Analysis of Bank of Georgia Group PLC

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Please read the disclaimer here:http://greedydragoninvestment.blogspot.com/p/about-greedy-dragon.html. Enjoy the article, bitches!

Whaddup, my fellow value investing aficionados. Welcome back to another stock analysis. It has been a long fucking time since I did one of these. Between studying for the CFA level III exam, work, and Netflix, I barely had the time (nor the motivation, frankly) to find new investment opportunities.

Speaking of the CFA, your boy got his bitch made ass handed to him. I had a hard time articulating the answers in my head for the essay session, I was fucking around writing and erasing the answers to the first four questions (there were 10 questions) for 2 hours before giving up and taking a nap like I used to do way back when I was a delinquent in high-school. I will go ahead and chalk up my first failure in the CFA programme as a “learning experience.” Anyway, y’all didn’t come here to hear me bitch, so let’s get down to business.

Bank of Georgia Group PLC is listed on the London Stock Exchange, and is recently trading around 17 Pounds per share with market capitalization of approximately 820 million Pounds. In this article I will attempt to analyze the country risk of Georgia and the fundamentals of Bank of Georgia Group.

Update on the Greedy Dragon portfolio: Since my last article, I bought 200 shares in Barclays at USD10.00 per share, 350 shares in Cloud Peak Energy at USD2.62 per share, 15,000 shares in Huayang at RM0.48 per share, and 200 shares in Qudian at USD6.11 per share. I also sold 1,000 shares of Northern Oil and Gas, 500 shares at USD2.88 per share and another 500 shares at USD3.65 per share.

Country Analysis

Georgia is situated in the Caucasus, between Russia and Turkey. Not the best of neighborhoods if you ask me. A worrying trend is the continued seizure of territory by Russia, which now occupies 20% of Georgia’s internationally recognized territory (source: Business Insider). According to the article, Russia has also warned that the admittance of Georgia into NATO could provoke a terrible conflict. From an investor’s perspective, the political risk of investing in Georgia is substantial.

Georgia has a population of about 3.7 million and GDP per capita of around USD4,300. According to The World Bank, the Georgian  economy expanded at a healthy pace of 4.8% in 2017. The services sector contributed 66.2% of GDP, while industry and agriculture contributed 23.4% and 9.6% respectively (source: Index Mundi). I think about half of the country’s labour force works in the agriculture sector.

The country is ranked as the 16th freest in Heritage’s 2018 Index of Economic Freedom.If y’all know anything about me, few things give me a hard-on like a country which strives for economic freedom.

According to the Ministry of Finance of Georgia, Government debt-to-GDP stood at 44.7% as at end-2017, which is manageable. However, investors need to pay attention to external Government debt-to-GDP, which stood at 35.3% as it could become significant in the event of a sharp depreciation in the Georgian Lari. Overall, I think that Government debt is at a manageable level.

Georgia had an estimated budget deficit of 3.9% in 2017 (source: Index Mundi), which is certainly something to keep an eye on going forward.

Georgia’s inflation rate stood at 6% in 2017 (source: Statista), but has moderated to below 3% in recent months (source: Trading Economics).To effectively compare investment opportunities from different countries, it is important to adjust revenue/profit growth, return on equity, and the earnings yield (inverse P/E) by the difference in inflation rates.

The unemployment rate is rather high, standing at 13.9% in 2017 (although it is improving, and is at the lowest point since 2004); the youth unemployment rate stood at 27.1% in 2017 and has also been improving (source: Trading Economics).
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To summarize the country analysis for Georgia, it has significant potential for growth given its low GDP per capita. Its free market policies is also a breath of fresh air in a world mired by socialism a.k.a economic AIDS. If left alone, I’m confident that Georgia will thrive. However, I gotta be honest, the political risks and high unemployment rate are a turnoff.

Fundamentals

The fundamentals and valuation of Bank of Georgia Group is like waking up at 11 am on a Saturday morning, lazing in bed for an hour or two, then going to grab a huge lunch. In other words, they are pretty damn good.

The Group undertook a demerger of its investment business earlier in the year, so we will be focusing solely on its banking business in our analysis.

The banking business posted solid return on average equity of between 21.9%-25.2% in 2015-2017.

Net profit increased 19.3% yoy in 2017 with cumulative net profit of the retail banking and corporate banking businesses standing at GEL 355.6 million.

However, net profit for 1H18 decreased 13.4% to GEL 147.7 million due to net non-recurring items of GEL 47.0 million as well as higher taxes attributed to GEL 30.3 million one-off impact of re-measurement of deferred tax balances, partially offset by a GEL 8.0 million demerger related corporate income tax gain. Profit before non-recurring items and tax increased 27.8% to GEL 231.2 million.

Client deposits & notes rose 26.9% and 24.7% yoy in 1H18 and 2017 respectively to GEL 7.2 billion and GEL 6.7 billion respectively.

Net interest margin stood at between 7.3% and 7.7% in the past 3 years, while impairment charge on average loans to customers stood at between 2.1%-2.9%. Non-performing loans to gross loans to clients stood at 3%, and the Bank of Georgia Group had a non-performing loans coverage ratio of 110.5%.

As at 30 June 2018, the Bank of Georgia Group had a tier 1 capital adequacy ratio of 12.5%; the minimum required tier 1 capital adequacy ratio was 9.9%. Bank of Georgia Group’s liquidity coverage ratio stood at 129.8% as at 30 June 2018, which is above the minimum required liquidity coverage ratio of 100%.

Loans in local currency accounted for 41.7% of the total loan book as at 30 June 2018, while client deposits in local currency represented 37.9% of total client deposits. It is important for investors to monitor the gap between foreign currency assets and foreign currency liabilities; some really fucked up things can happen if the gap grows too wide on either side. Asset-liability matching, bitches.

According to my very rough calculations, trailing twelve months earnings per share stood at GEL 8.0 per share after adjusting for one-off items and the issuance of 9.8 million Bank of Georgia Group Shares to Georgia Capital in relation to the demerger exercise. At the time of writing, 8.0 GEL is about 2.36 Pounds. Given Bank of Georgia Group’s closing price of 17.07 Pounds on 28 September 2018, the stock will have a P/E ratio of around 7.2 times (according to my potentially flawed math anyway), which I find attractive.

Overall, I really like the prospects of both the country of Georgia and the Bank of Georgia Group, and I may take a position in the stock in the near future. However, it’s not a stock that I would bet the farm on. Alright, we have come to the end of the article. My next article will be a performance report for the Greedy Dragon portfolio. I can’t believe five years have flown by just like that. Anyway, thank you for sticking around with me through these five years, all seven of you. Take care and stay rational.

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