Kernel revises FY16 guidance, provides details on new crushing asset

The management of Ukraine’s largest sunflower oil producer Kernel (KER PW) held a Feb. 26 conference call following the release of its 2QFY16 report (for Oct.-Dec. 2015) and its announcement of its acquisition of a 560 kt sunflower seed crushing plant, the binding agreement for which was signed on Feb. 25. The plant’s seller was state Ukrgazbank, according to a Feb. 11 Interfax report.

Andrey Verevskiy, the company’s board chairman and owner of a 39.2% stake, commented that the acquisition of the crushing asset will bring synergies to the company, which already operates a comparable sunflower crushing plant in the Kirovohrad region, where the target asset is located. Firstly, the purchase of a competitor will increase Kernel’s market power in the region, improving its ability to negotiate better sunflower seed prices. Secondly, the company will be able to share and dilute administrative and other fixed costs such as seed procurement. About USD 140-150 mln in CapEx and 2-2.5 years would be required to construct a similar new facility, Verevskiy said.

Kernel expects to operate the purchased asset based on its existing tolling agreement till the end of the production season, Verevskiy said. As of September, Kernel expects to operate the plant as its own subsidiary, at around 90% capacity load. The company hasn’t disclosed the counterparty of the tolling agreement. Meanwhile, Kernel is studying other crushing assets in Ukraine for possible acquisition.

Verevskiy guided on the crushing margin for FY2016 (ending June 2016), estimating it in the range of USD 120-130/t of oil (compared to USD 187/t in FY2015). He attributed the yoy decline of the margin to the reluctance of farmers to sell sunflower seed and the negative impact of tolling on margins. The company reiterated its plan to crush 2.7 mmt of sunflower seeds in FY2016 (+8% yoy).

Meanwhile, the ongoing hryvnia devaluation and farming improvements have served as the grounds for the upgraded guidance on EBITDA in the farming segment, from flat yoy (at USD 98 mln in FY2015) to USD 130 mln in FY2016,

Roman Topolyuk: The acquisition of the new plant is a positive development for Kernel since it will enable the company to support its crushing margin through strengthening its market position. At an EV/EBITDA multiple of 3.9x before the announcement, a 4.3x multiple currently (according to consensus estimates), and possible annual EBITDA that the asset can generate at USD 25 mln, we estimate its market value at around USD 98-108 mln. Meanwhile, we estimate the present value of purchase costs at USD 64 mln.

Taking into account management’s revised guidance, we expect the company to generate EBITDA of USD 366 mln in FY2016 (ending in June 2016), compared to Bloomberg consensus estimate of USD 346 mln.