16.Oct .2020 10:00

Refinancing risks mount for the upcoming bond maturity – Georgian Railway

Refinancing risks mount for the upcoming bond maturity – Georgian Railway
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Although COVID-19 related disruptions haven’t significantly affected Georgian Railway’s largest revenue category - freight transportation – other segments have come under significant pressure during the first half of 2020, particularly in 2Q20. After growing 7.4% y/y in 1Q20, GR’s revenue dropped by 15.2% y/y in 2Q20. Revenue from passenger traffic, freight handling and freight car rental, which together accounted for 25% of 2019 revenue, almost halved in 2Q20. In contrast, freight transportation and logistics service segments turned out to be more resilient revenue streams for the company. GR generated US$ 37.0mn in adjusted EBITDA in 1H20, up 3.0% y/y. Weaker GEL has pushed up company’s profitability margins as most of the revenue is USD denominated, while most of the operating expenses are incurred in GEL. GR is facing Eurobond maturity in 2022 and considering poor financial position of the company, securing financing at favorable terms might become difficult.

Despite the ongoing disruptions to global supply chains due to COVID-19 pandemic, transportation volumes going through Georgia have posted positive trends in 2020. Road transportation, which accounts for c. 70% of total freight going through Georgia, has increased marginally, up 1.1% to 19.1mn tons in 8M20, while freight transported by railway posted a strong 4.6% y/y growth in the same period.

Georgian Railway generated US$ 80.8mn in revenue in 1H20, which is 5.1% lower compared to the same period last year. Strong growth in revenue in 1Q20 (+7.4% y/y to US$ 42.0mn), mostly helped by robust performance in the first two months of the year, was not enough to offset the sharp decline in GR’s 2Q20 revenue, which was down 15.2% y/y to US$ 39.0mn. Importantly, freight transportation, the largest revenue category, was down by a marginal 1.6% y/y to US$ 53.2mn in 1H20 as transportation volumes remained strong (discussed below).

Passenger traffic was the hardest hit segment, down 59.4% y/y to US$ 1.7mn in 1H20. Notably, most of the decline occurred during 2Q20, as passenger transportation was stopped by government during March-June 2020 due to COVID-19 (revenue plummeted to below US$ 0.2mn in 2Q20 vs. US$ 2.4mn in 2Q19).

Freight handing, which is the second largest revenue category for the company, was up 4.5%% y/y to US$ 11.6mn in 1H20, however the growth was entirely stemming from strong performance in the first quarter, when revenue more than doubled (to US$ 6.2mn). Freight handling revenue dropped 31.5% y/y in 2Q20. Freight car rental revenue category also experienced sharp decline in 2Q20 (- 63.2% y/y). On a positive note, logistics service revenue increased in both quarters of the year, with the revenue up 12.2% y/y to US$ 9.5mn in 1H20.

Weak GEL contributed to the improvement of the company’s profitability margins. GR generated US$ 37.0mn in adjusted EBITDA in 1H20, up 3.0% y/y. As the company generates most of its revenue in USD, while most of the operating expenses are GEL denominated (GR’s operating expenses were down 10.5% y/y in 1H20 in USD terms and up 0.5% y/y in GEL terms) the company’s profitability margins improved in 1H20. Adjusted EBITDA margin came in at 45.8% in 1H20, compared to 42.2% in 1H19.