Lacuna | On Site



“I’d say the necessary condition for the existence of bargains is that perception has to be considerably worse than reality. That means the best opportunities are usually found among the things most others won’t do. After all, if everyone feels good about something and is glad to join in, it won’t be bargain-priced.”
– Howard Marks

Hunting for value at the crossroads of Eastern Europe and Western Asia

We recently had the chance to do on the ground due diligence and meet the management of our portfolio holding Georgia Capital in Tbilisi. It was the first field research trip for us since the pandemic hit and after a variety of Zoom/Team/Skype calls to stay in touch with representatives of portfolio companies, it was for sure a good thing to be back on the road.

Georgia Capital, an investment holding that invests in both publicly traded and private businesses in the country of Georgia, might appear as rather atypical investment for healthcare focused investors like us. Our engagement originates from accepting a share exchange deal it offered to take private our original portfolio holding Georgia Healthcare Group in 2019. We accepted the deal to not only stay exposed to our original investment, which we believe is a secular growth story in the context of a continued build-out of the Georgian Healthcare sector, but we wanted to capitalize on the chance of getting exposure to a range of additional quality assets in Georgia’s Banking, Insurance, Renewables, Utilities and Private Education industries.

We didn’t only get the chance to meet Georgia Capital CEO Irakli Gilauri during our trip, who is in our view an outstanding capital allocator, but we were also offered site visits to a flagship hospital as well as a diagnostic laboratory of Georgia Healthcare Group and a Banking branch of SOLO, a sub-unit of affiliate Bank of Georgia. Exchanging with operating subsidiary level business leaders was insightful and our impression was that there are a couple of motives that run like a red thread through the conglomerate: Execute well, grow profitable and optimize capital efficiency.

We remain confident on the value creation taking place at Georgia Capital, but we also got more convinced of the growth longevity of Georgia’s overall economy, which is expected to return to annual real GDP growth rates of 5%+ from FY21 onwards. At current prices, Georgia Capital’s stock trades at c. 40% discount to its NAV and at 7x our estimate of FY21 look-through EBIT, which represents an attractive relative valuation in the face of the underlying growth potential. The interplay of still promising growth runways for most of Georgia Capital’s portfolio holdings and a likely continuation of strong growth in the underlying economy itself, builds a strong foundation for future NAV growth. Additionally, we think the company provides a comfortable way to gain diversified exposure to a fast-growing and well-run small emerging market economy, which is hardly accessible for investors otherwise.

We see this investment as a growth stock trading at the relative valuation of a value stock. The dislocation might be rooted in transient factors like the stock being underfollowed and more generally due to the unwillingness of the mainstream to look for values beyond the comfort zone or in emerging economies in particular. As common sense suggests, the market pendulum might eventually swing back, especially when the company executes on its value realization plans.

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