Kernel enters Russian market with Russian Oils acquisition

Kernel (WSE: KER PW) acquired a 100% interest in Russian Oils, an oilseed crusher, for the latter’s enterprise value of USD 60 mln and a cash consideration in the range of USD 15 mln. While the transaction has already been approved by the Antimonopoly Committee of Russia and a share purchase agreement has been executed between the parties, other conditions must be fulfilled to complete the transaction, which is expected in early September. The acquisition of Russian Oils provides Kernel with additional sunflower seed crushing capacity in the range of 400,000 mt per year at three plants, two in Krasnodar region and one in Stavropol region. Russian Oils also adds oil refining and bottling capacity of 100,000 mt of oil per year. Kernel forecasts the newly acquired operations will add USD 20 mln to the group’s top line for the 2011/12 financial year. Yegor Samusenko: The nominal crushing capacity of these plants is 1,200-1,400 mt of sunflower oilseeds per day, based on different sources. This implies Kernel agreed to pay USD 43-50k per mt of daily capacity, which is almost two times less than Kernel paid for the Black Sea Industries crushing plant in Ukraine, and 6x lower than Kernel’s own EV/Capacity multiple if only oilseed crushing is considered. While the Russian oilseed crushing business has lower marginality due to (1) lower load due to a higher amount of capacity nationwide and (2) higher bargaining power of farmers, as oilseed supplies are lower than capacity, we think Kernel’s move into Russia should be value accretive in the long-term, especially for the multiples paid for this acquisition. In 2011/12E, we expect the newly acquired plant to contribute USD 16 mln in EBITDA (vs. Kernel`s guidance of USD 20 mln), assuming the plants work at 50% capacity utilization (vs. our expectations for Ukrainian operations at 77%).