
79 David Agmashenebeli Ave,
Company
JSC Geohydro
85.00%
0102, Tbilisi
Georgia 79 D.Agmashenebeli Ave, Tbilisi, 0102
JSC Svaneti Hydro
100.00%
Georgia
29a, Gagarin Street, Tbilisi 0160
JSC Zoti Hydro
100.00%
Georgia 79 D.Agmashenebeli Ave, Tbilisi, 0102
JSC Caucasian Wind Company
100.00%
Georgia 79 D.Agmashenebeli Ave, Tbilisi, 0102
JSC Caucasian Solar Company
100.00%
Georgia 79 D.Agmashenebeli Ave, Tbilisi, 0102
Bakhvi 2, LLC
95.00%
Georgia
JSC A Group
JSC Insurance Company Aldagi
JSC Insurance Company Tao
Aliance, LLC
100.00%
100.00%
100.00%
100.00%
Auto Way LLC
Insurance Informational Bureau, LLC
100.00%
22.50%
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
JSC Carfest (former JSC Uno
100.00%
Georgia
Leasing)
10 Medea (Mzia) Jugheli st,
Tbilisi, 0179
1, Berbuki str., Saburatlo, Tbilisi
Old Tbilisi, Pushkini str #3, Tbilisi
Old Tbilisi, Pushkini str #3, Tbilisi
20, Chavchavadze ave., floor 2,
Vake-Saburtalo, Tbilisi
20, Chavchavadze ave., Vake, Tbilisi
Baratashvili bridge underground
crossing, Mtkvari Left Bank,
Old Tbilisi, Tbilisi
3, Pushkini str., Krtsanisi, Tbilisi
JSC Greenway Georgia
100.00%
Georgia
6, University str., Vake, Tbilisi
Real estate
Real estate
Real estate
Real estate
Real estate
Renewable
Energy
Renewable
Energy
Renewable
Energy
Renewable
Energy
Renewable
Energy
Renewable
Energy
Renewable
Energy
Various
Insurance
Insurance
Various
12/2/2014
17/5/2017
17/5/2017
7/11/2018
22/8/2018
15/9/2015
11/10/2013
6/12/2013
20/8/2015
14/9/2016
27/10/2016
–
–
–
–
–
–
–
–
–
–
–
22/10/2015
8/23/2019
20/9/2018
31/7/2014
22/8/2007
3/1/2000
–
–
21/1/2015
30/4/2012
Various
Insurance
9/8/2004
23/7/2007
30/4/2012
–
Leasing
17/11/2017
–
Vehicle
Inspection
9/7/2010
1/5/2012
6, University str., Vake, Tbilisi
84 Brook Street, London, W1K 5EH
Car Wash
Healthcare
31/8/2018
27/8/2015
–
28/8/2015
142, A. Beliashvili str, Tbilisi
9, Anna Politkovskaias Str.
Healthcare
Insurance
29/4/2015
22/6/2007
–
–
Vake-Saburtalo District, Tbilisi
142, A. Beliashvili str, Tbilisi Pharmacy and
Distribution
Kievyan Str. 2/8, Erevan, Armenia Pharmacy and
Distribution
Peikrebi str. 14a, Tbilisi, Georgia Pharmacy and
Distribution
Healthcare
Healthcare
Healthcare
Healthcare
Healthcare
Healthcare
Georgia
142, A. Beliashvili str, Tbilisi
Georgia
142, A. Beliashvili str, Tbilisi
Georgia
142, A. Beliashvili str, Tbilisi
Georgia
23, P. Kavtaradze Str., Tbilisi
U. Chkeidze str. 10, Tbilisi, Georgia
Georgia
Georgia Djavakhishvili str. 85, Kutaisi, Georgia
19/10/1995
4/5/2016
28/12/2013
6/1/2017
24/2/2004
6/1/2017
1/8/2014
1/8/2014
13/2/2015
–
3/1/2017
20/7/2017
12/1/2012
30/6/2015
6/7/2016
5/9/2003
5/5/2003 29/11/2011
GreenWash, LLC
Georgia Healthcare Group PLC
JSC Georgia Healthcare Group
JSC Insurance Company Imedi L
100.00%
70.63%
100.00%
100.00%
Georgia
United
Kingdom
Georgia
Georgia
JSC GEPHA
67.00%
Georgia
JSC ABC Pharamcia (Armenia)
100.00%
Armenia
ABC Pharmalogistics, LLC
100.00%
Georgia
100.00%
100.00%
100.00%
99.80%
76.00%
67.00%
JSC Evex Hospitals
EVEX-Logistics, LLC
New Clinic, LLC
Caucasus Medical Center, LLC
JSC Pediatry
JSC Kutaisi County Treatment and
Diagnostic Center for Mothers
and Children
LLC Academician Z. Tskhakaia
National Centre of Intervention
Medicine of Western Georgia
NCLE Evex Learning Centre
Emergency Service, LLC
GNCo
High Technology Medical Center,
LLC
67.00%
Georgia
A Djavakhishvili str. 83A, Kutaisi,
Georgia
Healthcare
15/10/2004 29/11/2011
100.00%
85.00%
50.00%
100.00%
Georgia
Georgia
Georgia
Georgia
#83A, Javakhishvili street, Tbilisi
U. Chkeidze str. 10, Tbilisi, Georgia
Chavchavadze ave. N 16, Tbilisi
Tsinandali str. N 9, Tbilisi
Other
Healthcare
Healthcare
Healthcare
20/12/2013 20/12/2013
3/1/2015
5/8/2015
5/8/2015
18/6/2013
4/6/2001
16/4/1999
LLC Nefrology Development Clinic
80.00%
Georgia
Tsinandali str. N 9, Tbilisi
Healthcare
28/9/2010
5/8/2015
Centre
JSC Evex Clinics
Tskaltubo Regional Hospital, LLC
LLC Aliance Med
JSC Polyclinic Vere
New Dent, LLC
JSC Mega-Lab
JSC Patgeo
JSC Vabaco
Georgian Global Utilities, LLC
Georgian Water and Power, LLC
Rustavi Water, LLC
Gardabani Sewage Treatment, LLC
Mtskheta Water, LLC
Georgian Engineering and
Management Company (GEMC),
LLC
JSC Saguramo Energy
JSC Georgian Beverages
100.00%
67.00%
100.00%
97.80%
75.00%
92.00%
100.00%
67.00%
142, A. Beliashvili str, Tbilisi
Georgia
16 Eristavi street, Tskhaltubo
Georgia
142, A. Beliashvili str, Tbilisi
Georgia
18-20 Kiacheli str., Tbilisi
Georgia
Vazha Pshavela ave. #40, Tbilisi
Georgia
Georgia
Petre Kavtaradze str. 23, Tbilisi
Georgia Mukhiani, II mcr. District, Building 22,
1a, Tbilisi
Bochorishvili str. 37, Tbilisi, Georgia
Georgia
100.00% British Virgin
Islands
Georgia
Georgia
Georgia
Georgia
Georgia
100.00%
100.00%
100.00%
100.00%
100.00%
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
100.00%
100.00%
Georgia
Georgia
33, Kostava st. 1st Lane, Tbilisi
75 Chavchavadze Ave., Tbilisi
JSC Georgian Beverages Holding
JSC Teliani Valley
Teliani Trading (Ukraine), LLC
86.81%
100.00%
100.00%
Georgia
Georgia
Ukraine
8a Petre Melikishvili Ave, Tbilisi, 0179
3 Tbilisi highway, Telavi
18/14 Khvoiki St. Kiev
Healthcare
Healthcare
Healthcare
Healthcare
Healthcare
Healthcare
Healthcare
7/7/2015
1/4/2019
–
29/9/1999 29/11/2011
20/7/2017
22/11/2013 25/12/2017
–
24/12/2018
–
6/6/2017
1/8/2016
13/1/2010
Software
Development
Utilities
9/9/2013
28/9/2018
16/08/2007 31/12/2014
Utilities
Utilities
Utilities
Utilities
Utilities
25/06/1997 31/12/2014
31/08/1999 31/12/2014
20/12/1999 31/12/2014
1/9/1999 31/12/2014
20/03/2011 31/12/2014
Utilities
Beer
Production
and
Distribution
Investment
Winery
Distribution
11/12/2008 31/12/2014
7/2/2018
14/11/2016
-
17/12/2019
30/6/2000
28/2/2007
3/10/2006 31/12/2007
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewFinancial Statements 192
Georgia Capital PLC Annual Report 2019
Georgia Capital PLC Annual Report 2019
193
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
2. Basis of Preparation continued
Subsidiaries and Associates continued
Proportion of voting rights and
ordinary share capital held
2. Basis of Preparation continued
Subsidiaries and Associates continued
Proportion of voting rights and
ordinary share capital held
Subsidiaries
31 December 2019
Country of
incorporation
Address
Industry
Date of
incorporation
Date of
acquisition
Subsidiaries
31 December 2019
Country of
incorporation
Address
Industry
Date of
incorporation
Date of
acquisition
Georgia Logistics and Distribution,
100.00%
Georgia
2 Marshal Gelovani St, Tbilisi
Distribution
10/1/2006
27/3/2007
Amboli, LLC
Redberry, LLC
Lunchoba, LLC
GCMF, LLC
80.00%
60.00%
100.00%
Georgia
Georgia
Georgia 22 Nutsubidze IV Micro-district, Tbilisi
100.00%
Georgia
LLC
Le Caucase, LLC
100.00%
Georgia
Kupa, LLC
70.00%
Georgia
Global Beer Georgia, LLC
100.00%
Georgia
Kindzmarauli Marani, LLC
Alaverdi, LLC
Global Coffee Georgia, LLC
100.00%
100.00%
100.00%
Georgia
Georgia
Georgia
New Coffee Company, LLC
100.00%
Georgia
Genuine Brewing Company, LLC
100.00%
Georgia
Craf and Draft, LLC
100.00%
Georgia
JSC Artisan Wine and Drinks
100.00%
Georgia
Georgian Energy Trading Company
100.00%
Georgia
(GETC), LLC
Georgian Wind Company, LLC
100.00%
Georgia
Qartli Wind Farm, LLC
100.00%
Georgia
Georgia Energy Holding, LLC
100.00%
Georgia
Racha Hydro, LLC
95.00%
Georgia
Hydrolea, LLC
100.00%
Georgia
Geoenergy, LLC
100.00%
Georgia
Hydro Georgia, LLC
100.00%
Georgia
Darchi, LLC
Hydro S, LLC
Kasleti 2, LLC
100.00%
Georgia
100.00%
Georgia
100.00%
Georgia
Georgia Geothermal Company LLC
100.00%
Georgia
3 Tbilisi highway, Telavi
7 Kotetishvili st, Tbilisi, 0108
2 Marshal Gelovani St, Tbilisi
24, Leonidze st, Rustavi, Georgia
Tsilkani, Mtskheta Region, Georgia
Tsilkani, Mtskheta Region, Georgia
8a Petre Melikishvili Ave, Tbilisi, 0179
Tskneti Highway, No. 16/18, app. 36
56 A. Tsereteli Ave., Tbilisi
Chumlaki, Gurjaani Region, Georgia
29a Gagarini street, Tbilisi
Cognac
Production
Oak Barrel
Production
Production
and
distribution of
alcohol and
non-alcohol
beverages
Winery
Winery
Coffee
Distribution
Coffee
Distribution
Beer
Production
and
Distribution
Beer
Production
Wine
distribution
Car Services
9, Tashkenti st, Tbilisi, Georgia Digital Services
Catering
Services
8a Petre Melikishvili Ave, Tbilisi, 0179 Excess liquidity
management
company
Renewable
Energy Sales
Renewable
Energy
Renewable
Energy
Renewable
Energy
Renewable
Energy
Renewable
Energy
Renewable
Energy
Renewable
Energy
Renewable
Energy
Renewable
Energy
Renewable
Energy
Renewable
Energy
Education
Tbilisi, 0160
8a Petre Melikishvili Ave, Tbilisi, 0179
Tbilisi, 0179
8a Petre Melikishvili Ave, Tbilisi, 0179
15 Aleksandre Kazbegi Ave,
10 Medea (Mzia) Jugheli st,
10 Medea (Mzia) Jugheli st,
10 Medea (Mzia) Jugheli st,
10 Medea (Mzia) Jugheli st,
10 Medea (Mzia) Jugheli st,
10 Medea (Mzia) Jugheli st,
10 Medea (Mzia) Jugheli st,
10 Medea (Mzia) Jugheli st,
10 Medea (Mzia) Jugheli st,
Tbilisi, 0179
Tbilisi, 0179
Tbilisi, 0179
Tbilisi, 0179
Tbilisi, 0179
Tbilisi, 0179
Tbilisi, 0179
23/9/2006
20/3/2007
12/10/2006
20/3/2007
24/12/2014
–
18/12/2001
8/4/2008
26/12/2016
25/4/2018
19/8/2019
–
23/9/2009
15/2/2017
7/6/2011
7/2/2018
20/2/2019
26/8/2019
–
–
13/8/2004
29/8/2014
8/10/2018
25/6/2019
1/5/2019
–
2/5/2019
23/4/2019
18/6/2019
–
–
–
10/9/2012 30/12/2019
26/9/2019
31/10/2019
–
–
6/7/2012 28/10/2019
26/1/2012 28/10/2019
8/5/2012 28/10/2019
18/11/2013 28/10/2019
18/1/2019 28/10/2019
18/11/2013 28/10/2019
16/12/2019
–
7/6/2011
22/8/2019
Tbilisi Green School, LLC
80.00%
Georgia Education Group, LLC
100.00%
Tbilisi, 0179
Georgia Didube-Chughureti / Dighomi massive
IV, Building 5A, Apartment 35
8a Petre Melikishvili Ave, Tbilisi, 0179
Georgia
Education
16/7/2019
–
Green School, LLC
British-Georgian Academy, LLC
NNLE British International School
90.00%
70.00%
100.00%
Georgia
Georgia
Georgia
8a Petre Melikishvili Ave, Tbilisi, 0179
17, Leo Kvachadze str, Tbilisi
17, Leo Kvachadze str, Tbilisi
Education
Education
Education
21/10/2019
3/2/2006
3/2/2015
–
23/7/2019
–
of Tbilisi
British International School of
100.00%
Georgia
17, Leo Kvachadze str, Tbilisi
Education
5/9/2019
–
Tbilisi LLC
Buckswood International School –
80.00%
Georgia
2, Dolidze str, Tbilisi
Education
24/8/2005
29/7/2019
Tbilisi, LLC
JSC Liberty Consumer
JSC Intertour
75.10%
99.94%
Georgia
Georgia
74a Chavchavadze Ave, Tbilisi, 0162
49a, Chavchavadze Ave, Tbilisi, 0162
Investments
Travel agency
24/5/2006
29/3/1996
–
25/4/2006
Proportion of voting rights and
ordinary share capital held
Associates
#5 Clinic hospital, LLC
Ytong Capital, LLC*
JSC Isani Parki
31 December 2019
Country of
incorporation
Address
Industry
Date of
incorporation
Date of
acquisition
35.00%
28.90%
6.00%
Georgia
Georgia
Georgia
Temka, XI mcr. Block 1, N 1/47, Tbilisi
15, Kipshidze str, Tbilisi, Georgia
Kakheti Highway, Isani, Tbilisi
Healthcare
Production
Real estate
16/9/1999
4/5/2016
6/3/2015 30/10/2019
–
18/12/2017
* On 30 October 2019, one of the Group’s wholly-owned subsidiaries – JSC Georgia Real Estate (formerly JSC m2 Real Estate) acquires 28.9% equity investment in Ytong Capital LLC.
Total consideration paid was GEL 10,823.
During 2019, JSC Georgia Capital made capital reduction to its 100% shareholder with total consideration of GEL 80,389.
The consolidated financial statements as at 31 December 2018 include the following subsidiaries and associates:
Proportion of voting rights and
ordinary share capital held
Subsidiaries
31 December 2018
Country of
incorporation
Address
Industry
Date of
incorporation
Date of
acquisition
JSC Georgia Capital
JSC m2 Real Estate
m2 Residential, LLC
Optima ISANI, LLC
Tamarashvili 13, LLC
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
m2 Hospitality, LLC
m2, LLC (formerly JSC m2)
m2 Kutaisi, LLC
m2 at Melikishvili, LLC
Kass 1, LLC
Kakheti Wine and Spa, LLC
m2 at Gudauri, LLC
m2 Zugdidi, LLC
m2 Svaneti, LLC
m2 at Chavchavadze LLC
m2 Commercial Properties LLC
Caucasus Autohouse, LLC
Land, LLC
BK Construction, LLC
m2 Commercial Assets, 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%
100.00%
67.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Georgia
Kazbegi street 3-5, Tbilisi Georgia
Georgia 29 Ilia chavchavadze Ave., Tbilisi, 0105
Georgia 29 Ilia chavchavadze Ave., Tbilisi, 0105
Georgia
16 a Moscow ave., Tbilisi
13 Tamarashvili Str., Tbilisi, 0179
Georgia
10 Givi Kartozia st., Tbilisi
Georgia
3 Maro Makashvili st., Tbilisi
Georgia
25 Kazbegi Ave., Tbilisi, 0160
Georgia
6 Tamarashvili Str., Tbilisi, 0177
Georgia
Georgia
71 Vaja Pshavela Ave., 0186
1 Marshal Gelovani ave., Tbilisi
Georgia
2 Mikheil Shavishvili st, Tbilisi
Georgia
Georgia
50 I. Chavchavadze ave., Tbilisi
Georgia 29 Ilia chavchavadze Ave., Tbilisi, 0105
Georgia 29 Ilia chavchavadze Ave., Tbilisi, 0105
10 Melikishvili ave., Tbilisi
Georgia
10 Melikishvili ave., Tbilisi
Georgia
Georgia
20 Merab Kostava st., Tbilisi
Georgia 80 Aghmashenebeli ave., Tbilisi, 0102
Georgia 80 Aghmashenebeli ave., Tbilisi, 0102
Georgia 80 Aghmashenebeli ave., Tbilisi, 0102
Georgia 80 Aghmashenebeli ave., Tbilisi, 0102
50 I. Chavchavadze Ave., Tbilisi
Georgia
Georgia
80 Chavchavadze Ave., Tbilisi
Georgia 80 Aghmashenebeli ave., Tbilisi, 0102
Georgia
Between university and
Kavtaradze st., Tbilisi
Georgia 80 Aghmashenebeli ave., Tbilisi, 0102
Tbilisi, Chavchavadze ave. 29
Georgia
Investment
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
6/8/2015
27/9/2006
17/8/2015
25/7/2014
3/11/2011
6/7/2015
23/7/2015
21/5/2013
21/5/2013
21/5/2013
15/9/2015
15/9/2015
3/8/2016
17/8/2015
12/2/2014
17/5/2017
17/5/2017
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
16/10/2014 27/12/2017
–
23/04/2018
–
24/04/2018
–
7/11/2018
–
14/11/2018
–
5/9/2016
–
11/6/2014
–
29/3/2011
–
3/10/2014
Real estate
Real estate
18/5/2017
4/10/2018
2/6/2017
–
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewFinancial Statements 194
Georgia Capital PLC Annual Report 2019
Georgia Capital PLC Annual Report 2019
195
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
2. Basis of Preparation continued
Subsidiaries and Associates continued
Proportion of voting rights and
ordinary share capital held
Subsidiaries
31 December 2018
Country of
incorporation
Address
Industry
Date of
incorporation
Date of
acquisition
Melikishvili Business Center, LLC
Georgia Hospitality Management
100.00%
100.00%
Georgia 80 Aghmashenebeli ave., Tbilisi, 0102
Kazbegi street 3-5, Tbilisi Georgia
Georgia
Real estate
Real estate
4/12/2018
22/8/2018
Group, LLC
JSC Georgian Renewable Power
65.00%
Georgia
79 David Agmashenebeli Ave,
Company
JSC Geohydro
85.00%
0102, Tbilisi
Georgia 79 D.Agmashenebeli Ave, Tbilisi, 0102
JSC Svaneti Hydro
100.00%
Georgia
29a, Gagarin Street, Tbilisi 0160
JSC Zoti Hydro
100.00%
Georgia 79 D.Agmashenebeli Ave, Tbilisi, 0102
JSC Caucasian Wind Company
100.00%
Georgia 79 D.Agmashenebeli Ave, Tbilisi, 0102
JSC Caucasian Solar Company
100.00%
Georgia 79 D.Agmashenebeli Ave, Tbilisi, 0102
–
–
–
–
–
–
–
14/9/2015
11/10/2013
6/12/2013
20/8/2015
14/9/2016
27/10/2016
Renewable
Energy
Renewable
Energy
Renewable
Energy
Renewable
Energy
Renewable
Energy
Renewable
Energy
Various
Insurance
Insurance
Various
20/9/2018
31/7/2014
22/8/2007
3/1/2000
–
–
21/1/2015
30/4/2012
JSC Greenway Georgia (formerly
100.00%
Georgia
6, University str., Vake, Tbilisi
JSC A Group
JSC Insurance Company Aldagi
JSC Insurance Company Tao
Aliance, LLC
100.00%
100.00%
100.00%
100.00%
Georgia
Georgia
Georgia
Georgia
Auto Way LLC (formerly known as
100.00%
Georgia
Green Way, LLC)
Insurance Informational Bureau, LLC
22.50%
Georgia
JSC Uno Leasing (formerly known
100.00%
Georgia
as JSC AMF)
known as Premium Residence, LLC)
GreenWash, LLC
Georgia Healthcare Group PLC
JSC Georgia Healthcare Group
JSC Insurance Company Imedi L
JSC GEPHA
JSC ABC Pharamcia (Armenia)
ABC Pharmalogistics, LLC
JSC Medical Corporation EVEX
JSC Kutaisi County Treatment and
Diagnostic Center for Mothers
and Children
Academician Z. Tskhakaia National
Center of Intervention Medicine of
Western Georgia, LLC
100.00%
57.05%
100.00%
100.00%
67.00%
100.00%
100.00%
100.00%
66.70%
Georgia
United
Kingdom
Georgia
Georgia
Georgia
Armenia
Georgia
Georgia
Georgia
1, Berbuki str., Saburatlo, Tbilisi
Old Tbilisi, Pushkini str #3, Tbilisi
Old Tbilisi, Pushkini str #3, Tbilisi
20, Chavchavadze ave., floor 2,
Vake-Saburtalo, Tbilisi
20, Chavchavadze ave., Vake, Tbilisi
Baratashvili bridge underground
crossing, Mtkvari Left Bank,
Old Tbilisi, Tbilisi
3, Pushkini str., Krtsanisi, Tbilisi
Insurance
23/7/2007
Leasing
17/11/2017
–
–
6, University str., Vake, Tbilisi
84 Brook Street, London, W1K 5EH
Vehicle
Inspection
Car Wash
Healthcare
9/7/2010
1/5/2012
31/8/2018
27/8/2015
–
28/8/2015
40 Vazha-Pshavela Ave., Tbilisi
9, Anna Politkovskaias Str.
Healthcare
Insurance
29/4/2015
22/6/2007
–
–
Vake-Saburtalo District, Tbilisi
Old Tbilisi, Sanapiro str. #6, Tbilisi
Healthcare
Kievnaia sts. #2/8, 2/10, Erevan Pharmaceutical
Sanapiro Str.#6, Tbilisi Pharmaceutical
Healthcare
Medical
services
40 Vazha-Pshavela Ave., Tbilisi
85 Djavakhishvili street, Kutaisi, 4600
66.70%
Georgia
83 A Djavakhishvili street, Kutaisi
Tskaltubo Regional Hospital, LLC
66.70%
Georgia
16 Eristavi street, Tskhaltubo
Patgeo, LLC
GN KO, LLC
100.00%
50.00%
Georgia Gldani Nadzaladevi district, Mukhiani,
II mcr. District, Building #22, 1a,
Tbilisi
Chavchavadze ave. N 16, Tbilisi
Georgia
High Technology Medical Center,
100.00%
Georgia
Tsinandali str. N 9, Tbilisi
LLC
Geolab, LLC
–
Georgia
Tsinandali str. N 9, Tbilisi
Nephrology Development Clinic
80.00%
Georgia
Tsinandali str. N 9, Tbilisi
Center, LLC
Catastrophe Medicine Pediatric
100.00%
Georgia
U. Chkeidze str. N 10, Tbilisi
Center, LLC
4/5/2016
19/10/1995
6/1/2017
28/4/2013
6/1/2017
24/2/2004
31/7/2014
–
5/5/2003 29/11/2011
15/10/2004
12/9/2011
29/9/1999
12/9/2011
13/10/2010
27/9/2016
6/4/2001
5/8/2015
16/4/1999
5/8/2015
3/5/2011
5/8/2015
28/9/2010
5/8/2015
18/6/2013
5/8/2015
Medical
services
Medical
services
Medical
services
Medical
services
Healthcare
Service
Healthcare
Service
Healthcare
Service
Medical
services
2. Basis of Preparation continued
Subsidiaries and Associates continued
Proportion of voting rights and
ordinary share capital held
31 December 2018
Country of
incorporation
Address
Industry
Subsidiaries
JSC Pediatria
Emergency Service, LLC
JSC Poti Central Hospital (merged
with JSC Medical Corporation Evex)
76.00%
100.00%
Georgia 1, t. Chkheidze str., Didube-Chugureti
District, Tbilisi
#2, D. Uznadze st., Tbilisi
Georgia
100.00%
Georgia
Guria str. 171, Poti
Deka, LLC
97.20%
Georgia
23, P. Kavtaradze Str., Tbilisi
EVEX-Logistics, LLC
100.00%
Georgia
Vazha Pshavela ave. #40, Tbilisi
EVEX Collection, LLC
100.00%
Georgia
Vazha Pshavela ave. #40, Tbilisi
Unimed Achara, LLC (merged with
100.00%
Georgia
Vazha Pshavela ave. #40, Tbilisi
JSC Medical Corporation Evex)
Unimedi Samtskhe, LLC (merged
with JSC Medical Corporation Evex)
Unimedi Kakheti, LLC (merged with
JSC Medical Corporation Evex)
100.00%
Georgia
Vazha Pshavela ave. #40, Tbilisi
100.00%
Georgia
20 Chavchvadze ave Tbilisi
M. Iashvili Children’s Central
100.00%
Georgia
2/6 Lubliana Street, Tbilisi
and Rheumatology Centre,
LLC (merged with JSC Medical
Corporation Evex)
Iv Bokeria Tbilisi Referral Hospital
100.00%
Georgia
(merged with JSC Medical
Corporation Evex)
JSC Kutaisi St. Nicholas Surgical
and Oncological Hospital (merged
with JSC Medical Corporation Evex)
Kindzmarauli I turn, N1,
Isan-Samgori, Tbilisi
96.87%
Georgia
9 Paolo Iashvili street, Kutaisi
Referral Centre of Pathology, LLC
100.00%
Georgia
40 Vazha-Pshavela Ave., Tbilisi
EVEX Learning Center
JSC Mega-Lab
100.00%
100.00%
Georgia
Georgia
#83A, Javakhishvili street, Tbilisi
23 Kavtaradze str., Tbilisi
New Clinic, LLC
100.00%
Georgia
Vazha Pshavela ave. #40, Tbilisi
Alliance Medi, LLC
100.00%
Georgia
Vazha Pshavela ave. #40, Tbilisi
Medical Center Alimedi, LLC
–
Georgia
17 R. Tabukashvili str., Tbilisi
JSC Polyclinic Vere
97.80%
Georgia
18-20 Kiacheli str.,Tbilisi
New Dent, LLC
75.00%
Georgia
Vazha Pshavela ave. #40, Tbilisi
JSC Vabaco
67.00%
Georgia 37. 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
100.00% British Virgin
Islands
Georgia
Georgia
Georgia
Georgia
Georgia
100.00%
100.00%
100.00%
100.00%
100.00%
Georgian Global Utilities, LLC
Georgian Water and Power, LLC
Rustavi Water, LLC
Gardabani Sewage Treatment, LLC
Mtskheta Water, LLC
Georgian Engineering and
Management Company (GEMC),
LLC
JSC Saguramo Energy
JSC Teliani Valley
Date of
incorporation
Date of
acquisition
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
29/6/2010
1/5/2012
29/6/2010
1/5/2012
3/5/2011
19/2/2014
6/3/2000
19/2/2014
16/3/2017
–
3/11/2000
20/5/2008
Medical
services
Medical
services
Medical
services
Medical
services
Medical
services
Medical
services
Medical
services
Medical
services
Medical
services
Medical
Service
Medical
Service
Medical
Service
Medical
services
Medical
services
Education
Medical
services
Medical
services
Medical
services
Medical
services
Medical
services
Medical
services
Software
Developer
Utilities
29/12/2014
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
16/08/2007 31/12/2014
Utilities
Utilities
Utilities
Utilities
Utilities
25/06/1997 31/12/2014
31/08/1999 31/12/2014
20/12/1999 31/12/2014
1/9/1999 31/12/2014
20/03/2011 31/12/2014
100.00%
77.62%
Georgia
Georgia
33, Kostava st. 1st Lane, Tbilisi
3 Tbilisi highway, Telavi.
Utilities
Winery
11/12/2008 31/12/2014
28/2/2007
30/6/2000
Various
9/8/2004
30/4/2012
Hospital, LLC (merged with JSC
Medical Corporation Evex)
Institute of Pediatrics, Alergology
100.00%
Georgia
5 Lubliana Street 5, Tbilisi
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewFinancial Statements 196
Georgia Capital PLC Annual Report 2019
Georgia Capital PLC Annual Report 2019
197
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
2. Basis of Preparation continued
Subsidiaries and Associates continued
Proportion of voting rights and
ordinary share capital held
Subsidiaries
31 December 2018
Country of
incorporation
Address
Industry
Date of
incorporation
Date of
acquisition
100.00%
Georgia
2 Marshal Gelovani St, Tbilisi
Distribution
10/1/2006
27/3/2007
Georgia Logistics and Distribution,
LLC (Formerly known as Teliani
Trading (Georgia), LLC)
Teliani Trading (Ukraine), LLC
Le Caucase, LLC
100.00%
100.00%
Ukraine
Georgia
Kupa, LLC
70.00%
Georgia
Global Beer Georgia, LLC
100.00%
Georgia
Global Coffee Georgia, LLC
New Coffee Company, LLC
Georgia
Georgia
Genuine Brewing Company, LLC
100.00%
Georgia
JSC Georgian beverages
100.00%
Georgia
Kindzmarauli Marani, LLC
JSC Liberty Consumer
JSC Intertour
JSC Prime Fitness
100.00%
75.10%
99.94%
100.00%
Georgia
Georgia
Georgia
Georgia
Proportion of voting rights and
ordinary share capital held
3 Tbilisi highway, Telavi
Tsilkani, Mtskheta Region, Georgia
18/14 Khvoiki St. Kiev
2 Marshal Gelovani St, Tbilisi
Distribution
Cognac
Production
Oak Barrel
Production
Production
and
distribution
of alcohol
and non-
alcohol
beverages
Coffee
Distribution
Coffee
Distribution
Beer
Production
and
Distribution
Oak Barrel
Production
Winery
Investments
Travel agency
78 Chavchavadze Ave, Tbilisi, 0162 Fitness centre
56 A. Tsereteli Ave., Tbilisi
74a Chavchavadze Ave, Tbilisi, 0162
49a, Chavchavadze Ave, Tbilisi, 0162
Tskneti Highway, No. 16/18, app. 36
Kazbegi street 3-5, Tbilisi Georgia
75 Chavchavadze Ave., Tbilisi
29a Gagarini street, Tbilisi
3/10/2006 31/12/2007
20/3/2007
23/9/2006
12/10/2006
20/3/2007
24/12/2014
26/12/2016
–
–
23/9/2009
15/2/2017
14/11/2016
7/2/2018
7/6/2016
–
18/12/2001
24/5/2006
29/3/1996
7/3/2006
25/4/2018
–
25/4/2006
–
Associates
#5 Clinic hospital, LLC
JSC Isani Parki
31 December 2018
Country of
incorporation
Address
Industry
Date of
incorporation
Date of
acquisition
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. Certain accounting
policies relate to assets, liabilities, income and expenses of subsidiaries of the Group which were consolidated up until 31 December 2019 before
change of Company’s investment entity status, and might not be relevant for Company’s assets and liabilities as at 31 December 2019 or to its
operations going forward:
Change in Basis of Accounting
IFRS 10 Consolidated Financial Statements
Following the change in investment entity status on 31 December 2019 (Note 2), the Group de-consolidated its subsidiaries and recognised them
as investments in subsidiaries at their fair value as at 31 December 2019.
Prospective application of IFRS 10 investment entity accounting requirements resulted in the following changes to the balance sheet as of
31 December 2019:
Assets
Cash and cash equivalents
Amounts due from credit institutions
Marketable securities
Accounts receivable
Insurance premiums receivable
Inventories
Investment properties
Prepayments
Income tax assets
Property and equipment
Right-of-use asset
Goodwill
Intangible assets
Other assets
Equity investments at fair value
Total assets
Liabilities
Accounts payable
Insurance contracts liabilities
Income tax liabilities
Deferred income
Lease liabilities
Borrowings
Debt securities issued
Other liabilities
Total liabilities
Equity
Share capital
Additional paid-in capital
Treasury shares
Other reserves
Retained earnings
Before change
in investment
entity status
Effect – change
in investment
entity status
After change in
investment
entity status
249,978
63,126
42,509
209,015
63,425
323,515
184,744
94,390
2,760
2,027,284
100,067
197,281
75,232
189,814
601,957
(248,735)
(63,126)
(42,509)
(209,015)
(63,425)
(323,515)
(184,744)
(94,156)
(2,760)
(2,027,284)
(100,067)
(197,281)
(75,232)
(189,814)
1,156,240
1,243
–
–
–
–
–
–
234
–
–
–
–
–
–
1,758,197
4,425,097
(2,665,423)
1,759,674
176,685
71,645
2,033
77,521
103,699
1,163,094
1,113,246
249,306
(176,685)
(71,645)
(2,033)
(77,521)
(103,699)
(1,163,094)
(1,113,246)
(241,653)
2,957,229
(2,949,576)
–
–
–
–
–
–
–
7,653
7,653
1,320
108,863
(138)
415,356
664,658
–
–
138
(415,356)
977,180
1,320
108,863
–
–
1,641,838
Total equity attributable to shareholders of Georgia Capital PLC
1,190,059
561,962
1,752,021
Non-controlling interests
Total equity
Total liabilities and equity
Change in equity attributable to shareholders of Georgia Capital PLC
Reserves reclassified to profit or loss
– Revaluation of investment securities, net of tax
– Gains/(losses) from currency translation differences
Gain from change in investment entity status
277,809
(277,809)
–
1,467,868
284,153
1,752,021
4,425,097
(2,665,423)
1,759,674
561,962
26,866
681
26,185
588,828
Strategic ReviewOur BusinessGovernanceAdditional InformationStrategic ReviewDiscussion of ResultsFinancial StatementsStrategic ReviewOverviewFinancial Statements 198
Georgia Capital PLC Annual Report 2019
Georgia Capital PLC Annual Report 2019
199
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
3. Summary of Significant Accounting Policies continued
Change in Basis of Accounting continued
IFRS 10 Consolidated Financial Statements continued
In separate financial statements of the Company, investments in subsidiaries (previously measured at cost) were re-measured at fair value at
31 December 2019, with the difference recognises in profit or loss for the period.
Business Combinations and Goodwill (Policy Applied up to 31 December 2019)
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.
Business Combination Under Common Control (Policy Applied up to 31 December 2019)
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 (Policy Applied up to 31 December 2019)
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.
3. Summary of Significant Accounting Policies continued
Investments in Associates and Joint Ventures (Policy Applied up to 31 December 2019) continued
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 organization 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 (Policy Applied up to 31 December 2019)
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.
Fair Value Measurement
The Group measures financial instruments, such as debt securities owned, equity investments, derivatives, investments in subsidiaries (starting from
31 December 2019) and non-financial assets such as investment properties 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 (Policy Applied up to 31 December 2019)
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.
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.
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.
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.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
3. Summary of Significant Accounting Policies continued
Non-Current Assets Held For Sale and Discontinued Operations (Policy Applied up to 31 December 2019) continued
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.
3. Summary of Significant Accounting Policies continued
Financial Assets continued
Financial Assets at Amortised Cost (Debt Instruments) continued
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.
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 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.
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 ninety 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.
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.
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 and investments in subsidiaries (from 31 December 2019).
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).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
3. Summary of Significant Accounting Policies continued
Impairment of Financial Assets continued
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.
3. Summary of Significant Accounting Policies continued
Insurance and Reinsurance Receivables (Policy Applied up to 31 December 2019)
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.
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 profit or loss.
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.
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.
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.
Insurance Liabilities (Policy Applied up to 31 December 2019)
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 (Policy Applied up to 31 December 2019)
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 (Policy Applied up to 31 December 2019)
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 (Policy Applied up to 31 December 2019)
Property and equipment 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.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
3. Summary of Significant Accounting Policies continued
Property and Equipment (Policy Applied up to 31 December 2019) 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 group
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.
Leases (IAS 17, Applied Until 1 January 2019)
The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease.
The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset (or assets) and the arrangement
conveys a right to use the asset (or assets), even if that asset is (or those assets are) not explicitly specified in an arrangement.
Group as a Lessee
A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards
incidental to ownership to the Group is classified as a finance lease.
Finance leases are capitalised at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present
value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve
a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs in the statement of profit or loss.
A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the
end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. An operating lease is a lease
other than a finance lease.
Operating lease payments are recognised as an operating expense in the statement of profit or loss on a straight-line basis over the lease term.
Group as a Lessor
Leases in which the Group does not transfer substantially all the risks and rewards of ownership of an asset are classified as operating leases.
Rental income arising is accounted for on a straight-line basis over the lease terms and is included in revenue in the statement of profit or loss due
to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased
asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which
they are earned.
Leases (IFRS 16, Applied Since 1 January 2019)
The Group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use
of an identified asset for a period of time in exchange for consideration.
Group as a Lessee
The Group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets.
The Group recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.
Right-of-use Assets
The Group recognises right-of-use assets at the commencement date of the lease (i.e. the date the underlying asset is available for use). Right-of-use
assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The
cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the
commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end
of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease
term. The Group’s right-of-use assets are presented separately in statement of financial position.
3. Summary of Significant Accounting Policies continued
Leases (IFRS 16, Applied Since 1 January 2019) continued
Right-of-use Assets continued
If ownership of the leased asset transfers to the Group at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation
is calculated using the estimated useful life of the asset.
Lease Liabilities
At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the
lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, and amounts
expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to
be exercised by the Group and payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate.
The variable lease payments that do not depend on an index or a rate are recognised as expense in the period on which the event or condition
that triggers the payment occurs. In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease
commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities
is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is
remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment
of an option to purchase the underlying asset.
Short-term Leases and Leases of Low-value Assets
The Group applies the short-term lease recognition exemption to its short-term leases of vehicles and equipment across the Group, exemption will
not be applied to the lease of real estate. The Group also applies low value lease exemption to its low value leases such as computers and furniture
(assets with a value, when new, of GEL 15,000 or less). Lease payments on short-term leases and leases of low-value assets are recognised as
expense on a straight-line basis over the lease term.
Group as a Lessor
Leases in which the Group does not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases.
Rental income arising is accounted for on a straight-line basis over the lease terms and is included in revenue in the statement of profit or loss due to its
operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and
recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned.
Inventories (Policy Applied up to 31 December 2019)
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 (Policy Applied up to 31 December 2019)
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 (Policy Applied up to 31 December 2019)
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 4 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 (Policy Applied up to 31 December 2019)
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”.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
3. Summary of Significant Accounting Policies continued
Goodwill Impairment (Policy Applied up to 31 December 2019) continued
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.
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.
Contingencies
Contingent liabilities are not recognised in the 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 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.
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.
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. Dividend revenue is presented gross of any non-
recoverable withholding taxes, which are disclosed separately in the statement of comprehensive income. Dividend expense relating to equity
securities sold short is recognised when the shareholders’ right to receive the payment is established.
Net Gain or Loss on Financial Assets and Liabilities at Fair Value Through Profit or Loss
Net gains or losses on financial assets and liabilities at FVPL are changes in the fair value of equity investment at fair value, financial assets
and liabilities held for trading or designated upon initial recognition as at FVPL and exclude interest and dividend income and expenses.
3. Summary of Significant Accounting Policies continued
Income and Expense Recognition continued
Insurance Income and Expense (Policy Applied up to 31 December 2019)
• 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.
• Provision for unearned premiums
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 (Policy Applied up to 31 December 2019)
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.
Utility and Energy Revenue (Policy Applied up to 31 December 2019)
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:
• 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
3. Summary of Significant Accounting Policies continued
Income and Expense Recognition continued
Real Estate Revenue (Policy Applied up to 31 December 2019)
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.
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.
Beverage Revenue (Policy Applied up to 31 December 2019)
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 (Policy Applied up to 31 December 2019)
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 programme 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 (Policy Applied up to 31 December 2019)
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.
Education Revenue (Policy Applied up to 31 December 2019)
Education revenue is recognised in line with the satisfaction of performance obligations in Education contracts.
3. Summary of Significant Accounting Policies continued
EBITDA
The Group separately presents EBITDA on the face of the 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, gain from change in investment entity status 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.
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 2019
31 December 2018
Lari to GBP
Lari to USD
Lari to EUR
3.7593
3.3955
2.8677
2.6766
3.2095
3.0701
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.
For performance obligations which are satisfied at a point in time, respective revenue is recognised at a point in time. Revenue is recognised on a
straight-line basis for learning process, catering and transportation services over the period during which the performance obligation is being satisfied.
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.
Renewable Energy Revenue (Policy Applied up to 31 December 2019)
The Group recognises revenue from Renewable Energy 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. Revenue amount is based on power
generation by the end of each period and application of the relevant tariff for services set in the agreements with customers.
Adoption of New or Revised Standards and Interpretations
The nature and the effect of these changes are disclosed below:
IFRS 16 Leases
The Group applied IFRS 16 Leases for the first time. The nature and effect of the changes as a result of adoption of this new accounting standard
is described below.
IFRS 16 supersedes 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. The standard 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.
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Georgia Capital PLC Annual Report 2019
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211
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
3. Summary of Significant Accounting Policies continued
Adoption of New or Revised Standards and Interpretations continued
IFRS16 Leases continued
Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify leases as either operating or finance leases
using similar principles as in IAS 17. Therefore, IFRS 16 did not have an impact for leases where the Group is the lessor.
The Group adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of 1 January 2019. Under this
method, the standard is applied retrospectively with the cumulative effect of initially applying the standard recognised at the date of initial application.
The effect of adoption IFRS 16 as at 1 January 2019 (increase/decrease) is as follows:
Assets
Right-of-use assets
Property and equipment
Prepayments
Total assets
Liabilities
Income tax liabilities
Lease liabilities
Total liabilities
1 January 2019
93,053
(8,799)
(261)
83,993
–
83,993
83,993
The adoption had no impact on shareholder equity.
Nature of the Effect of Adoption of IFRS 16
The Group has lease contracts for various items of land, building, vehicles and other equipment. Before the adoption of IFRS 16, when a lease was
determined to be economically similar to purchasing the underlying asset, the lease was classified as a finance lease and reported on a company’s
balance sheet. All other leases were classified as operating leases and not reported on a company’s balance sheet (they were “off balance sheet
leases”). Off balance sheet leases were accounted for similarly to service contracts, with the company reporting a rental expense in the income
statement. Upon adoption of IFRS 16, the Group applied a single recognition and measurement approach for all leases, except for short-term leases
and leases of low-value assets as described below. The standard provides specific transition requirements and practical expedients, which have
been applied by the Group.
(a) Leases Previously Classified as Finance Leases
The Group did not change the initial carrying amounts of recognised assets and liabilities at the date of initial application for leases previously classified
as finance leases (i.e. the right-of-use assets and lease liabilities equal the lease assets and liabilities recognised under IAS 17). The requirements of
IFRS 16 were applied to these leases from 1 January 2019.
(b) Leases Previously Accounted for as Operating Leases
The group recognised a lease liability at the date of initial application for leases previously classified as an operating lease applying IAS 17. Lease liability
was measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate at the date of initial
application. A right-of-use asset was recognised at the date of initial application for leases previously classified as an operating lease applying
IAS 17 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 also applied the available practical expedients wherein it:
• Used a single discount rate to a portfolio of leases with reasonably similar characteristics.
• Relied on its assessment of whether leases are onerous immediately before the date of initial application.
• Excluded the initial direct costs from the measurement of the right-of-use asset at the date of initial application.
The lease liabilities as at 1 January 2019 can be reconciled to the operating lease commitments as of 31 December 2018, as follows:
Liabilities
Operating lease commitments as at 31 December 2018
Weighted average incremental borrowing rate as at 1 January 2019
Discounted operating lease commitments as at 1 January 2019
Less:
Commitments relating to short-term leases
Commitments relating to leases of low-value assets
Lease payments relating to renewal and termination periods not included in operating lease commitments as at 31 December 2018
Add:
Commitments relating to leases previously classified as finance leases
Lease liabilities as at 1 January 2019
1 January 2019
129,940
6.74%
90,978
1,624
3,075
10,962
8,676
83,993
3. Summary of Significant Accounting Policies continued
Adoption of New or Revised Standards and Interpretations continued
IAS 23 Borrowing Costs
Up until reporting period ended 31 December 2018, the Group’s accounting policy was to capitalise borrowing costs to cost of inventory represented
by residential apartments. 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 to customer 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, starting from interim reporting period ended 30 June 2019, the Group changed
its existing accounting policy retrospectively and ceased capitalisation of borrowing costs to cost of inventory property represented by residential
apartments from the moment when such properties become ready for sale.
Infrastructure Assets
In the second half of 2019, the Group changed its accounting policy with respect to infrastructure assets category of property, plant and equipment.
The Group now applies the cost model, where infrastructure assets are carried at cost less accumulated depreciation and any accumulated impairment.
Prior to this change in policy, the Group applied the revaluation model, where infrastructure assets were carried at the fair value at the date of the
revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. The Group believes that cost model
provides more reliable and more meaningful presentation for investors since, (1) it enhances comparability for the investors as the application of cost
model is a market practice across utility industry, and (2) it more closely aligns the accounting with the business activities around these asset categories.
The change of accounting policy has been accounted for retrospectively and resulted in GEL 106,296 reduction in net property and equipment on
1 January 2018. In line with IAS 36 requirements, the Group revisited composition of its cash generating units (CGUs) for the purpose of performing
impairment test of infrastructure assets as at the transition date. In applying the impairment requirements under the cost model, the Group identified
separate water and energy CGUs, which were previously treated as a single CGU and asset category under the revaluation model. Under revaluation
model, excess of fair value over historical cost in the energy CGU compensated for the respective downside effect in water utility CGU. As a result of
change in accounting policy to cost model, fair value surplus existing in the energy CGU was no longer eligible for recognition, while the accumulated
deficit of value in use of the water CGU below its historical cost resulted in reduction of property and equipment at 1 January 2018.
Retrospective Application Effect: Borrowing Costs (a) and Infrastructure Assets (b)
Changes in accounting policy has been applied retrospectively by restating each of the affected consolidated financial statement line items
for the prior periods, as follows:
Consolidated statement of financial position as at 31 December 2018
Inventory
Property and equipment
Intangible assets
Deferred revenue
Equity
Consolidated statement of financial position as at 1 January 2018
Inventory
Property and equipment
Intangible assets
Deferred revenue
Equity
Consolidated income statement for the year ended 31 December 2018
Revenue
Cost of sales
Gross profit
Other operating expenses
EBITDA
Depreciation and amortisation
Interest expense
Net profit
Earnings per share, basic and diluted
As previously
reported
278,615
1,671,917
51,634
62,059
1,201,815
As previously
reported
80,110
657,635
5,457
73,066
834,047
As previously
reported
1,282,866
(796,191)
486,675
(11,601)
217,691
(74,155)
(91,619)
16,911
(0.2572)
Change in
accounting
policy
(2,385)
(98,293)
(163)
286
(101,127)
Change in
accounting
policy
(3,397)
(106,296)
(314)
423
(110,430)
Change in
accounting
policy
129
6,307
6,436
376
6,812
7,706
(5,276)
9,242
0.250
As restated
276,230
1,573,624
51,471
62,345
1,100,688
As restated
76,713
551,339
5,143
73,489
723,617
Note
(a)
(b)
(b)
(a)
(a),(b)
Note
(a)
(b)
(b)
(a)
(a),(b)
As restated
Note
1,282,995
(789,884)
493,111
(11,225)
(a)
(a)
(a)
(b)
224,503
(a),(b)
(66,449)
(96,895)
(b)
(a),(b)
26,153
(a),(b)
(0.0069)
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Georgia Capital PLC Annual Report 2019
Georgia Capital PLC Annual Report 2019
213
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
3. Summary of Significant Accounting Policies continued
Adoption of New or Revised Standards and Interpretations continued
Retrospective Application Effect: Borrowing Costs (a) and Infrastructure Assets (b) continued
Consolidated statement of other comprehensive income for the year ended 31 December 2018
Income from currency translation differences
Net other comprehensive income to be reclassified to profit or loss in
subsequent periods
Other comprehensive loss for the year, net of tax
Total comprehensive loss for the year
As previously
reported
9,185
8,095
(240,410)
(223,499)
Change in
accounting
policy
As restated
Note
61
61
61
9,246
8,156
(240,349)
(a)
(a)
(a)
9,303
(214,196)
(a),(b)
Change in accounting policy affected the result of change in investment entity status (Note 3), as reduction of net carrying value of infrastructure assets
increased the gain on their deemed disposal. This effect arises from the different requirements of IFRS to account for changes in accounting policy
retrospectively and for change in investment entity status, on a prospective basis.
The following Interpretations and amendments did not have any impact on the financial statements of the Group:
IFRIC Interpretation 23 Uncertainty over Income Tax Treatment
Amendments to IFRS 9: Prepayment Features with Negative Compensation
Amendments to IAS 19: Plan Amendment, Curtailment or Settlement
Amendments to IAS 28: Long-term interests in associates and joint ventures
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:
Amendments to IFRS 3: Definition of a Business
Amendments to IAS 1 and IAS 8: Definition of Material
These amendments have no impact on the consolidated financial statements of the Group.
Annual Improvements 2015-2017 Cycle (issued in December 2017)
These improvements include:
•
•
•
IFRS 3 Business Combinations
IFRS 11 Joint Arrangements
IAS 12 Income Taxes
Group does not expect any effect on its consolidated financial statements.
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:
Assessment of Investment Entity Status
Entities that meet the definition of an investment entity within IFRS 10 are required to measure their subsidiaries at FVPL rather than consolidate
them. The criteria which define an investment entity are, as follows:
• An entity that obtains funds from one or more investors for the purpose of providing those investors with investment management services.
• An entity that commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income,
or both.
• An entity that measures and evaluates the performance of substantially all of its investments on a fair value basis.
The Group invests funds, originally obtained from its investors, in greenfield and/or developed businesses and bolt-on acquisitions for its private
portfolio companies, with a target to acquire businesses at low multiples as compared to their frontier and emerging market peers, uses its robust
corporate governance and strong ability to access capital and management to help the portfolio companies institutionalise their governance and grow
into mature, independent, companies, obtains dividend inflows from its mature investments and once the businesses are developed, identifies the next
best owners for such businesses and exits the investment ideally at a higher multiple (vs entry multiple) to monetise on capital appreciation gains.
4. Significant Accounting Judgements and Estimates continued
Assessment of Investment Entity Status continued
The Group reports to its investors via quarterly investor information, and to its management, via internal management reports, on a fair value basis.
All investments are reported at fair value to the extent allowed by IFRS in the Group’s annual reports. The Group has a clearly documented exit
strategy for all of its investments.
The Board has also concluded that the Group meets the additional characteristics of an investment entity, in that it has more than one investment;
the Group’s ownership interests are predominantly in the form of equities and similar securities; it has more than one investor and its investors are
not related parties.
Georgia Capital PLC holds a single investment in JSC Georgia Capital (an investment entity on its own), which holds a portfolio of investments;
although JSC Georgia Capital is wholly capitalised by Georgia Capital PLC, Georgia Capital PLC is funded by many investors who are unrelated
to the entity; and ownership in Georgia Capital PLC is represented by units of equity interests acquired through a capital contribution. Thus the
judgement above refers to both entities in aggregation. The Board has concluded that the Group meets the definition of an investment entity.
These conclusions will be reassessed on a continuous basis, if any of these criteria or characteristics change.
Until 2019, Georgia Capital did not measure and evaluate its equity investments in portfolio companies at fair value and therefore did not meet
investment entity definition. In 2019, Georgia Capital management started to measure investments in portfolio companies at fair value and evaluating
their performance on a fair value basis, such fair values are estimated internally and are disclosed to investors in management accounts. During 2019,
management finalised a robust process for measuring fair values of private portfolio companies and implemented rigorous controls. As a final step,
on 31 December 2019, Georgia Capital finalised corporate governance oversight over valuation process and as a result, started meeting investment
entity definition on 31 December 2019.
Estimates and Assumptions
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of
causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below. The Group based its
assumptions and estimates on parameters available when the financial statements were prepared. However, existing circumstances and assumptions
about future developments may change due to market changes or circumstances arising beyond the control of the Group. Such changes are reflected
in the assumptions when they occur.
Fair Valuation of the Investment Portfolio
The investment portfolio, a material asset of the Group, is held at fair value. Details of valuation methodologies used and the associated sensitivities
are disclosed in Note 31. Given the importance of this area, the Board has formed a separate Audit and Valuations Committee to review the valuations
to be placed on portfolio companies, compliance with the valuation standards and usage of appropriate judgement. Detailed valuation process is
disclosed in Note 31.
Determining the Lease Term of Contracts With Renewal And Termination Options – Group as Lessee (Applied up to 31 December 2019)
The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease
if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.
The Group has the option, under some of its leases to lease the assets for additional terms and under some of its leases to terminate the lease
agreements. The Group applies judgement in evaluating whether it is reasonably certain to exercise the option to renew or the option to terminate the
lease. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal or termination. After the commencement
date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to
exercise (or not to exercise) the option to renew or terminate (e.g. a change in business strategy).
Measurement of Fair Value of Investment Properties and Property and Equipment (Applied up to 31 December 2019)
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.
The Group performs valuation of its investment properties 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. Result of this valuation is presented in Note 12, 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
5. Business Combinations
Acquisitions During the Year Ended 31 December 2019
Acquisition of Redberry
On 7 May 2019 the Group acquired 60% share capital in digital services company, Redberry LLC.
5. Business Combinations continued
Acquisitions During the Year Ended 31 December 2019 continued
Acquisition of Amboli
In June 2019, Georgia Capital acquired an 80% equity interest in Amboli LLC, car service provider.
Provisionally estimated net assets of Redberry LLC at acquisition date comprised GEL 399. Consideration comprised of GEL 1,222.
Additional GEL 7,568 capital has been injected for digital start-up development and the amount is taken into account in NCI calculations.
The fair value of aggregate identifiable assets and liabilities of the companies as at the date of acquisition were:
Cash and cash equivalents
Accounts receivable
Property and equipment
Right-of-use assets
Intangible assets
Other assets
Lease liabilities
Accounts payable
Other liabilities
Total identifiable net assets
Non-controlling interests
Goodwill arising on business combination
Purchase consideration
The net cash outflow on acquisition was as follows:
Cash paid
Cash acquired with the subsidiary
Net cash outflow
Fair value
recognised on
acquisition
134
290
101
288
39
12
864
447
7
11
465
399
3,187
4,010
1,222
31 December
2019
(1,222)
134
(1,088)
The acquisition enables the Group to have a platform for investments in the digital business. Management considers that the purchases will have
a positive impact on the value of the Group’s business.
Since the acquisition, company has recorded total of GEL 2,690 and GEL 389 of revenue and profit, respectively. If the combination had taken place
at the beginning of the period, the revenue and profit of the Group including this acquisition only would have been GEL 1,474,378 and GEL 604,425,
respectively.
The primary factor that contributed to the cost of the business combination that resulted in the recognition of goodwill on acquisition is the assembled
workforce that is expected to generate future economic benefits.
The Group elected to measure the non-controlling interest in the acquiree at the proportionate share of its interest in the acquiree’s identifiable
net assets.
Provisionally estimated net assets of Amboli LLC at acquisition date comprised negative GEL 708. Consideration comprised of GEL 3,434.
The fair value of aggregate identifiable assets and liabilities of the companies as at the date of acquisition were:
Cash and cash equivalents
Accounts receivable1
Inventories
Property and equipment
Right-of-use assets
Intangible assets
Prepayments
Borrowings
Lease liabilities
Accounts payable
Other liabilities
Total identifiable net assets
Non-controlling interests
Goodwill arising on business combination
Purchase consideration2
The net cash outflow on acquisition was as follows:
Cash paid
Cash acquired with the subsidiary
Net cash outflow
Fair value
recognised on
acquisition
102
117
1,436
1,006
1,104
91
640
4,496
3,315
1,148
721
20
5,204
(708)
(141)
4,001
3,434
31 December
2019
(2,800)
102
(2,698)
1 The fair value of the receivables amounted to GEL 117. The gross amount of receivables is GEL 219.
2 Purchase consideration comprises of GEL 3,434, which consists of cash payment of GEL 2,800 and holdback amount with a fair value of GEL 634.
The Group decided to increase its presence in the auto services markets by acquiring the company. Management considers that the purchases
will have a positive impact on the value of the Group’s business.
Since the acquisition, the company has recorded total of GEL 5,078 of revenue. If the combination had taken place at the beginning of the period,
the revenue and profit of the Group including this acquisition only would have been GEL 1,475,711 and GEL 603,666, respectively.
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.
The Group elected to measure the non-controlling interest in the acquiree at the proportionate share of its interest in the acquiree’s identifiable
net assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
5. Business Combinations continued
Acquisitions During the Year Ended 31 December 2019 continued
Acquisition of Private Schools
In June-July 2019 Georgia Capital signed SPAs with private schools: British-Georgian Academy (“BGA”) to acquire 70% equity stake,
Buckswood International School – Tbilisi LLC to acquire 80% equity stake and Tbilisi Green School (Green School) to acquire 80% equity stake.
Provisionally estimated net assets of education businesses at acquisition date comprised GEL 5,752. Total consideration comprised of GEL 40,245.
5. Business Combinations continued
Acquisitions During the Year Ended 31 December 2019 continued
Acquisition of Alaverdi
On 20 August 2019 the wine business of Georgia Capital acquired 100% equity interest in Alaverdi LTD, producer of exquisite Georgian wines
and spirits. The acquisition was carried out through locally established special purpose vehicle (SPV). The control over Alaverdi is obtained without
having direct controlling 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 Alaverdi.
The fair value of aggregate identifiable assets and liabilities of the companies as at the date of acquisition were:
Provisionally estimated net assets of Alaverdi LTD at acquisition date comprised GEL 25,619. Total consideration comprised of GEL 33,286.
Cash and cash equivalents
Accounts receivable1
Inventories
Property and equipment
Right-of-use assets
Intangible assets
Prepayments
Other assets
Borrowings
Accounts payable
Deferred income
Other liabilities
Total identifiable net assets
Non-controlling interests
Goodwill arising on business combination
Purchase consideration2
The net cash outflow on acquisitions was as follows:
Cash paid
Cash acquired with the subsidiary
Net cash outflow
Fair value
recognised on
acquisition
5,397
523
197
34,723
3,268
55
1,534
610
46,307
20,934
2,140
14,896
2,585
40,555
5,752
3,228
37,721
40,245
31 December
2019
(39,588)
5,397
(34,191)
The fair value of aggregate identifiable assets and liabilities of the companies as at the date of acquisition were:
Cash and cash equivalents
Accounts receivable1
Inventories
Property and equipment
Prepayments
Other assets
Borrowings
Accounts payable
Other liabilities
Total identifiable net assets
Goodwill arising on business combination
Purchase consideration
The net cash outflow on acquisition was as follows:
Cash paid
Cash acquired with the subsidiary
Net cash outflow
1 The fair value of the receivables amounted to GEL 315. The gross amount of receivables is GEL 315.
Fair value
recognised on
acquisition
223
315
7,567
19,713
140
1,671
29,629
2,910
527
573
4,010
25,619
7,667
33,286
31 December
2019
(33,286)
223
(33,063)
1 The fair value of the receivables amounted to GEL 523. The gross amount of receivables is GEL 998.
2 Purchase consideration comprises of GEL 40,245, which consists of cash payment of GEL 39,588 and holdback amount with a fair value of GEL 657.
Alaverdi owns vineyards and free land plot in Kakheti region, available for immediate vineyard development. The acquisition of Alaverdi is in line
with Georgia Capital’s strategy to reach a vineyard base of 1,000 hectares.
The acquisitions are in line with the Group’s business model combining premium, mid-level and affordable school segments. Management considers
that the purchases will have a positive impact on the value of the Group’s business.
Since the acquisition, the education business has recorded total of GEL 12,083 and GEL 2,938 of revenue and profit, respectively. If the combination
had taken place at the beginning of the period, the revenue and profit of the Group including this acquisition only would have been GEL 1,485,863
and GEL 604,950, respectively.
The primary factor that contributed to the cost of the business combination that resulted in the recognition of goodwill on acquisition is the assembled
workforce, premises and experienced management that is expected to generate future economic benefits.
The Group elected to measure the non-controlling interest in the acquirees at the proportionate share of its interest in the acquirees’ identifiable
net assets.
Since the acquisition, Alaverdi LTD has recorded total of GEL 3,111 and GEL 809 of revenue and profit, respectively. If the combination had
taken place at the beginning of the period, the revenue and profit of the Group including this acquisition only would have been GEL 1,480,668
and GEL 603,996, respectively.
The primary factor that contributed to the cost of the business combination that resulted in the recognition of goodwill on acquisition is the assembled
workforce, premises and experienced management that is expected to generate future economic benefits.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
5. Business Combinations continued
Acquisitions During the Year Ended 31 December 2019 continued
Acquisition of Hydrolea
On 29 October 2019 the renewable energy business of Georgia Capital acquired 100% equity interest in Hydrolea LTD, operator of three
Hydro Power Plants with aggregate 21MW installed capacity.
Provisionally estimated net assets of Hydrolea LTD at acquisition date comprised GEL 65,252. Total consideration comprised of GEL 65,252.
The fair value of aggregate identifiable assets and liabilities of the companies as at the date of acquisition were:
Cash and cash equivalents
Amounts due from credit institutions, net
Accounts receivable1
Inventories
Property and equipment
Intangible assets
Other assets
Borrowings
Accounts payable
Other liabilities
Total identifiable net assets
Purchase consideration2
The net cash outflow on acquisition was as follows:
Cash paid
Cash acquired with the subsidiary
Net cash outflow
Fair value
recognised on
acquisition
3,137
250
1,266
52
107,980
17
1,129
113,831
47,882
316
381
48,579
65,252
65,252
31 December
2019
(59,600)
3,137
(56,463)
1 The fair value of the receivables amounted to GEL 1,266. The gross amount of receivables is GEL 1,266.
2 Purchase consideration comprises of GEL 65,262, which consists of cash payment of GEL 59,600 and holdback amount with a fair value of GEL 5,652.
Since the acquisition, Hydrolea LTD has recorded total of GEL 1,394 and GEL 1,372 of revenue and profit, respectively. If the combination had
taken place at the beginning of the period, the revenue and profit of the Group including this acquisition only would have been GEL 1,481,579
and GEL 600,327, respectively.
Acquisition of Litera
On 4 December 2019 the Hospitality and Commercial Real Estate business of Georgia Capital acquired 50% share of JSC Litera. JSC Litera
was established in December 2019 and operates in food and beverage business. The control over Litera is obtained without having more than
50% equity interest, through shareholder agreement signed with minority shareholder.
Provisionally estimated net assets of JSC Litera at acquisition date comprised GEL 175. Total consideration comprised of GEL 1,295 cash payment,
which has been fully paid as at reporting date. Concurrently with the acquisition, the Group made injection to share capital of JSC Litera in the
amount of US$ 415 (GEL 1,190) without changing the Group’s ownership percentage. The cash injection was deemed to be linked to the acquisition
transaction and contributed to the estimation of acquisition-date non-controlling interest.
5. Business Combinations continued
Acquisitions During the Year Ended 31 December 2019 continued
Acquisition of Litera continued
The fair value of aggregate identifiable assets and liabilities of the companies as at the date of acquisition were:
Cash and cash equivalents
Property and equipment
Other liabilities
Total identifiable net assets
Non-controlling interests
Goodwill arising on business combination
Purchase consideration
The net cash outflow on acquisition was as follows:
Cash paid
Cash acquired with the subsidiary
Net cash outflow
Fair value
recognised on
acquisition
–
175
175
–
–
175
702
1,822
1,295
31 December
2019
(1,295)
–
(1,295)
Since the acquisition, JSC Litera has recorded immaterial revenue. If the combination had taken place at the beginning of the period, the Group’s
revenue and profits would not have been materially different.
The primary factor that contributed to the cost of the business combination that resulted in the recognition of goodwill on acquisition is the assembled
workforce, premises and experienced management that is expected to generate future economic benefits.
The Group elected to measure the non-controlling interest in the acquirees at the proportionate share of its interest in the acquirees’ identifiable
net assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
5. Business Combinations continued
Acquisitions During the Year Ended 31 December 2019 continued
Acquisition of Qartli Wind Farm
On 30 December 2019 the renewable energy business of Georgia Capital acquired 100% equity interest in Qartli Wind Farm LLC.
Provisionally estimated net assets of Qartli Wind Farm LLC at acquisition date comprised GEL 41,322. Total consideration comprised of GEL 41,322.
The fair value of aggregate identifiable assets and liabilities of the companies as at the date of acquisition were:
Cash and cash equivalents
Amounts due from credit institutions, net
Accounts receivable1
Property and equipment
Other assets
Borrowings
Accounts Payable
Total identifiable net assets
Purchase consideration
The net cash outflow on acquisition was as follows:
Cash paid
Cash acquired with the subsidiary
Net cash outflow
Fair value
recognised on
acquisition
9,772
6,337
1,271
74,578
306
92,264
50,312
630
50,942
41,322
41,322
31 December
2019
(41,322)
9,772
(31,550)
1 The fair value of the receivables amounted to GEL 1,271. The gross amount of receivables is GEL 1,271.
Since the acquisition, Qartli Wind Farm LLC has not recorded any revenue or profit. If the combination had taken place at the beginning of the period,
the revenue and profit of the Group including this acquisition only would have been GEL 1,489,944 and GEL 606,607, respectively.
6. Segment Information
At 31 December 2019 three new segments were added to the Group’s reportable segments: Education, Auto Service and Digital Services.
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 RE
– 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;
Beverages
Education
Auto Services
Digital Services
Other
– Principally producing and distributing wine, beer and soft beverages;
– Principally providing education for learners from Preschool to 12th grade (K-12);
– Principally providing auto and technical inspection services to corporate and individual clients;
– Principally providing tech-based marketing solutions to large Georgian corporate and Government agencies;
– Comprises of early stage business and feasibility costs incurred in 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.
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 for the year
ended 31 December 2019 and 2018.
As at 31 December 2019, and the for the periods following the change in investment entity status (refer to Note 3) the management of Georgia Capital
will no longer monitor and use consolidated financial information going forward and will solely focus on fair value information for performance evaluation
and decision-making. In line with updated management view the change also applied to the presentation of segment information as at 31 December
2019 and 2018, as outlined in the tables on pages 222 to 223.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
6. 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 2019:
Revenue
Cost of sales
Gross profit
Operating expenses and
impairment
EBITDA
Dividend income
Profit/(loss) for
the year
Net Asset Value
Healthcare
Water Utility
Housing
Development
P&C Insurance
Renewable
Energy
Hospitality and
Commercial RE
976,329
(650,191)
326,138
(150,955)
175,183
–
61,550
430,079
168,457
(41,868)
126,589
(31,739)
94,850
–
35,470
483,970
117,741
(101,946)
15,795
(19,260)
(3,465)
–
(16,796)
43,853
64,631
(31,311)
33,320
(17,589)
15,731
–
16,171
(108)
16,063
(2,974)
13,089
–
37,588
(7,627)
29,961
(5,216)
24,745
–
18,280
164,923
3,629
106,800
15,822
245,558
Beverages
125,092
(80,349)
44,743
(42,315)
2,428
–
(30,683)
87,119
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:
Healthcare
Water Utility
Housing
Development
P&C Insurance
Renewable
Energy
Hospitality and
Commercial RE
Beverages
Revenue
Cost of sales
Gross profit
Operating expenses and
impairment
EBITDA
Dividend income
861,337
(574,866)
286,471
(154,448)
132,023
–
149,128
(36,920)
112,208
(29,051)
83,157
–
Profit/(loss) for the year
53,235
40,700
137,901
(111,004)
26,897
(11,583)
15,314
–
1,307
59,271
(25,748)
33,523
(15,453)
18,070
–
17,082
–
–
–
(789)
(789)
–
(816)
38,461
(4,085)
34,376
(2,841)
31,535
–
76,499
(46,980)
29,519
(35,734)
(6,215)
–
26,395
(28,916)
Auto Service Digital Services
Education
Other
19,610
(9,799)
9,811
(7,417)
2,394
–
(6,729)
25,757
2,700
(2,142)
558
(396)
162
–
389
8,790
12,125
(680)
11,445
(7,593)
3,852
–
2,730
56,316
Inter-
Business
Eliminations/
Consolidations
Corporate
Center
521
–
521
(67,528)
42,997
(24,531)
Group
Total
1,473,437
(883,024)
590,413
(32,252)
(31,731)
122,221
(182)
(317,927)
(24,713)
(97,268)
272,486
24,953
–
–
–
(39)
(39)
–
(44)
648,230
(127,582)
604,266
2,183
98,520
(1,847)
1,752,021
Other
Corporate
Center
Inter-
Business
Eliminations /
Consolidations
Group
Total
–
–
–
(1,395)
(1,395)
–
(1,326)
–
–
–
(39,602)
9,719
1,282,995
(789,884)
(29,883)
493,111
(18,253)
(18,253)
72,504
2,697
939
(28,944)
(48,629)
(84,205)
(268,608)
224,503
23,875
26,153
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
7. 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
8. 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
9. Marketable Securities and Equity Investments at Fair Value
Internationally listed debt securities
Locally listed debt securities
Marketable securities
Subsidiaries (Note 31)
Bank of Georgia Group PLC*
Equity Investments at Fair Value
31 December
2019
31 December
2018
–
1,243
–
1,243
–
2,577
227,541
26,813
256,931
(1)
1,243
256,930
31 December
2019
31 December
2018
–
–
–
–
–
35,924
4,375
40,299
–
40,299
31 December
2019
31 December
2018
–
–
–
67,933
3,891
71,824
31 December
2019
31 December
2018
1,758,197
–
1,758,197
–
457,495
457,495
11. Inventories
Healthcare and pharma inventory
Real estate inventory
Other inventory
Inventory
31 December
2019
31 December
2018
–
–
–
–
146,164
96,979
33,087
276,230
The Group performed inventory net realisable value test and charged impairment in the amount of GEL nil as at 31 December 2019 (2018: GEL 179).
12. 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
Change in investment entity status
At 31 December
31 December
2019
31 December
2018
151,232
13,430
(860)
8,265
723
11,954
(184,744)
–
159,989
27,626
(2,461)
6,895
(48,971)
8,154
–
151,232
* Non-cash additions comprised GEL nil as at 31 December 2019 (2018: 1,145).
** Comprised of GEL 8,635 transfer from property and equipment (2018: transfers to property and equipment GEL 8,930), GEL 7,912 transfer to other assets – inventories
(2018: GEL 40,041).
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 nil as at 31 December 2019 (2018: 43,676)). 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 October 2019 the valuation of the properties has
been performed by accredited independent valuers. Refer to Note 31 for details on fair value measurements of investment properties as at
31 December 2018.
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.
*
In 2019, the Group recognised dividend income in the amount of GEL 24,953 (2018: GEL 23,875) from investment in Bank of Georgia Group PLC.
10. 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 28)
Accounts receivable, net
31 December
2019
31 December
2018
–
–
–
–
–
–
–
–
–
–
–
115,150
23,965
21,024
18,235
4,317
700
94
8,456
191,941
(21,713)
170,228
Accounts receivable balance includes contract assets from sales to customers GEL 2,586 as at 31 December 2018. For more details, please refer to
Note 25.
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Georgia Capital PLC Annual Report 2019
Georgia Capital PLC Annual Report 2019
227
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
13. Property and Equipment
The movements in property and equipment during the year ended 31 December 2019 were as follows:
13. Property and Equipment continued
The movements in property and equipment during the year ended 31 December 2018 were as follows:
Cost
31 December 2018 (restated)*
Transfer to right-of-use assets at
adoption of IFRS 16
(Note 3)*
1 January 2019
Additions
Business combinations, (Note 5)
Disposals
Transfers
Transfers (to)/from investment
properties
Transfers to from other assets*
Write off**
Revaluation
Currency translation differences
Change in investment entity
Office
buildings
Hotels
Hospitals
and clinics
Assets under
construction
Infrastructure
Assets
Factory and
equipment
Computers
and
equipment
Other
Total
195,653
24,360
433,159
248,941
430,267
101,116
278,838
114,639 1,826,973
–
195,653
20,856
37,001
(8,664)
35,237
–
24,360
439
–
–
–
(8,799)
424,360
4,943
–
–
–
–
248,941
182,006
522
(297)
(250,180)
(12,700)
5,041
–
3,474
502
–
–
–
–
2,763
–
–
–
–
–
3,761
–
–
–
4,106
–
430,267
56,259
182,558
–
210,341
–
–
(39,011)
–
15,617
–
101,116
7,239
–
(66)
(71)
–
278,838
23,983
3,673
(985)
(762)
–
114,639
33,304
14,522
(3,368)
5,435
(8,799)
1,818,174
329,029
238,276
(13,380)
–
–
–
–
–
–
–
–
–
–
232
304
–
–
–
923
(8,635)
5,041
(39,011)
3,474
24,143
status
(276,400)
(27,562)
(429,303)
(188,859)
(856,031)
(108,218)
(304,979)
(165,759)
(2,357,111)
At 31 December 2019
Accumulated impairment
31 December 2018 (restated)*
Disposals
Currency translation differences
Change in investment entity
status
At 31 December 2019
Accumulated depreciation
31 December 2018 (restated)*
Depreciation charge
Currency translation differences
Transfers
Write off**
Disposals
Change in investment entity
–
105
–
–
(105)
–
6,463
2,297
26
–
–
(292)
–
–
–
–
–
–
162
217
87
–
–
–
–
(4)
–
–
4
–
10,753
2,377
–
–
–
–
status
(8,494)
(466)
(13,130)
At 31 December 2019
–
–
–
–
–
1,766
–
–
104,530
–
3
(1,766)
(104,533)
–
36,036
23,353
1,218
–
(1,653)
(525)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
23
–
1
(24)
–
–
(7)
5
–
2
–
–
106,413
5
4
(106,422)
–
10,805
8,850
868
–
–
(105)
60,125
28,544
123
(18)
–
(826)
22,592
14,007
12
18
–
(2,109)
146,936
79,645
2,334
–
(1,653)
(3,857)
Cost
1 January 2018 (restated)*
Additions
Business combinations
Disposals
Transfers
Transfers (to)/from investment
properties
Transfers from inventory
Transfer to assets of disposal
group held for sale
Currency translation differences
Office
buildings
Hotels
Hospitals
and Clinics
Assets under
construction
Infrastructure
Assets
Factory and
equipment
136,784
10,213
6,639
(833)
19,107
–
2,991
–
–
–
8,572
223
19,837
–
–
22,209
–
–
(6,624)
–
–
142,801
274,101
–
–
(153,275)
(19,840)
228
14,939
9
–
1,532
417,574
–
325
4,601
275,669
12,582
–
297
141,719
91,023
5,726
15,303
(70)
(10,866)
–
–
–
–
–
–
–
–
Computers
and
equipment
13,949
62,174
5,632
(297)
(1,170)
–
172
Other
Total
41,614
20,659
4,042
(382)
11,109
701,840
410,655
31,616
(1,285)
–
–
–
8,569
623
198,315
63
37,297
300
668,450
6,505
31 December 2018 (restated)*
195,653
24,360
433,159
248,941
430,267
101,116
278,838
114,639
1,826,973
Accumulated impairment
31 December 2017
Effect of change in accounting
policy (Note 3, (b))*
1 January 2018 (restated)*
Reversal
Disposals
Transfers
Transfer from assets of disposal
group held for sale
Transfers to investment properties
Currency translation differences
31 December 2018 (restated)*
Accumulated depreciation
1 January 2018 (restated)*
Depreciation charge
Currency translation differences
Transfers
Transfers to investment properties
Transfer from assets of disposal
group held for sale
Disposals
390
–
390
(15)
–
–
–
(271)
1
105
5,249
1,460
(229)
(70)
(90)
327
(184)
–
–
–
–
–
–
–
–
–
–
–
162
–
–
–
–
–
–
–
–
–
–
–
(4)
–
–
(4)
–
5,192
–
–
–
5,561
–
–
–
3,849
3,849
–
–
(2,083)
–
–
–
102,447
102,447
–
–
2,083
–
–
–
1,766
104,530
–
–
–
–
–
–
–
–
–
–
23
–
23
–
–
–
–
–
–
23
1
–
1
–
(8)
–
–
–
–
414
106,296
106,710
(15)
(8)
–
(4)
(271)
1
(7)
106,413
–
–
–
–
–
–
–
–
–
23,084
12,883
(1)
(5)
–
–
75
3,887
7,490
47
(613)
–
6,314
23,674
191
352
–
5,257
10,684
29
336
–
–
(6)
29,771
(177)
6,316
(30)
43,791
61,545
37
–
(90)
41,975
(322)
36,036
10,805
60,125
22,592
146,936
(58,429)
(20,418)
(87,948)
(34,520)
(223,405)
–
–
–
–
–
31 December 2018 (restated)*
6,463
162
10,753
Net book value:
31 December 2018 (restated)*
189,085
24,198
422,410
247,175
289,701
90,311
218,690
92,054 1,573,624
Net book value:
1 January 2018 (restated)*
131,145
–
–
138,952
150,138
87,136
7,612
36,356
551,339
At 31 December 2019
–
–
–
–
–
–
–
–
–
31 December 2018 (restated)*
189,085
24,198
422,410
247,175
289,701
90,311
218,690
92,054
1,573,624
* Comprised GEL 4,693 transfer from inventory and GEL 8,451 transfer to right-of-use assets.
**
In July 2019, a mudflow in Mestia in the Valley of Mestiachala caused damage to Mestiachala 1 and 2 Hydro Power Plants and the surrounding infrastructure. Mestiachala HPPs
are owned by the Group’s Renewable Energy segment, operated by Georgian Renewable Power Company, LLC. As a result the NBV of damaged infrastructure assets written
off was GEL 37,358. Respective non-recurring expense of GEL 37,357 was recognised in the Group’s 2019 financial statements. The expense amount was offset with the income
recognised as a result of reimbursement of damage from a reinsurance contract concluded by JSC Aldagi (Group’s P&C Insurance segment) in the amount of GEL 36,707.
* Certain amounts do not correspond to the 2018 consolidated financial statements as they reflect the adjustments made for changes in accounting policy described in Note 3 ((b)
infrastructure assets).
The Group pledges its property as collateral for its borrowings. The carrying amount of the pledged property as at 31 December 2019 was nil
(31 December 2018: GEL 662,034).
14. Leases
Group as a Lessee
The Group has lease contracts for various items of land, building, vehicles and other equipment used in its operations. The Group’s obligations under
its leases are secured by the lessor’s title to the leased assets. Generally, the Group is restricted from assigning and subleasing the leased assets.
Some lease contracts include extension and termination options and variable lease payments, which are further discussed below. The Group also
has certain leases of machinery with lease terms of 12 months or less and leases of office equipment with low value. The Group applies the “short-
term lease” and “lease of low-value assets” recognition exemptions for these leases.
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Georgia Capital PLC Annual Report 2019
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229
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
14. Leases continued
Group as a lessee continued
Set out below are the carrying amounts of right-of-use assets recognised and the movements during the period:
15. Goodwill and Intangible Assets
Movements in goodwill during the years ended 31 December 2019 and 31 December 2018, were as follows:
Gross Balance
At 1 January 2019
Additions
Business combination (Note 5)
Disposals
Transfers from/(to) PPE
Currency translation differences
Change in investment entity status
At 31 December 2019
Accumulated Depreciation
At 1 January 2019
Additions
Disposals
Currency translation differences
Change in investment entity status
At 31 December 2019
Net Book Value:
Balance at 1 January 2019
Balance at 31 December 2019
Land
Buildings
Vehicles
Other
equipment
2,687
1,325
348
–
(348)
38
(4,050)
–
–
314
–
–
(314)
–
2,687
–
90,188
25,402
4,245
(2,218)
–
186
(117,803)
–
–
22,552
(783)
13
(21,782)
–
90,188
–
178
163
57
–
–
–
(398)
–
–
98
–
–
(98)
–
178
–
–
–
10
–
–
–
(10)
–
–
1
–
–
(1)
–
–
–
Set out below are the carrying amounts of lease liabilities and the movements during the period:
At 1 January 2019
Additions
Business combination (Note 5)
Interest expense on lease liabilities
Payments of principal portion of lease liabilities
Payment of interest portion of lease liabilities
Foreign exchange rate movements
Change in investment entity status
At 31 December 2019
The following are the amounts recognised in profit or loss:
Depreciation expense of right-of-use assets
Interest expense on lease liabilities
Expense relating to short-term leases (included in administrative expenses)
Expense relating to leases of low-value assets (included in administrative expenses)
Variable lease payments (included in administrative expenses)
Total amount recognised in profit or loss
Total lease payments including low-value and short-term leases during the year was GEL 32,842.
Total
93,053
26,890
4,660
(2,218)
(348)
224
(122,261)
–
–
22,965
(783)
13
(22,195)
–
93,053
–
2019
83,993
34,989
1,595
6,664
(21,087)
(6,665)
4,209
(103,699)
–
2019
(22,189)
(6,665)
(534)
(130)
(4,427)
(33,938)
Cost
1 January
Business combinations
Transfer from/(to) assets of disposal group held for sale
Currency translation differences
Change in investment entity status
At 31 December
Accumulated impairment
1 January
Change in investment entity status
At 31 December
Net book value:
1 January
At 31 December
31 December
2019
31 December
2018
146,787
55,221
–
(35)
(201,973)
–
4,692
(4,692)
–
26,627
5,362
114,798
–
–
146,787
4,692
–
4,692
142,095
–
21,935
142,095
Impairment Test for Goodwill
As at 31 December 2019, Georgia Capital meets the definition of investment entity under IFRS 10, therefore it is not required to perform impairment
tests of goodwill of the subsidiaries consolidated up to 31 December 2019.
Goodwill acquired through business combinations have been allocated to five individual cash-generating units, for impairment testing: Property &
Casualty Insurance, Beverage, 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
Beverage
Pharmacy
Healthcare
Health Insurance
Total
31 December
2018
15,454
11,843
77,755
33,581
3,462
142,095
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%.
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:
P&C Insurance
Beverage
Pharmacy
Healthcare
Health Insurance
2018, %
15.6%
2018, %
15.3%
2018, %
14.4%
2018, %
12.7%
2018, %
14.3%
Group as a Lessor
The Group has entered into operating leases of certain investment properties. Rental income recognised by the Group during the year is GEL 8,903
(2018: GEL 5,467). Future minimum rentals receivable under non-cancellable operating leases as at 31 December are as follows:
Discount rate
Not later than 1 year
Later than 1 year but not later than 5 years
Later than 5 years
Total
Most of the Company’s leases are prices in USD and have lease term varying from 3 months to 10 years (average term: 4 years).
31 December
2018
5,243
11,531
9,090
25,864
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; and
• Growth of other healthcare business lines through an increased market demand and economic growth.
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Georgia Capital PLC Annual Report 2019
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231
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
15. Goodwill and Intangible Assets continued
Discount Rates continued
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 and acquisitions of intangible assets
presented in the consolidated statement of cash flows.
16. Other Assets and Liabilities
Other Assets Comprise:
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
2019
31 December
2018
–
–
–
–
–
–
–
–
–
–
150,300
18,796
18,240
38,028
16,969
3,124
742
661
4,602
251,462
*
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.
Other Liabilities Comprise:
Payables for transaction costs related to GHG share exchange
Other taxes payable
Accruals
Amounts payable for share acquisitions**
Other insurance liabilities
Pension fund liabilities
Finance lease liability
Dividends payable to non-controlling shareholders
Derivative financial liabilities
Provisions
Other
Other liabilities
31 December
2019
31 December
2018
4,782
381
96
–
–
–
–
–
–
–
2,394
7,653
–
22,859
55,623
92,126
19,707
18,932
8,746
991
715
525
15,547
235,771
17. Taxation continued
The effective income tax rate differs from the statutory income tax rates. As at 31 December 2019 and 31 December 2018 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
2019
2018 (restated)*
608,899
15%
(91,335)
88,225
(376)
–
292
(1,439)
(4,633)
29,759
15%
(4,464)
3,141
(19)
(2,183)
587
(668)
(3,606)
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, 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 are as follows:
Tax effect of deductible temporary differences:
Tax credits carried forward
Insurance premiums receivables
Other assets and liabilities
Deferred tax assets
Investments in subsidiaries
Other assets and liabilities
Deferred tax liabilities
31 December
2018
1,078
1,327
2,405
1,119
1,119
31 December
2018
21,048
688
639
22,375
21,048
–
21,048
1,327
Net
2018
25,732
106,343
(106,730)
58,533
(54,864)
20,953
–
49,967
** 2018 amount payable for share acquisitions comprise payables for healthcare and wine business acquisitions.
Net deferred tax asset recognised in the consolidated statement of financial position
17. Taxation
The corporate income tax (expense) credit comprises:
Current income tax expense
Deferred income tax (expense)/credit
Income tax (expense)
Deferred income tax credit (expense) in other comprehensive income/(loss)
2019
2018 (restated)*
(4,548)
(85)
(4,633)
–
(3,924)
318
(3,606)
–
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%.
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 assets and liabilities of disposal
group held for sale
Change in investment entity status
At 31 December
Insurance
contract
liabilities
2019
68,207
159,857
(156,674)
85,218
(84,963)
–
(71,645)
–
2019
Reinsurance
assets
2019
(18,240)
(22,517)
24,792
(8,226)
10,347
–
13,844
–
Insurance
contract
liabilities
2018
46,403
135,595
(133,965)
65,728
(66,507)
20,953
–
68,207
2018
Reinsurance
assets
2018
(20,671)
(29,252)
27,235
(7,195)
11,643
–
–
(18,240)
Net
2019
49,967
137,340
(131,882)
76,992
(74,616)
–
(57,801)
–
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Georgia Capital PLC Annual Report 2019
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233
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
19. Borrowings
Borrowings comprise:
Borrowings from local financial institutions
Borrowings from international financial institutions
Other borrowings
Borrowings
31 December
2019
31 December
2018
–
–
–
–
306,340
451,984
6,031
764,355
Some long-term borrowings from international credit institutions are received upon certain conditions (the Lender Covenants). At 31 December 2018,
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 USD, carry interest rates from 5% to 12%,
with average remaining terms of maturity of 4 years.
As at 31 December 2018, borrowings from international financial institutions are denominated in GEL, EUR and USD, carry interest rates from 1.63%
to 12.25%, with average remaining terms of maturity of 8 years.
As at 31 December 2018, other borrowings are denominated in GEL and EUR, carry interest rates from 12% to 13%, with average remaining terms
of maturity of 3 months.
During 2018 total amount of interest paid comprised GEL 96,312.
Material Non-Cash Transactions
In 2019 year the Group incurred borrowings costs with total amount GEL 10,260 (2018: GEL 24,816) of which GEL nil (2018: GEL 6,018) has
been capitalised as a part of investment property, GEL 4,261 (2018: GEL 3,153) was capitalised as a part of inventory property, GEL 5,678
(2018: GEL 15,450) was capitalised as part of property and equipment and GEL 321 (2018: GEL 195) was capitalised as part of intangible assets.
Changes in Liabilities Arising From Financing Activities
Carrying amount at 1 January 2018
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
IFRS 16 transition effect
Foreign currency translation
Cash proceeds
Cash repayments
Acquisition of subsidiaries (Note 5)
Other*
Change in investment entity status (Note 3)
Carrying amount at 31 December 2019
Borrowings
Debt securities
Lease liabilities
650,734
(7,335)
247,574
(393,981)
267,010
14,560
(14,207)
764,355
–
37,151
660,400
(416,682)
125,353
(7,483)
(1,163,094)
77,835
63,497
747,184
(80,747)
93,493
–
15,139
916,401
–
56,649
247,053
(106,713)
–
(144)
(1,113,246)
–
–
–
–
–
–
–
–
–
–
83,993
4,209
–
(21,087)
1,595
34,989
(103,699)
–
* Other movement for lease liabilities represents amounts recognised at conclusion of the new lease contracts during the year.
20. Debt Securities Issued
Debt securities issued comprise:
USD denominated Eurobonds issued by Georgia Capital
USD 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
2019
31 December
2018
–
–
–
–
–
732,519
85,663
84,858
13,361
916,401
In March 2018, JSC Georgia Capital issued a 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
2019
31 December
2018
–
–
–
–
–
27,249
19,846
4,867
10,383
62,345
31 December
2019
31 December
2018
–
–
–
139,879
3,235
143,114
Most of trade payables represent amounts due to suppliers in Healthcare, Water Utility, Housing Development, Hospitality and Commercial Real
Estate and Beverages segments. Trade payables are usually short-term, denominated mostly in GEL and USD 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.
Commitments and Contingencies
As at 31 December 2018, the Group’s commitments and contingencies comprised the following:
Operating lease commitments
Not later than 1 year
Later than 1 year but not later than 5 years
Later than 5 years
Capital expenditure commitments
Total Commitments
31 December
2018
23,383
75,147
31,410
129,940
10,341
140,281
As at 31 December 2018 capital expenditure commitments represent the commitment for purchase of property and capital repairs GEL 9,624
and software and other intangible assets GEL 717.
24. Equity
Share Capital
As at 31 December 2019, issued share capital comprised of 40,169,775 authorised common shares (31 December 2018: 39,384,712),
of which 40,169,775 were fully paid (2018: 39,384,712). Each share has a nominal value of one British penny. Shares issued and outstanding
as at 31 December 2018 are described below:
1 January 2018
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
Issue of share capital
Cancellation of shares
31 December 2019
Number
of ordinary
shares
10,000,000
1,526,000
(11,526,000)
39,384,712
–
39,384,712
3,435,438
(2,650,375)
40,169,775
Amount
10,000
1,526
(11,526)
1,644,011
(1,642,718)
1,293
113
(86)
1,320
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235
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
24. Equity continued
Share Issue
On 18 November 2019, the Company announced a share exchange facility for GHG shareholders. Under the exchange facility GHG shareholder’s had
the opportunity to exchange GHG shares for GCAP shares in the ratio of 1:0.192. The facility closed on 18 December 2019, as a result of which GCAP
exchanged 17,892,911 existing GHG shares for 3,435,438 new GCAP shares. The Group’s interest in GHG increased to 70.6%. The Group incurred
transaction costs of GEL 5,888 in relation to this transaction.
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 (GEL 120.1 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. In August 2019, the Group finalised the buyback programme.
Total number of shares bought back comprised 3,336,843 with total consideration of GEL 120,117.
Treasury Shares
In 2019, the Group acquired 3,608,174 own shares for total consideration of GEL 133,060.
In 2019, the Group paid cash consideration of GEL 135,889 (2018: GEL 111,118) for acquisition of treasury shares, of which GEL 60,461
(2018: GEL 66,701) was related to shares acquired for settlement of employee share-based payments and GEL 75,428 (2018: GEL 44,417)
were other acquisitions made by the Company, including those under the share buyback programme.
On 12 June 2019 and 22 August 2019, 2,000,000 and 650,375 treasury shares bought back under the Buyback Programme were cancelled,
respectively. 686,468 shares were transferred to JSC Georgia Capital Executive Equity Compensation Trust. As at 31 December 2019, the number
of treasury shares outstanding was 4,207,224 (2018: 3,567,765).
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 2019 and 31 December 2018 are presented in the statements of other
comprehensive income.
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. The following table summarises key information before intragroup 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 profit/loss per share
Profit/(loss) for the year attributable to ordinary shareholders of the parent
Weighted average number of ordinary shares outstanding during the year*
Earnings/(loss) per share
Diluted profit/loss per share
Profit/(loss) for the year attributable to ordinary shareholders of the Group
Weighted average number of diluted ordinary shares outstanding during the year
Diluted earnings/(loss) per share
2018
1,222,503
665,487
287,016
861,337
53,237
53,237
12,687
33,142
2019
2018
(restated)*
569,262
34,610,215
16.4478
569,262
35,372,783
16.0932
(254)
36,925,304
(0.0069)
(254)
36,925,304
(0.0069)
* 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
Pharma revenue
Healthcare revenue
Utility and energy revenue
Net insurance premiums earned
Beverages revenue
Real estate revenue
Auto service revenue
Education revenue
Digital services revenue
Other income
Revenue
Cost of pharma services
Cost of healthcare
Cost of utility and energy
Net insurance claims incurred
Cost of beverages
Cost of real estate
Cost of auto service
Cost of education
Cost of digital services
Cost of sales
Gross profit
Gross Healthcare and Pharma Profit
Revenue from Government programmes
Revenue from free flow (non-insured retail individuals)
Revenue from insurance companies
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
2019
570,836
315,042
162,962
131,882
124,705
97,780
19,540
12,083
2,324
36,283
2018
(restated)*
501,090
291,069
139,290
106,730
76,358
142,147
–
–
–
26,311
1,473,437
1,282,995
(424,814)
(176,753)
(41,121)
(76,992)
(80,283)
(70,441)
(9,799)
(679)
(2,142)
(386,153)
(154,452)
(36,274)
(58,533)
(46,879)
(107,593)
–
–
–
(883,024)
(789,884)
590,413
493,111
2019
2018
221,397
84,299
9,346
315,042
430,312
140,524
570,836
885,878
(112,321)
(48,189)
(3,280)
(12,963)
200,652
78,500
11,917
291,069
378,398
122,692
501,090
792,159
(105,440)
(34,012)
(3,226)
(11,774)
(176,753)
(154,452)
(309,213)
(115,601)
(275,887)
(110,266)
(424,814)
(386,153)
(601,567)
(540,605)
284,311
251,554
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237
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
25. Gross Profit continued
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 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 beer sales
Revenue from wine sales
Revenue from distribution of imported goods
Change in net realisable value of agricultural produce after harvest
Other beverage revenue
Beverages revenue
Cost of beer
Cost of wine
Cost of distribution
Cost of other beverage revenue
Cost of beverages
Gross beverages profit
2019
2018
131,608
31,354
162,962
(33,102)
(8,019)
(41,121)
130,238
9,052
139,290
(33,663)
(2,611)
(36,274)
121,841
103,016
2019
73,981
82,693
156,674
(2,552)
(22,240)
(24,792)
2018
54,040
79,925
133,965
(3,020)
(24,215)
(27,235)
131,882
106,730
(47,697)
(37,521)
(85,218)
558
7,668
8,226
(76,992)
54,890
2019
49,668
42,216
19,569
2,899
10,353
124,705
(32,803)
(23,553)
(15,894)
(8,033)
(80,283)
44,422
(37,096)
(28,632)
(65,728)
4,311
2,884
7,195
(58,533)
48,197
2018
27,395
27,020
14,065
2,875
5,003
76,358
(17,848)
(15,188)
(10,625)
(3,218)
(46,879)
29,479
25. Gross Profit continued
Gross Real Estate Profit
Revenue from apartment sale
Revenue from construction services
Income from operating leases
Revaluation of m2 investment property
Revenue from hospitality services
Real estate revenue
Cost of apartments sold
Cost of construction services
Cost of operating leases
Cost of hospitality services
Cost of real estate
Gross real estate profit
2019
52,022
21,835
9,416
7,498
7,009
97,780
(43,513)
(19,412)
(2,445)
(5,071)
(70,441)
27,339
2018
(restated)*
96,052
27,864
6,454
6,626
5,151
142,147
(79,962)
(23,637)
(879)
(3,115)
(107,593)
34,554
Total revenue above includes the following revenue streams that are not in scope of IFRS 15 Revenue from Contracts with customers:
Real estate revenue:
Net gains from revaluation of investment property
Income from operating leases
Beverages revenue:
Change in net realisable value of agricultural produce after harvest
Net insurance premiums earned
Other income
Revenue from BI insurance*
Gain from call option
Payables derecognised
Litigation reserve reversal
Loss from sale of PPE and IP
Net gains (losses) from revaluation of investment property
2019
2018
7,498
9,416
16,914
2,899
2,899
6,626
6,454
13,080
2,875
2,875
131,882
106,730
9,933
6,619
1,021
–
589
767
–
6,863
3,881
817
262
269
170,624
134,777
* Reimbursement of lost revenue due to business interruption under insurance contract.
Salary and employee benefit expenses included in cost of sales comprised GEL 128,664 (2018: GEL 124,333). Inventory recognised as an expense
during the period comprised GEL 55,307 (2018: GEL 185,512).
Contract Assets and Liabilities
The Group has recognised the following revenue-related contract assets and liabilities:
Deferred income
Accounts receivable
Contract assets*
31-Dec-18
47,616
134,815
2,586
* 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.
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239
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
25. Gross Profit continued
Contract Assets and Liabilities continued
Decrease in deferred revenue, contract assets and accounts receivable as at 31 December 2019 is due to change in investment entity status.
On 31 December 2019 the Group met investment entity status, therefore the Group’s subsidiaries are consolidated up to 31 December 2019.
As of that date, the subsidiaries have been de-consolidated, including the respective contract assets and liabilities, and recognised as Investments
in subsidiaries at their fair value (Note 3).
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 29,239 revenue in the current reporting period (2018: GEL 54,935) that relates to carried-forward contract liabilities
and is included in the deferred income.
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
2019
2018
(149,542)
(24,274)
(3,184)
(177,000)
(121,537)
(14,618)
(913)
(137,068)
For directors’ remuneration refer to page 151 of Directors’ Remuneration Report on page 145 in Group’s Annual Report 2019. For total number
of employees of the Group refer to page 85 of Resources and Responsibilities section on page 80 in Group’s Annual Report 2019.
General and Administrative Expenses
Marketing and advertising
Legal and other professional services
Office supplies
Operating taxes
Utility expenses
Repair and maintenance
Occupancy and rent
Corporate hospitality and entertainment
Communication
Travel expenses
Banking services
Security
Customer service fee
Personnel training and recruitment
Other
General and administrative expenses
Auditor’s Remuneration
Auditors’ remuneration is included within legal and other professional services expenses above and comprises:
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
Corporate finance services
Other non-audit services
Total other services fees
Total fees
2019
(21,800)
(21,422)
(11,637)
(10,951)
(6,547)
(5,783)
(5,090)
(3,566)
(3,490)
(3,258)
(3,220)
(1,702)
(1,697)
(740)
(16,008)
2018
(17,278)
(14,227)
(7,800)
(10,275)
(3,824)
(4,974)
(23,160)
(2,576)
(2,866)
(2,430)
(2,843)
(1,348)
(1,710)
(1,829)
(10,386)
(116,911)
(107,526)
2019
480
3,775
4,225
860
47
907
–
–
–
5,162
2018
371
2,238
2,609
675
15
690
2,048
36
2,084
5,383
26. Salaries and Other Employee Benefits, and General and Administrative Expenses continued
Auditor’s Remuneration continued
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 GEL 179 (2018:nil) and in respect of other services of the Group
were GEL 26 (2018: GEL 142).
Fees related to corporate finance services are included in non-recurring expenses under demerger fees. 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
Write-offs
Currency translation differences
Change in investment entity status
At 31 December
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
2019
8,285
958
(24)
333
(9,552)
–
Provisions
2019
525
120
–
–
(645)
–
Insurance
premiums
receivable
2018
4,243
1,898
1,787
242
–
8
107
8,285
Other assets
2018
Provisions
2018
22
50
–
–
–
(72)
–
–
3,103
231
–
(1,302)
(1,353)
(154)
–
525
The movements in the allowance for financial assets according to IFRS 9 are as follows:
At 31 December
(Reversal)/Charge
Recoveries
Write-offs
Change in investment entity status
At 31 December
Cash and cash
equivalents
2019
Amounts due
from credit
institutions
2019
Debt
securities
owned
2019
Accounts
receivable
2019
Other assets
2019
1
–
–
–
(1)
–
–
–
–
–
–
–
309
(172)
–
–
(137)
–
21,713
12,026
(220)
(2,506)
(31,013)
–
414
(380)
–
–
(34)
–
Cash and cash
equivalents
2018
Amounts due
from credit
institutions
2018
Debt
securities
owned
2018
Accounts
receivable
2018
Other assets
2018
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
–
2
2
(1)
–
–
–
1
–
–
–
–
–
–
–
–
–
192
192
117
–
–
–
309
4,003
13,830
17,833
10,080
(9,479)
3,415
(136)
21,713
–
–
–
414
–
–
–
414
Total
2019
8,810
1,078
(24)
333
(10,197)
–
Total
2018
7,368
2,179
1,787
(1,060)
(1,353)
(218)
107
8,810
Total
2019
22,437
11,474
(220)
(2,506)
(31,185)
–
Total
2018
4,003
14,024
18,027
10,610
(9,479)
3,415
(136)
22,437
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.
Increase in impairment charge in 2019 and 2018 is mainly attributable to the increased gross balance of receivables of healthcare and utility businesses.
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241
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
28. Net Non-Recurring Items
Net non-recurring expense for the year ended 31 December 2019 comprised:
Net loss on flood of Mestiachala
Termination benefits
Prepayments write-off
Other
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
2019
(1,068)
(4,397)
(3,019)
(646)
(9,130)
2018
(20,303)
(12,845)
(2,070)
(2,422)
(1,325)
(783)
(1,503)
(41,251)
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 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 2019 the Trustee has repurchased 2,087,337 (2018: 1,191,127) shares.
There were no cancellations or modifications to the awards in 2019 or 2018 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 granted to the senior executives
of the Group 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
2019
2018
2,394,556
343,638
(239,000)
(111,000)
–
2,394,556
–
–
2,388,194
2,394,556
The weighted average remaining contractual life for the share awards outstanding as at 31 December 2019 was 4 years (2018: 5.4 years).
The weighted average fair value of shares granted during the year was GEL 38.2 (2018: GEL 33.4). The weighted average fair value of shares forfeited
and vested was GEL 37.7.
29. Share-Based Payments 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
2019
31,733
27,136
2018
38,621
34,921
Expense arising from equity-settled transactions in the amount of GEL 2,862 (2018: GEL 20,303, related to demerger of Group) was recognised
in net non-recurring expenses related to termination of employment agreement of the executive in 2019.
30. Risk Management
Introduction
Risk is inherent in the Group’s activities but it is managed through a process of on-going 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 and Valuation Committee
The Audit and Valuation 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.
It is responsible for reviewing and approving half-yearly and annual valuations of the Company’s portfolio investments prepared and presented to
it by the Management Board. The Committee will ensure that the Valuation Policy complies with the obligations within any agreements in place,
legislation, regulations, guidance and other policies of the Company.
Investment Committee
The Investment Committee ensures a centralised process-led approach to investment; and the over-riding 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 and Valuation 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
30. Risk Management continued
Introduction continued
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.
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 (Policy Applied up to 31 December 2019)
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.
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.
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 table below demonstrates the Group’s financial assets credit risk profile by external rating grades:
Cash and cash equivalents
Amounts due from credit institutions
Marketable securities
Total
31 December 2019
31 December 2018
BB+ to BB-
B+ to B-
Not graded
BB+ to BB-
B+ to B-
Not graded
1,243
–
–
1,243
–
–
–
–
–
–
–
–
229,842
24,776
70,668
325,286
23,940
15,354
1,156
40,450
3,148
169
–
3,317
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.
30. Risk Management continued
Liquidity Risk continued
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.
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.
Financial liabilities
31 December 2019
Borrowings
Debt securities issued
Accounts payable
Other financial liabilities
Total undiscounted financial liabilities
Financial liabilities
31 December 2018
Borrowings
Debt securities issued
Accounts payable
Other financial liabilities
Total undiscounted financial liabilities
Less than
3 months
3 to 12
months
1 to 5
years
Over
5 years
–
–
–
7,660
7,650
Less than
3 months
54,945
5,358
129,028
66,788
256,119
–
–
–
–
–
3 to 12
months
149,118
122,556
3,734
17,756
293,164
–
–
–
–
–
1 to 5
years
519,690
333,500
10,351
94,384
–
–
–
–
–
Over
5 years
274,900
757,335
–
–
Total
–
–
–
7,650
7,650
Total
998,653
1,218,749
143,113
178,928
957,925
1,032,235
2,539,443
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. Risks associated with changes in fair value of equity investment and its implied
fair value components are disclosed in Note 31.
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 US dollar.
The tables below indicate the currencies to which the Group had significant exposure 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 twelve months. A negative amount in
the table reflects a potential net reduction in income statement or equity, while a positive amount reflects a net potential increase.
31 December 2018
Amounts due from credit institutions
Accounts receivable
Insurance premiums receivable
Marketable securities
Total
Notes
9
11
10
Neither past
due nor
impaired
Past due or
impaired
40,299
127,682
56,955
71,824
296,760
–
42,546
846
–
43,392
Total
40,299
170,228
57,801
71,824
340,152
Currency
EUR
GBP
USD
2019
2018
Change in
currency
rate in %
7.9%
10.2%
6.4%
Effect on profit
before tax
–
(130)
(36)
Change in
currency
rate in %
9.9%
10.8%
7.1%
Effect on profit
before tax
(23,283)
151
(23,409)
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.
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.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
30. Risk Management continued
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 (Policy Applied up to 31 December 2019)
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, %
2018, %
38%
75%
77%
94%
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, property GEL 5,830, liability GEL 2,625, cargo GEL 1,142, life GEL 1,625 and other GEL 2,174.
Capital Management
Management monitors the Group’s capital on a regular basis based on statement of Net Asset Value (NAV) prepared on fair value bases, same as
equity attributable to shareholders of Georgia Capital PLC as at 31 December 2019 in the amount of GEL 1,752,021. Net Asset Value (NAV) statement,
which breaks down NAV into its components, including 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 it’s 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 shareholder’s 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.
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 2019 the Group complied with all of regulatory requirements as well as insurance capital
and insurance liquidity regulations, in full.
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 2019
Assets measured at fair value
Equity investments at fair value
Assets for which fair values are disclosed
Cash and cash equivalents
31 December 2018 (restated)*
Assets measured at fair value
Total investment properties
Land
Residential properties
Non-residential properties
Marketable securities
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
Level 1
Level 2
Level 3
Total
–
–
–
1,758,197
1,758,197
1,243
–
1,243
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
–
–
289,701
289,701
18,668
1,038
661
16,969
–
–
170,228
162,862
162,862
715
715
151,232
49,128
14,196
87,908
71,824
457,495
289,701
289,701
18,668
1,038
661
16,969
256,930
40,299
170,228
162,862
162,862
715
715
506,711
678,973
254,056
184,551
760,767
863,524
Valuation Techniques
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.
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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
31. Fair Value Measurements continued
Valuation Techniques continued
Investment in Subsidiaries
Equity investments at fair value include investment in subsidiary at fair value through profit or loss representing 100% interest of JSC Georgia Capital.
Georgia Capital PLC holds a single investment in JSC Georgia Capital (an investment entity on its own), which holds a portfolio of investments,
both meet the definition of investment entity and Georgia Capital PLC measures its investment in JSC Georgia Capital at fair value through profit
or loss. Investments in investment entity subsidiaries and loans issued are accounted for as financial instruments at fair value through profit and
loss in accordance with IFRS 9. Debt securities owned are measured at fair value through other comprehensive income. We determine that, in the
ordinary course of business, the net asset value of investment entity subsidiaries is considered to be the most appropriate to determine fair value.
JSC Georgia Capital’s net asset value as of 31 December 2019 is determined as follows:
Assets
Cash and cash equivalents
Marketable securities
Equity investments at fair value
Of which listed investments
GHG
BoG
Of which private investments:
Late stage
Water Utility
Housing Development
P&C Insurance
Early stage
Renewable Energy
Hospitality & Commercial RE
Beverages
Pipeline
Education
Auto Service
Digital Services
Other
Loans issued
Other assets
Total assets
Liabilities
Debt securities issued
Other liabilities
Total liabilities
Net Asset Value
31 December
2019
117,215
62,493
2,251,465
1,027,814
430,079
597,735
1,223,651
692,746
483,970
43,853
164,923
439,478
106,800
245,558
87,120
91,427
56,316
25,757
8,790
564
151,884
8,782
2,591,839
825,952
7,690
833,642
1,758,197
In measuring fair values of JSC Georgia Capital’s investments, following valuation methodology is applied:
Equity Investments in Listed Portfolio Companies
Equity instruments listed on an active market are valued at the price within the bid/ask spread, that is most representative of fair value at the reporting
date, which usually represents the closing bid price. The instruments are included within Level 1 of the hierarchy.
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.
The value of an unquoted equity investment is generally crystallised through the sale or flotation of the entire business, rather than the sale of
an individual instrument. Therefore, the estimation of fair value is based on the assumed realisation of the entire enterprise at the reporting date.
Recognition is given to the uncertainties inherent in estimating the fair value of unquoted companies and appropriate caution is applied in exercising
judgements and in making the necessary estimates.
31. Fair Value Measurements continued
Valuation Techniques continued
Equity Investments in Private Portfolio Companies continued
Fair value of equity investment in private portfolio companies is usually determined using one of the valuation methods 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 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 will be used for the purposes of valuation. Earnings can be adjusted for extraordinary or non-recurring items.
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).
Discounted Cash Flow
Under the Discounted Cash Flow (DCF) valuation method, fair value is estimated by deriving the present value of the business using reasonable
assumptions of expected future cash flows and the terminal value and date, and the appropriate risk-adjusted discount rate that quantifies the risk
inherent to the business. The discount rate is estimated with reference to the market risk-free rate, a risk adjusted premium and information specific
to the business or market sector. DCF is mostly used to estimate fair value of project-based cash-flow driven businesses.
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.
Price of Recent Investment
The price of a recent investment, if resulting from an orderly transaction, generally represents fair value as of the transaction date. At subsequent
measurement dates, the price of a recent investment may be an appropriate starting point for estimating fair value. However, adequate consideration
must be given to the current facts and circumstances, including, but not limited to, changes in the market or changes in the performance of the
investee company. The valuer should assess at each measurement date whether changes or events subsequent to the relevant transaction would
imply a change in the investment’s fair value.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
31. Fair Value Measurements continued
Valuation Techniques continued
Equity Investments in Private Portfolio Companies 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.
Based on DCF, we might make upward or downward adjustment to the value of valuation target as derived from primary valuation method. If fair
value estimated using discounted cash flow analysis significantly differs from the fair value estimate derived using primary valuation method, the
difference is examined thoroughly, and judgement is applied in estimating fair value at the measurement date.
Valuation Process for Level 3 Valuations
Georgia Capital’s Management Board proposes fair value to be placed at each reporting date to the Audit and Valuation Committee. The Audit and
Valuation Committee is responsible for the review and approval of fair values of investments at the end of each reporting period.
Fair values of investments in private companies is assessed internally in accordance with Georgia Capital’s valuation methodology by the Valuation
Workgroup.
Description of Significant Unobservable Inputs to Level 3 Valuations
The following tables show descriptions of significant unobservable inputs to level 3 valuations of investments in subsidiaries:
Valuation technique
Unobservable input
(weighted average)
Fair value
Range
Description
Loans Issued
Equity investments at fair value
Late stage
Water Utility
Housing Development
P&C Insurance
Early stage
EV/EBITDA
DCF
P/E
Discount rate
EV/EBITDA multiple of peers
Cashflow probability
Revenue per sq.m.
Cost per sq.m.
P/E multiple of peers
Renewable Energy
Hospitality and Commercial RE
Beverages
Recent transaction price
NAV
EV/EBITDA/EV/Sales
Recent transaction price
Multiple
EV/EBITDA/EV/Sales multiple of peers
Pipeline
Education
Auto Service
Digital Services
Other
Recent transaction price
EV/EBITDA
Recent transaction price
Recent transaction price
Recent transaction price
EV/EBITDA multiple of peers
Recent transaction price
Recent transaction price
* amounts in (brackets) are the weighted multiples used in valuation.
7.9x - 11.0x (8.8x)*
70% - 100%
1,832 - 4,511
1,333 - 3,563
6.6x - 12.3x (9.0x)*
n/a
1x
8.6x - 13.8x
(10.0x)*
1.3x - 3.9x (2.2x)*
n/a
6.6x - 15.4x (10.4x)*
n/a
n/a
692,746
483,970
43,853
164,923
439,478
106,800
245,558
87,120
91,427
56,316
25,757
8,790
564
Sensitivity Analysis to Significant Changes in Unobservable Inputs Within Level 3 Hierarchy
In order to determine reasonably possible alternative assumptions the Group adjusted key unobservable model inputs. The Group adjusted the
inputs used in valuation by increasing and decreasing them by 5%, which is considered by the Group to be within a range of reasonably possible
alternatives based on the earnings multiples used across peers.
If the peer multiple used to value each unquoted investment valued on an earnings multiple basis as at 31 December 2019 decreased by 5%, value
of equity investments at fair value would decrease by 62 million or 8%. If the multiple increased by 5% then the equity investments at fair value would
increase by 62 million or 8%.
If WACC used to value each unquoted investment valued using DCF decreased by 5%, the value of equity investments at fair value would increase by
2 million or 4%. If the WACC increased by 5% then the equity investments at fair value would decrease by 2 million or 4%.
If the multiple used to value each unquoted investment valued on NAV and recent transaction price basis as at 31 December 2019 decreased by 5%,
value of equity investments at fair value would decrease by 21 million or 5%. If the multiple increased by 5% then the equity investments at fair value
would increase by 21 million or 5%.
31. Fair Value Measurements continued
Methodology Applied Before 31 December 2019
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 parent company’s market capitalisation from 1 January 2013 till 31 December 2017 period,
which equalled 34.7%. If in 2018 the volatility was 10% higher, fair value of call option would increase by GEL 2,533, if volatility was 10% lower call
option value would decrease by GEL 2,770. The Group recognised GEL 6,619 (2018: GEL 6,863) 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.
Impact on Fair Value of Level 3 Financial Instruments Measured at Fair Value of Changes to Key Assumptions (Applied Before
31 December 2019)
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
Other derivative, call option
2018
Effect of
reasonably
possible
alternative
assumptions
Carrying
Amount
–
+ / – 0
16,969 +2,533/ – 2,770
Description of significant unobservable inputs to valuations of non-financial assets (applied before 31 December 2019)
The following tables show descriptions of significant unobservable inputs to level 3 valuations of investment properties and revalued properties and
equipment:
Investment property
Land
Residential properties
Non-residential properties
2018
Valuation technique
Significant unobservable inputs
Range
(weighted average)
151,232
49,128 Market approach
Price per square metre
14 - 3,127 (1,162)
14,196 Market approach
Price per square metre
1,496 - 6,077 (4,413)
87,908
32,461 Market approach
Income approach
55,447
Price per square metre
Capitalisation rate
Occupancy rate
165 - 27,883 (5,089)
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
31. Fair Value Measurements continued
Methodology Applied Before 31 December 2019 continued
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 2019
Fair value
2019
Unrecognised
gain/(loss)
2019
Carrying
value 2018
Fair value
2018
Unrecognised
gain/(loss)
2018
1,243
–
–
–
–
1,243
–
–
–
–
256,930
40,299
150,300
764,355
916,401
256,930
40,299
163,900
760,767
863,524
–
–
–
–
–
–
–
–
13,600
3,588
52,877
70,065
Movements in Level 3 Financial Instruments Measured at Fair Value (Applied Before 31 December 2019)
The following tables show a reconciliation of the opening and closing amounts of level 3 financial assets which are recorded at fair value:
Level 3 financial assets
Equity securities at FVOCI
Call option
Equity investments at fair value
At
1 January
2018
1,153
–
–
Reclassification
of securities
Transfer
from AHS
Gain on
revaluation
At
31 December
2018
Gain on
revaluation
Investment
entity
classification
At
31 December
2019
(1,153)
–
–
–
10,106
–
–
6,863
–
–
16,969
–
–
6,619
–
–
(23,588)
1,758,197
–
–
1,758,197
32. Maturity Analysis continued
Cash and cash equivalents
Amounts due from credit institutions
Marketable securities*
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
31 December 2018 (restated)*
Less than
1 Year
256,930
29,884
71,824
457,495
153,106
57,801
211,868
–
62,424
1,021
–
–
–
80,507
More than
1 Year
–
10,415
–
–
17,122
–
64,362
151,232
55,485
1,384
1,573,624
142,095
51,471
170,955
Total
256,930
40,299
71,824
457,495
170,228
57,801
276,230
151,232
117,909
2,405
1,573,624
142,095
51,471
251,462
1,382,860
2,238,145
3,621,005
135,826
60,555
1,119
35,163
157,629
86,089
128,635
7,288
7,652
–
27,182
606,726
830,312
107,136
143,114
68,207
1,119
62,345
764,355
916,401
235,771
605,016
1,586,296
2,191,312
777,844
651,849
1,429,693
All investment properties and revalued properties of property and equipment are level 3. Reconciliations of their opening and closing amounts
are provided in Notes 12 and 13 respectively.
* Internationally listed debt and equity investments are allocated to “less than 1 year” rather than based on contractual maturity.
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:
Cash and cash equivalents
Equity investments at fair value
Prepayments
Total assets
Other liabilities
Total liabilities
Net
Less than
1 Year
1,243
–
234
1,477
7,653
7,653
31 December 2019
More than
1 Year
–
1,758,197
–
Total
1,243
1,758,197
234
1,758,197
1,759,674
–
–
7,653
7,653
(6,176)
1,758,197
1,752,021
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
Loans issued*
Liabilities
Debt securities issued
31 December 2019
31 December 2018
Joint
Ventures and
Management***
Associates Management***
Entities under
common
control**
Joint
Ventures and
Associates
–
–
–
–
–
–
–
–
–
–
2,596
2,596
–
–
–
–
1,038
1,038
–
–
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253
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2019 (THOUSANDS OF GEORGIAN LARI) CONTINUED
ABBREVIATIONS AND REFERENCES
33. Related Party Disclosures continued
Income and expenses
Gross profit****
Salaries and other employee benefits
Administrative expenses
Net foreign currency (loss)
Interest income
Interest expense
2019
Joint
Ventures and
Management***
Associates Management***
2018
Entities under
common
control**
Joint
Ventures and
Associates
–
–
–
–
–
(390)
(390)
–
–
–
–
199
–
199
–
–
–
–
–
–
–
1,998
(428)
(527)
(675)
4,482
(5,038)
(188)
–
–
–
–
73
–
73
* 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 GEL133,830,
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 2019, one of the Group’s subsidiaries, JSC Georgia Real Estate (formerly JSC m2 Real Estate) has loans issued to
a joint venture and associate. Interest income on loan issued is GEL 199 (2018: GEL 73).
** Entities under common control comprise of BGEO Group PLC’s Banking Business subsidiaries.
*** Management of Georgia Capital PLC consist of four executives and six members of the Board of Directors (five executives and six board of directors in 2018).
**** The amount represents gross real estate profit received from key management personnel as a result of sale of apartments.
Compensation of key management personnel comprised the following:
Salaries and other benefits
Share-based payments compensation
Total key management compensation
2019
3,589
12,988
16,577
2018
2,605
18,131
20,736
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 2019 was 10 (2018: 11).
34. Events after the Reporting Period
Buyout of the Minority Shareholder in Renewable Energy
On 25 February 2020 the Group bought out 34.4% stake minority shareholder, RP Global, in Georgian Renewable Power Company LLC. As part of the
buyout, Georgia Capital will pay a fixed cash consideration of GEL 39 million. An additional deferred adjustable consideration of up to GEL 12.6 million
may be payable if actual market electricity sales prices are higher during 2023-2025 than the Group’s current internal forecasts.
Change in fair value of listed and unquoted investments
As at 3 April 2020, fair value of listed equity investments has declined by 39.5% (to GEL 621,991) compared to 31 December 2019 in light of COVID-19
pandemic impact on stock markets. The fair value of our unquoted portfolio investments may have increased or decreased since 31 December 2019.
The valuations depend on market multiples and outlook and the direct exposure to the impact of COVID-19 of each particular portfolio investment.
ADR
AGM
APM
Average Daily Rate
Annual General Meeting
Alternative Performance Measure
BoG or BoGG
Bank of Georgia Group PLC
Compounded annual growth rate
GHG
HPP
IAS
IASB
IFC
Georgia Healthcare Group
Hydro Power Plant
International Accounting Standards
International Accounting Standards Board
International Finance Corporation
Deep and Comprehensive Free Trade Agreement
IMF
International Monetary Fund
CAGR
DCFTA
DEG
EBITDA
EECP
EFTA
EPS
ESMS
EUR
EV
EY
FCF
FDI
FRC
FTA
GBP
GDP
GEL
Deutsche Investitions- und
Entwicklungsgesellschaft – German
Investment and Development Corporation
Earnings before interest, taxes, non-recurring
items, FX gain/losses and depreciation
and amortisation
Executives’ Equity Compensation Plan
European Free Trade Association
Earnings per share
Environmental and Social Risk
Management Procedures
Euro
Enterprise Value
Ernst & Young
Free Cash Flow
Foreign direct investment
Financial Reporting Council
Free Trade Agreement
Great British Pound, national currency of the UK
Gross domestic product
Georgian Lari or Lari, national currency
of Georgia
GGU
Georgian Global Utilities
IPO
IRR
JSC
KfW
KPIs
LSE
LTIP
LTM
MOIC
MoU
MTPL
MW
NAV
NBG
NGO
NIM
NMF
NOI
NPLs
NTM
OECD
P&C
PLC
PPA
RAB
Initial Public Offering
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
Next twelve months
Organisation for Economic Co-operation
and Development
Property and Casualty
Public limited company
Power Purchase Agreement
Regulatory Asset Base
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255
ABBREVIATIONS AND REFERENCES CONTINUED
RevPar
Revenue per available room
ROAE
ROIC
SMEs
TBD
TPL
TSR
UK
US$
WACC
WPP
Return on average total equity
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
Weighted Average Cost of Capital
Wind Power Plant
REFERENCES
BGEO Group PLC Former parent company of Georgia Capital PLC
prior to demerger
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
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).
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 in the P&C insurance business.
MOIC
Realised MOIC
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).
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 portfolio
companies’ operational performance and the
profitability of these companies’ operations. The
Company considers EBITDA to be an important
indicator of representative recurring operations.
ROAE
ROIC
Expense Ratio
Equals sum of acquisition costs and operating
expenses divided by net earned premiums in the
P&C insurance business.
Value creation
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 2019.
Liquid assets and
Loans issued
Liquid asset and loans issued in Georgia Capital
include cash, marketable debt securities and
issued short-term loans.
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.
Multiple of Capital Invested is calculated as
follows: i) the numerator is the cash and non-cash
inflows from dividends and sell-downs plus fair
value of investment at reporting date, and ii) the
denominator is the gross investment amount.
Realised Multiple of Capital Invested is calculated
as follows: i) the numerator is the cash and
non-cash inflows from dividends and sell-downs,
ii) the denominator is the gross investment
amount.
Return on average total equity equals profit for
the period attributable to shareholders divided
by monthly average equity attributable to
shareholders for the same period for BoGG
and P&C insurance.
Return on invested capital is calculated as EBITDA
less depreciation, divided by aggregate amount of
total equity and borrowed funds.
Value creation of each portfolio investment is
calculated as follows: we aggregate a) change in
beginning and ending fair values, b) gains from
realised sales (if any) and c) dividend income
during period. We then adjust the net result to
remove capital injections (if any) to arrive at the
total value creation / investment return.
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Georgia Capital PLC Annual Report 2019
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 4 June 2020 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
75 to 79.
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.
The outer cover of this report has been
laminated with a biodegradable film.
Around 20 months after composting,
an additive within the film will initiate
the process of oxidation.
Additional Information
www.georgiacapital.ge