Fitch affirms B+ rating for Kernel

Fitch Ratings affirmed its B+ long-term issuer default
rating of Ukrainian sunflower oil producer and grain trader Kernel (KER PW,
KERPW) and stable outlook for the rating, according to the agency’s October 19
press release. The rating approval was despite “a leverage spike and weak
operating results expected for financial year ended June 2018 due to a
challenging operating environment,” the agency said. At the same time, it
expects “a rebound in profits and an improvement in leverage, due to Kernel’s
expansion plans and strong support from the group relationship banks”. And
Kernel has “limited execution risk” in its expansion plans, according to agency
findings.

The agency’s rating affirmation was based on key
assumptions which include expectations about EBITDA increasing to USD 460 mln
in FY2022, CapEx spending near USD 240 mln in period FY2019-2022, and a stable
dividends payment at an amount of USD 20 mln p.a.

Andriy Perederey: The key
point of Kernel’s rating affirmation is the agency’s expectation of an improved
sunflower seed market environment, where it observed an excess of crushing
capacities and shortfall of seed supply. The company’s operating environment
improvement depends on opening access to regions with smaller capacity
utilization and infrastructure strengthening.  Such factors will allow
Kernel to increase crop trade volumes and process more sunflower seeds with a
higher margin. And such improvements need strong CapEx spending.

We support Fitch’s view that Kernel’s expansion
plans will result in a profits rebound in case of successful implementation. So
far, we believe that the company’s rating, which is two notches above the
sovereign rating, looks justified.