Kernel becomes Ukraines largest listed farmer with 330 ths ha

Kernel (KER PW) entered into a call option agreement to purchase two farming companies with a total landbank of 119.2 ths ha and 330 kt in storage facilities, the company announced on Friday. A 79.2 ths ha farming company is located in Khmelnitsk region close to Kernel’s Chortkiv sugar plant and existing operations at the Enselco farm. Another 40.0 ths ha farm is located in Poltava region. The company will pay USD 98 mln in cash for the companies and bear USD 82 mln in borrowings of the acquired entities. Kernel valued the lease rights at USD 79 mln during acquisition. The company plans to harvest 100 ths ha of acquired land this year and estimates the new assets will contrinute USD 45 mln into EBITDA for FY2013.  Following the acquisitions, Kernel’s landbank stands at 330 ths ha and storage capacity at 2.7 mln mt, the largest figures for listed Ukrainian companies.

Yegor Samusenko: With an acquisition multiple of USD 660/ha for lease rights only, or USD 1,224/ha net of storage assets, the acquisition looks value-added for Kernel. Though smaller peers report acquisition multiples below this, we believe the price Kernel paid more than justifies the premium for the size and potential synergy from its own sugar beets availability close to the sugar plant (we estimate synergy effect of USD 400-800/ha per annum from that, under efficient sugar beet planting). We deem the quality of the land in Khmelnitsk and Poltava regions as above the country’s average and estimate the fair value of large-scale agricultural operations in this region at USD 1,800/ha and USD 2,800/ha, respectively, which brings the fair value of acquired assets at USD 290 mln (not accounting for potential synergies with other business lines, i.e. grain trading) vs. the deal-implied EV of USD 180 mln.