Kernel revenue rises 2%, EBITDA surges 31% yoy in 1Q16

Ukrainian sunflower oil producer Kernel (KER PW) reported on Nov. 30 a 2% yoy increase in net revenue to USD 384 mln in 1QFY17 started in July. Its 1Q EBITDA increased 31% yoy to USD 72.4 mln. Higher operating profit and the foreign exchange gain on intercompany transactions and borrowings enabled the company to post a bottom line of USD 62.9 mln, which is 2.6x higher yoy.

Revenue in its core segment, bulk oil, fell 7.5% yoy to USD 175.6 mln. EBITDA for the given segment declined 52% yoy to USD 12.6 mln due to poor availability of sunflower seeds in the market in May-June 2016, which translated into expensive carry-over stock.

In its second-largest segment, grain trading, the company reported a 27% yoy increase in grain supplies to 1.2 mmt in 1QFY17, while its revenue rose 13% yoy to USD 200 mln.

The company’s farming segment posted record revenue of USD 146 mln, a 2.6x increase yoy in 1QFY17 with EBITDA at USD 77.7 mln, compared to USD 22.6 mln a year ago. Most of this EBITDA growth was attributable to revaluation of crops in fields and agricultural produce at the moment of harvest as a result of double-digit growth in yields. In addition, USD 30.8 mln in unrealized profits surfaced, owing to intragroup sales of agricultural products. 

The company’s operating cash flow before working capital changes decreased 28% yoy to USD 41.4 mln in 1QFY17. The company’s net debt decreased 16% yoy to USD 326.2 mln, with the net debt/LTM EBITDA ratio standing at 0.87x as of end-September 2016. 

Igor Zholonkivskyi: We expect the market’s reaction to Kernel’s reported 1QFY17 results will be slightly positive. While the company has managed to maintain modest growth in its top line and post solid EBITDA growth yoy due to a solid performance of its farming segment, its operating cash flow has shrunk along with grain and sunflower oil prices during the second half of calendar year 2016. In addition, the deficit on the sunflower seed market has hiked up production costs.

However, Kernel has managed to maintain a healthy balance sheet by keeping its debt ratios in check by deleveraging further. We expect the deficit of sunflower seed – which negatively affected the company’s core bulk oil segment performance during 1QFY17 – will correct itself in the coming quarters on the back of a strong Ukrainian sunflower seed harvest collected this fall (with harvested volumes having risen 25% yoy, according to industry estimates). Therefore, we remain bullish on Kernel stock.