15 November 2011
Kernel (KER PW) yesterday reported revenues of USD 392 mln (up 13% y-o-y) for its 1Q11/12 ended on September 30, 2011. EBITDA declined 33% y-o-y to USD 45 mln, and net income decreased 6% y-o-y to 32.0 mln. Management attributed the profit decline to uncertainty in grain exports, which led to a net operating loss of USD 5.4 mln. The loss was due to a bet that early export duties would be removed (and thus aggressive grain purchases) which has not materialized and resulted in close to a zero operating margin in its grain trading segment, and due to an inability to meet quality on a one rapeseed contract, which forced Kernel to cancel delivery and post a USD 5 mln loss on the contract. In its bulk oil segment, Kernel`s sales grew at moderate 5% y-o-y, mainly due to 55% growth in prices, while the volume decline was attributed to an abnormally high base in 1Q10/11, because the company had been selling high bulk oil inventories following its acquisition of Allseeds in 4Q09/10. The operating margin in its bulk oil segment was flat y-o-y in 1Q11/12 at 13%. Yegor Samusenko: We deem the posted declines in EBITDA as a one-off event due to its bet on the removal of early export duties. Following cancellation of the duties, we expect Kernel to continue exporting grain at a more typical 7%-12% EBITDA margin, which combined with historically high grain volumes available for export this season should keep Kernel’s EBITDA margin for the segment at 10% for the full year. We are positively surprised by the strong margins in its bottled oil segment and that sugar sales were 25% above the current price, which should have a strong impact on its margin in 2Q-3Q11/12. This however is somewhat mitigated by low margins in its farming segment, which the company positions as a key growth segment in the future, but so far is unable to show high operating efficiency. All in all, we slightly upgrade our projections for 2011/12 to USD 2,436 mln in revenues (up from management guidance of USD 2,300 mln) and USD 409 mln in EBITDA (vs. USD 370 mln).