Kernel EBITDA falls 6% yoy in 9MFY17

The 3QFY17 EBITDA for Kernel (KER PW, KERPW), Ukraine’s largest sunflower oil producer, dropped 19% yoy to USD 80.8 mln as increased competition among the company’s key business segments resulted in lower sales volumes.  The 9MFY17 EBITDA fell 6% yoy to USD 283 mln. The 9MFY17 revenue increased by 3.3% yoy to USD 1,659 mln, while net income posted a decline of 17.3% yoy to USD 192 mln

The 3QFY17 EBITDA in the bulk oil segment dropped by 22.3% to USD 26 mln. 9MFY17 EBITDA decreased 27.5% yoy to USD 66 mln. The grain trading segment reported even a larger decline with 9MFY17 plummeting 52% to USD 21 mln.

The export terminals and silo services segment posted a traditionally solid performance with 9MFY17 EBITDA increasing respectively 25.1% and 63.7% yoy  to USD 36 mln and 39 mln.

The oilseed crushing volumes remained mostly flat in 9MFY17 at 2.05 mt (vs 2.04 mt last year).

As of end-March 2017, the company’s net debt stood at USD 370 mln (vs USD 305 mln last year), while its net debt / EBITDA ratio increased to 1.1x (vs 0.8x last year).

Igor Zholonkivskyi:  As seed crushing capacities increased in Ukraine from 10 mt to 16 mt during the last 3 years, the competition has grown considerably, which resulted in lower profitability in Kernel’s key bulk oil segment. This is a “new normal” business environment for Kernel which is likely to persist in the foreseeable future.   We expect the company’s FY2017 EBITDA to be in USD 325 mln – USD 335 mln range (vs USD 346 mln in FY2016), which should allow the company to comfortably service its debt.   If and when the company manages to acquire an additional 150,000 ha land bank, this can potentially add about USD 40 mln to its EBITDA, which however, will be to a large extent offset by the complete phasing out of government VAT subsidies for agricultural companies.  Whether or not the company will be able to increase oil seed crushing capacities in the coming years is not clear – despite zero or even negative profitability many medium and small seed crushing plant owners are generally reluctant to sell their assets. 

As such, we have a neutral outlook on KER PW stock as we do not see a reassuring growth story for Kernel that would push its stock much higher in the mid-term perspective.