Kernel bulk oil sales fall 18%, grain sales up 57% in 9M14

Grain trader and sunflower oil producer Kernel (KER PW) reported its operating update for FY3Q14 (Jan-Mar 2014) on April 18. Its bulk oil sales increased 52% yoy and 1% qoq in the quarter to 264 kt. The average price of sunflower oil fell 25% yoy (and 4% qoq) to USD 866/t in 3QFY14. Kernel’s grain trading operations doubled yoy to 1.31 mmt in the quarter. The company processed 709 kt of sunflower seeds for the period, 4% higher yoy but 2% lower qoq. Export terminal throughput increased 66% qoq to 1.04 mmt (-18% qoq).

The quarterly result implies that in 9MFY14, bulk oil sales decreased 18% yoy to 622 kt, seeds crushing decreased 12% yoy to 1.67 mmt, while grain trading operations advanced 57% yoy to 3.53 mmt on the record grain harvest in Ukraine last season. Export terminal throughput grew 19% yoy to 3.09 mmt.

The company also announced a significant increase in its crop farming operations this season: it reported on good conditions of its winter crops on 34 kha and revealed its plan to plant 345 kha with spring crops. This represents a 54% yoy increase in farming operations compared to the last year (when 247 kha were harvested).

Alexander Paraschiy: The 3QFY14 operating results indicate the company maintained a high capacity crushing load for the second consecutive quarter and is catching up compared to the extremely poor yoy result demonstrated in 1QFY14. While the company’s operating margin in 3QFY14 could have been better, due to the depreciation of the local currency (as of most of Kernel’s costs are in hryvnia), we do not expect the company will be able to meet its full-year EBITDA guidance of USD 250 mln. The February-March hryvnia devaluation should also cause a one-off negative effect on Kernel’s bottom line of about USD 60 mln owing to devalued VAT receivables, which are denominated in the local currency (UAH 1.9 bln as of end-December 2013).

Since the company has significantly increased its farming operations, we believe its farming segment has a good chance to become the core bottom line driver in the next season. Though, we have to admit that much will depend on progress in the efficiency of its farming operations: historically, the company was not able to demonstrate good results, but we believe the ongoing planting season may offer positive surprises.