Kernel Group’s revenues decline 23% yoy in 1H10

Kernel Group (WSE: KER PW), one of Ukraine’s largest domestic grain and vegetable oil producers, released its financials for the first half of its 2010 financial year this morning. According to the document, the group’s revenues declined by 22.6% yoy to USD 512.5 mln as EBITDA slid by 13.7% yoy to USD 91.8 mln, which translates into an EBITDA margin of 17.9% (+1.8 pp yoy). The company’s net profit grew 23.7% yoy to USD 82.4 mln, which raised Kernel’s 1H10 net margin by 6.1 pp yoy to 16.1%. Net debt grew 87% yoy to USD 350.4 mln, assuming (adjusted for full FY2010 EBITDA guidance) net debt/EBITDA ratio of 1.8x vs. 1.0x a year ago. Ruslan Patlavskyy:  Despite the output increase in all Kernel’s business segments in 1H10 (bottled oil: +12.4% yoy, bulk oil:+36.0% yoy, grain handling: +16.7% yoy, grain: +11.5% yoy and silo services: +25.2% yoy), the 32% and 34% yoy declines in average bulk sunflower oil and grain prices respectively were the major contributors to the 22.6% yoy decreases in revenues. At the same time, we would highlight that though the 41% yoy growth in the group’s total debt to USD 400.7 mln, its net finance costs declined by 62% yoy to USD 8.9 mln, serving as one of the drivers of the company’s 24% yoy bottom line growth. Given the reported results, certain  seasonality of Kernel’s business, and fragile sunoil price dynamics in January-April 2010, we believe that the management’s FY 2010 guidance (revenues: USD 1.05 bln (+0.3% yoy), EBITDA: USD 195 mln (+2.6% yoy) and net income: USD 155 mln (+17% yoy)) could be reviewed downward. The exception might be its net income forecast as currently banks’ declining lending rates should curb Kernel’s financial cost growth in 2H10.