Georgian blue-chips blaze listings path

Georgian blue-chips blaze listings path
Bank of Georgia listed on the London Stock Exchange 10 years ago.
By Carmen Valache in Istanbul April 14, 2016

Many Eastern European and Central Asian markets are currently out of favour with investors, but Georgian companies are defying the trend. Three of them are already listed on the London Stock Exchange (LSE), proving that investors can be interested in small and resource-poor emerging markets. Now the Georgian Stock Exchange (GSE) is trying to get in on the act, and persuade companies and local and international investors to look at domestic listings.

The way to London's capital market for Georgian companies was paved by the country's largest bank, Bank of Georgia (BoG), back in 2006. At the time it dual listed in London, its share value increased by 30% "almost immediately", Bruce Packard, an independent London-based bank analyst, told bne Intellinews. "BoG came to London on the eve of the financial crisis, when investors were nervous that Greece was going to default, and valuations of European banks reflected that fear. When it listed, its shares were absurdly cheap, but later its share price increased threefold to £27 per share."

Despite the global financial crisis and the current gloom hanging over emerging markets, its share price has increased from some $18 per share at the time of listing to £19.50 as of 11 April.

In time, BoG became an investors' darling, expanding into a full-fledged holding with multiple financial and non-financial subsidiaries such as utility management, real estate and healthcare, and posting double-digit growth in revenue and profits year after year. It eventually acquired a premium listing in London, a status that requires greater transparency but gives access to a wider range of investors such as British pension funds.  It is now largely owned by LSE investors, with a mere 5% of its shares owned by management and shareholders from its Georgian listing.

Aspiring to follow in its footsteps, the second largest bank in Georgia, TBC Bank, floated in London in June 2014 in what became the largest initial public offering (IPO) by a Georgian company to date, and the largest ever off-FTSE index international IPO of a company from Europe, Middle East and Africa.  The bank raised some $239mn when it floated to expand its financing for micro, small and medium entreprises, it explained to bne Intellinews in an email.

Perhaps this privileged market entrance, at a time of high investor interest in emerging markets, contributed to TBC Bank shares’ subsequent poor performance. The bank's stock prices have followed a downward trend, declining from $13.2 per share when it listed to $9.79 as of 11 April.

"There is some frustration at TBC Bank because they did not have the same impact when they listed [as BoG]. That is partly because they are still a GDR [global depository receipt], and partly because they were valued at a higher price than BoG in the first place," Packard says, adding that TBC Bank shares are not settled through Crest, the LSE settlement system, because the company does not have a premium listing, and are therefore hard to find for retail and even institutional investors.

TBC Bank is seeking a premium listing this year, which should bring in more foreign investment, Packard believes. TBC Bank says that 71% of its shareholders are already international investors from the LSE, and that the bank's founders maintain only a 22% share. Nevertheless, the bank is seeking a premium listing in order to "help expand our investor base and increase our liquidity".

The latest Georgian company to list on LSE is also the first non-financial institution to do so. Georgia Healthcare Group (GHG) is a private healthcare business that encompasses a hospital chain – Evex Healthcare Services – and a medical insurance company, Imedi Medical Insurance. It floated on the LSE in November 2015, raising some $110mn.

A subsidiary of Bank of Georgia Holdings, GHG acquired automatic premium listing thanks to the status of its parent company, which still maintains a 65% stake in the company. Its share price experienced a decline from £1.84 a share to £1.55 a share after the IPO, but saw a rebound to £1.75 a share in March 2016 after the company announced that it was acquiring the third largest pharmaceutical chain in the country.

"The decline in stock value in January and February has to do more with [declining] investor confidence in emerging markets in general than with GHG's fundamentals. The value of our shares has been in line with our expectations. Investors were waiting to see results, which we have delivered and continue to deliver in a sustained manner," Nikoloz Gamkrelidze, GHG CEO, told bne Intellinews in an interview.

A chicken-and-egg question

Unlike BoG, GHG chose not to be listed in Georgia. "Unfortunately, GSE is not well developed enough, so there was no sense in us being listed on GSE. Georgia needs time to develop its capital market. The country is small, the corporates are small and not sophisticated enough - corporate governance is an issue for some of them, for instance. The country needs time to develop its capital market, and companies need funding to expand in the meantime," Gamkrelidze said.

Packard, however, believes that listing on the LSE is a way for bigger Georgian companies to raise money fast, but that, in the long term, Georgia has to find ways to connect domestic investors to investment opportunities. "Investors in London are not going to understand the value of listed companies as well as Georgians, and Georgian companies have to create long-term savings systems," he believes.

"If GHG is a good investment, then the government and BoG should encourage Georgians themselves to invest in the company. If Georgia aspires to become a functioning market economy, in the mould of Singapore and Hong Kong or even a middle-income economy like Chile or Poland, then the country needs a stock market."

Gamkrelidze thinks that it is premature for large companies to look at raising equity on the domestic stock market. "GSE is better developed than other stock exchanges in the region, but cannot cover the financing needs of large companies. The stock exchange has seen four bond issuances in the last two years, including one of our subsidiary Evex in 2015. At the moment, GSE is better positioned to raise debt for medium-sized companies than equity for large ones," he said.

Indeed, with a market capitalisation of just $651mn at end-2015 and only $395mn in traded volume in 2015, the majority of which was off-exchange trading (OTC), GSE is simply too small to enable larger companies such as BoG, TBC Bank and GHG to raise hundreds of millions of dollars on it. The solution, according to Gamkrelidze, is for such companies to continue raising capital on international markets and to thus boost economic growth, which will in turn help the development of the domestic capital market. "This is just the beginning. There will be other Georgian companies listed on LSE," he added, without revealing any names.

A usual suspect to seek LSE listing next is government-owned Georgian Railways, which had planned to go public in 2012, but opted for a $500mn Eurobond issuance instead because of market conditions, Nino Papava, head of research at consultancy Galt & Taggart, explains. "There have not been any talks of Georgian Railways going public recently, and there are no other clear candidates to go public in the short-term," she says.

Tbilisi has been making strides in promoting the development of local capital markets in recent years, George Paresishvili, CEO of GSE told bne Intellinews. He says GSE, a private stock exchange owned by its members, including TBC Bank and BoG, is poised to benefit from Georgia’s connection to Deutsche Borse-owned post-trade service provider Clearstream through BoG.

It also has technical assistance from international financial institutions (IFIs) such as the World Bank, the International Finance Corporation (IFC), the European Bank for Reconstruction and Development (EBRD) and the Asian Development Bank, which are considering listing their local-currency denominated bonds on the exchange, and should benefit from planned legislative initiatives such as a corporate tax reform and a pension reform.

Gamkrelidze believes that corporate tax reform, which will exempt reinvested corporate profits from taxation starting in 2017, will be particularly beneficial for the private sector. "The reform will increase the liquidity of private companies by an estimated GEL500mn (€192.8mn) a year, so it will obviously boost private sector investment," he said.

Gamkrelidze thinks that the pension reform is a more distant prospect. However, Paresishvili insists that it is one of the "most important things that the government and the National Bank of Georgia (NBG) can do to boost the local investor base", the other three key measures being floating some of the large public companies such as Georgian Railways on the GSE, abolishing capital gains tax, and making local corporate bonds eligible for sale and repurchase (repo) operations with the central bank.