Kernel to buy a large crushing plant at decent price

Ukraine’s government decided to allow Ukrgazbank, a state bank, to sell its ownership right in the Ellada vegetable oil plant to Kernel (KER PW) for USD 96.7 mln, Interfax-Ukraine reported on Feb. 11. Kernel will have to immediately pay 50% of the value, and the pay the balance within the next five years.

Ellada plant, with an annual processing capacity of about 1 mmt of sunflower seeds, was pledged under a loan to Ukrgazbank by Creative holding, which is now insolvent. Cretative owes Ukrgazbank USD 86 mln in debt and USD 10.8 mln in overdue interest. Tender to sell the debt was conducted in December 2015, and Kernel’s subsidiary was the single bidder.

According to Interfax, Delloitte&Touche estimated the value of the plant at USD 36 mln. Kernel has provided no comment on this news.

Alexander Paraschiy: The deal looks like a bargain for Kernel, a headache for the largest state banks, Oschadbank (OSCHAD) and Ukreximbank (EXIMUK), and a potential loss for the state budget.

By this decision, the government has completely resolved a debt issue (worth USD 96 mln) of its minor bank, Ukrgazbank, but escalated the debt problem (worth about USD 400 mln) of its two key banks. Creative owes to state Oschadbank and Ukreximbank about USD 300 mln and USD 100 mln, respectively, according to media reports. After Ellada, Creative’s flagship asset, has sold, it will be hard for other creditors to recover any value from remaining Creative’s debt, we believe. The government’s decision, therefore, looks sub-optimal for the government. That said, we believe there is chance that the deal will be cancelled.

We estimate that the newly acquired plant would be able to produce for Kernel around 410 kt of sunflower oil p.a. Having the minimum assumed EBITDA of USD 90-100 per ton of sunflower oil, the plant could potentially generate around USD 37-41 mln of EBITDA p.a. Kernel’s stock trades at 3.6x EV/EBITDA currently. This values Ellada at USD 133-148 mln (or about USD 110 mln assuming the plant’s capacity load is 80%). This compares favorably to the present value of Kernel’s possible investment in Ellada of around USD 82 mln. If the deal is finalized, Kernel’s share in Ukraine’s sunflower oil market would increase from 21% to 30%.