Kernel increases EBITDA 2% yoy in 2QFY16 on strong farming

Ukraine’s largest sunflower oil producer and one of its leading grain traders, Kernel (KER PW) increased its EBITDA 2% yoy to USD 145 mln in 2QFY16 (Oct. – Dec. 2015), according to its financial report published on Feb.26. Kernel’s EBITDA slid 10% yoy to USD 200 mln in 1HFY16.

 

The quarterly result was driven by a strong financial performance from the farming segment (its EBITDA grew 70% yoy to USD 74 mln during the quarter), which more than offset the EBITDA decrease in Kernel’s core bulk oil segment of -38% yoy to USD 35 mln (implying  an EBITDA per ton of USD 119, -41% yoy).

 

Kernel attributed the superb farming result to cheaper energy, labor and land lease costs (in dollar terms) amid comparable yoy farming crop yields. Income from the VAT subsidy also drove the segment’s EBITDA. In particular, the company generated USD 23 mln from the subsidy in 1HFY16 (at least USD 20 mln generated in 2QFY16, we estimate), compared to USD 7 mln in 1HFY15.

 

The weak crushing margin was attributed to farmers’ slow sunflower seed sales during the quarter and the negative impact of tolling agreements on the average crushing margin.

 

The company’s CapEx for the first half of FY2016 slightly increased to USD 18 mln compared to USD 14 mln a year ago. Net interest-bearing debt fell 37% yoy to USD 466 mln as of end-2015, and up 20% qoq due to seasonal investments into working capital.

 

As an additional announcement on Feb. 26, Kernel reported that it had entered on Feb. 25 into a binding agreement to acquire an oilseed crushing plant for USD 95.8 mln, payable in arrears over five years. The production facility has a crushing capacity of 560 kt of sunflower seed per year, Kernel reported. Currently, Kernel operates at the facility through a tolling agreement.

 

Roman Topolyuk: We explain Kernel’s margin squeeze in its key business segment, production of sunflower oil (on the top of some negative impact from tolling agreement) with the ongoing hryvnia devaluation, which causes farmers to remain reluctant to actively sell the sunflower seeds. This is subject to reversal later in the season and once hryvnia stabilizes. Acquisition of the plant, which has been operated according to a tolling agreement, will also contribute to the expected recovery of the margin.

 

Farming’s strong performance during the quarter is also the result of VAT subsidies’ recognition in 2QFY16 by Kernel in the amount close to what the company used to generate in the full financial year.

 

The disclosed sunflower seed crushing capacity of the purchased plant came in at 560 kt, which is lower than what we had estimated (1,000 kt). We estimate the plant will contribute close to USD 98 mln to Kernel’s value (based on assumed EBITDA of the plant of USD 25 mln p.a. and Kernel’s multiple of 3.9x EV/EBITDA) while the present value of purchase costs could range USD 70 – USD 80 mln, depending on the exact payment schedule.