research reports

GR released 9M18 unaudited results together with Management Discussion and Analysis. Revenue increased 3.3% y/y to US$ 126.3mn, mostly due to increased logistics and freight car rental revenues, up 65.4% y/y to US$ 28.8mn. Passenger traffic also posted a 19.2% y/y growth to US$ 9.0mn in 9M18, enhanced by main line passengers. Meanwhile, operating expenses posted slight growth of 3.7% y/y to US$ 114.2mn. Adjusted EBITDA increased 3.6% y/y to US$ 49.3mn. GEL’s depreciation-related non-cash FX loss of US$ 4.2mn in 9M18 compared to US$ 31.6mn gain in the same period last year caused the bottom line to plunge to US$ 7.3mn. Fitch Ratings revised Georgian Railway's outlook to positive from stable and affirmed the rating at “B+”, in November 2018.

Freight transportation, the largest revenue category, declined 9.9% y/y to US$ 71.0mn in 9M18 from last year’s low base of US$ 78.8mn. This decline was fully offset by logistic service revenue growth of 59.1% y/y to US$ 21.3mn. Freight car rental and passenger traffic revenues, together accounting for 13.0% of total revenue, posted significant growth of 86.4% y/y to US$ 7.4mn and 19.2% y/y to US$ 9.0mn, respectively. Other revenue was down 24.9% to US$ 2.3mn.

9M18 operating expenses increased 3.7% y/y to US$ 114.2mn. Employee benefits expense, largest expense category, remained flat at US$ 44.3mn. Depreciation and amortization expense rose 7.4% y/y to US$ 35.6mn. Other categories, accounting for just 30.0% of total expenses increased 4.1% y/y; Namely electricity, consumables, and maintenance expenses were up 3.6% to US$ 13.2mn, increased logistical service and freight car rental revenue-related costs were also up 39.1% to US$ 5.0mn and 54.6% y/y to US$ 1.8mn, respectively. Taxes (exc. Income tax) were down 9.1% y/y to US$ 7.6mn, the only category that posted a decrease both in GEL and USD terms.

The decline in freight transportation revenue was mainly attributable to decrease in liquid cargo transportation. Oil products transportation revenue, which makes up 96.3% of liquid cargo, was down 10.9% y/y to US$ 28.8mn, while crude oil transportation more than halved (-56.9% y/y) to US$ 1.1mn in 9M18. The drop in oil products transportation (635,000 tons lower) was driven by the reduced transportation volumes from Kazakhstan, while 61.2% y/y drop in crude oil transportation volumes by rail is explained by re-direction of crude oil from Azerbaijan into the pipelines going through Georgia. 

Dry cargo transportation, accounting for 57.9% of total revenue, decreased 6.4% y/y to US$ 41.1mn in 9M18 explained by reduced transportation of sugar and ferrous metals. Sugar transportation fell 35.6% y/y to US$ 2.8mn and accounted for more than half of the total decline in dry cargo revenue. Reduced transportation volumes from Brazil, coupled with decreased share of cane sugar (relatively more profitable product) in product mix are to be blamed for the decline. Ferrous metals and scrap revenue shrank 16.7% y/y 9M18 to US$ 2.8mn due to decrease in transportation to profitable routes. Construction freight and grain transportation were also down 11.6% y/y to US$ 1.9mn and 5.9% y/y to US$ 2.2mn, respectively. Other dry cargo categories rose, with chemicals and fertilizers category posting the largest positive contribution to the revenue, increasing 15.7% y/y to US$ 4.2mn, while ores transportation, which contributed 20.1% of total dry cargo transportation, posted a low single-digit growth of 3.8% y/y to US$ 8.3mn.

9M18 adjusted EBITDA increased 3.6% y/y to US$ 49.3mn. As a result, the adjusted EBITDA margin rose from 38.9% in 9M17 to 39.0% in 9M18. The growth in other income to US$ 5.8mn (+74.5% y/y) was stemming from the sale of fixed assets in the reporting period. GEL’s 5.6% depreciation against US$ in Sep-18 vs Sep-17 led to a non-cash FX loss of US$ 4.2mn compared to US$ 31.6mn gain in the same period last year. This caused net income to drop to US$ 7.3mn in 9M18 from US$ 37.8mn in 9M17.

Operating cash increased 22.8% y/y to US$ 64.6mn in 9M18. Cash flow for investing activities came in at US$ 27.0 compared to US$ 56.8 last year, while cash flow from financing activities stood at US$ 42.0mn vs US$ 22.9mn in 9M17. This is explained by acquisition of two new Stadler trains from the proceeds of the new loan by GR in 2017.

Fitch Ratings revised Georgian Railway's outlook to positive from stable and affirmed the rating at “B+”, in November 2018. The upgrade in outlook reflected the change in the Georgian Sovereign rating (BB-/Positive) in March 2018.

GNERC updated Grid Code for Electricity on October 26, 2018 to include requirements of Energy Community’s regulation No 543/2013 concerning submission and publication of data in electricity markets. This update is one step forward to implement Georgia’s obligations under the Energy Community. The Grid Code sets general rules for gathering, submission and publication of information on ENTSO-E’s platform. The mentioned information includes: actual and forecasted loads, planned and emergency maintenance, grid congestions, NTCs, etc. The dispatch licensee - Georgian State Electrosystem (GSE) - is responsible for the data gathering and publication process and should prepare detailed instructions by April, 2019 and start publication by November, 2019.

MoESD revised the annual balance of electricity in November 2018. The forecast for annual electricity consumption growth for 2018 was revised downwards from 9.9% to 8.2% in November 2018. The high expectation for annual growth was caused by 11.8%y/y increase in consumption during May-July period. Since August 2018, the growth of consumption slowed down to average 2.6% y/y. As a result, consumption forecast was revised to follow the trend. Actual electricity consumption was up by 6.9% y/y and reached 7.4 TWh in 10M18. 

Updated annual balance of electricity also includes updated forecast of supply for November and December and actual figures for 10M18. According to updated balance, the import in 2018 is expected at last year’s record level of 1.5TWh. The record high electricity import in 2017 was caused by Enguri’s closure in winter reducing supply and 2018 import forecast is explained by increased electricity consumption.

Electricity consumption increased by 3.2% y/y in October 2018. The growth was driven by increased consumption of direct consumers (+40.5%y/y), as new companies were added to the group of eligible consumers, in line with legal changes effective since May 2018. Consumption by distribution licensees was down by 0.7% y/y in October 2018, caused by above-mentioned reallocation of eligible consumers. The addition of new commercial and household subscribers to the group was not sufficient to fully absorb the mentioned reallocation effect, especially for Telasi.

Uzbekistan is Central Asia's most populous country, comprising nearly half of the region's total. The country has over 1,800 mineral reserves with substantial deposits of gold, copper, uranium, coal and natural gas. 

The economy experienced the smallest contraction among its peers after the collapse of the Soviet Union in 1991. The country managed to increase its nominal GDP by 19x to US$ 67.1bn between 1992 and 2016. However, this was not sufficient to raise the living standards of the population with per capita GDP at US$ 2,124 in 2016 – one of the lowest globally, albeit up from US$ 167 in 1992.

Solid economic growth was insufficient for quality job creation given the rapidly increasing labor force. Uzbekistan’s annual average real GDP growth of 8.3% over 2007-16 was 6th highest in the world. Despite unprecedented growth levels public sector was unable to meet labor market demand with 500,000 new job seekers entering the market every year. 

A private sector-driven growth model and attracting foreign investment are high on agenda. Worsening external environment since 2014 required the economy to move towards a different growth model. At end-2016, newly elected president Shavkat Mirziyoyev acknowledged that the economy needed new drivers of growth and some dismantling given that it was still closed and centrally planned 25 years after the collapse of the Soviet Union. The government’s five-year development strategy, adopted in February 2017, is the country’s official roadmap of liberal economic reforms aiming to increase private investment in the economy.

Uzbekistan implemented a series of reforms under its development strategy in 2017-18. Institutional progress was rapidly acknowledged by international observers. The World Bank named Uzbekistan as one of the top improvers globally and the regional leader in terms of its total number of reforms in its 2018 “Doing Business” report. Despite this progress, the authorities have much work to do to move away from a state controlled economic model and combat widespread corruption. 

Uzbekistan has the potential to become the largest economy in Central Asia given its natural resources combined with the government’s commitment to promoting private sector-led growth. Moreover, Uzbekistan’s large FX reserves and low and affordable foreign debt provide a cushion against global market volatility. According to the IMF, the economy has the potential to grow by 5.0% in 2018-19, before accelerating slowly to 6.0% by 2022.

Highlights

• Real GDP growth in the US was an annualized 3.5% y/y (advance estimate) in 3Q18, after an annualized 4.2% y/y growth in 2Q18. Unemployment rate was unchanged at 3.7% in October 2018.
• Real GDP growth in EU19 came in at 1.7% y/y in 3Q18, after 2.1% y/y in 2Q18. Unemployment rate in EU19 was unchanged at 8.1% in September 2018.
• China’s economy grew by 6.5% y/y in 3Q18, 0.2ppts lower than in 2Q18.
• Economic growth accelerated and came in at 6.5% y/y in Kazakhstan and 5.6% y/y in Georgia, while it slowed to 0.6% y/y in Russia and was negative 0.1% y/y in Armenia in September 2018, based on rapid estimates. In 9M18, real GDP growth was 3.7% y/y in Belarus and 0.8% y/y in Azerbaijan.
• Annual inflation in the US was 2.5% in October 2018, up from 2.3% in previous month. Based on the Eurostat flash estimate, annual inflation in EU19 was 2.2% in October 2018, up from 2.1% in September 2018.
• In October 2018, annual inflation was below the target level in Georgia (2.3%), Armenia (2.8%), Russia (3.5%) and Belarus (4.9%); inflation was within the target range in Kazakhstan (5.3%), and above the target in Ukraine (9.5%) and Turkey (25.2%).
• Monetary policy rate was cut to 9.75% (from 10.0%) in Azerbaijan and it increased to 9.25% (from 9.0%) in Kazakhstan in October 2018. The policy rate has remained unchanged in other countries.

Please see the full report for detailed coverage of the fixed income markets of Georgia, Armenia, Azerbaijan, Belarus, Kazakhstan, and Ukraine.