Kernel EBITDA jumps 2.1x yoy in FY2021 on tailwind

Ukraine’s leading sunflower oil producer, farmer and
grain trader Kernel (KER PW, KERPW) reported record high P&L in its annual
results released on Oct. 4. Its FY2021 (ending June 2021) revenue increased 37%
yoy to USD 5,647 mln with all segments going up, mostly due to better prices.
In particular, its oilseed segment revenue increased 13% yoy to USD 1,747 mln
(seed processing decreased 7% yoy to 3.18 mmt), its farming segment revenue
increased 9% yoy (volumes fell 13% yoy) and infrastructure & trading
segment revenue jumped 43% yoy (grain export volumes increased 1% yoy to 8.01
mmt).

The company’s FY2021 EBITDA increased 110% yoy to USD
929 mln, mostly driven by its prop trading company Avere which demonstrated an
“exceptional result” due to high volatility of soft commodity prices. Avere’s
EBITDA increased 9.6x yoy to USD 385 mln (excluding Avere, Kernel’s EBITDA
increased 35% yoy to USD 544 mln). In the oilseed segment, Kernel’s EBITDA fell
63% yoy to USD 56 mln (EBITDA per ton of oil processed fell 59% yoy to USD 41),
which the company attributed to high competition for oilseeds (amid the low
harvest of the last year), as well as trading loss in the last quarter and
one-off losses related to suppliers’ defaults under forward agreements (due to
which, in 4QFY21, Kernel’s EBITDA in the segment was negative). Its EBITDA in
the infrastructure & trading segment (excluding Avere) decreased 37% yoy to
USD 111 mln, again, due to lower margins that resulted from high competition
for decreased harvest volumes in Ukraine. Kernel’s farming EBITDA increased
244% yoy to USD 461 mln, due to better prices last year, as well as due to high
prices and the current season’s high harvest of early crops (which led to IAS
41 gain of USD 133 mln).

Kernel’s net profit increased 335% yoy to USD 513 mln,
and the company expects to distribute 7% of it in dividends (USD 35.6 mln, up
0.9% yoy, implying DPS of USD 0.44). The company has already spent USD 50 mln
on its share buyback program in September (purchasing 3.84% of shares), out of
a total announced program of USD 250 mln for two years.

Its operating cash flow before working capital changes
increased 86% yoy to USD 786 mln and net cash generated from operations
increased 71% yoy to USD 460 mln. Its cash used for investment activities was
broadly flat yoy at USD 205 mln in FY2021. In the next year, Kernel expects to
spend USD 265 mln for CapEx.

The company’s end-June net debt amounted to USD 836
mln (including USD 324 mln in capitalized lease liabilities), down 15% yoy. Its
net debt to EBITDA ratio improved to 0.90x as of end-June, from 2.21x a year
ago.

In FY2022, the company plans to increase oilseed
crushing volumes 16% yoy to 3.7 mmt due to an increase of its crushing capacity
(with the commissioning of a brand new plant in western Ukraine) and an
expected 24% higher sunflower seed harvest in Ukraine this season. In the oil
segment, the company expects better margins due to a decrease in competition
for seeds and a lack of one-off writedowns. A record grain harvest in Ukraine
will allow the company to increase grain export volumes (it expects volumes to
increase to 11 mmt, or 37% more yoy in FY2022) and preserve strong results in
the segment. At the same time, Kernel expects no more exceptional results of
Avere. In the farming segment, the company expects to benefit from its bumper
harvest and still strong soft commodity prices.

Alexander Paraschiy: The company’s EBITDA exceeded market expectations and our estimate of USD 738-749 mln, but the positive surprise is mostly driven by a
good grain trading conditions. The reported year was exceptional for Kernel,
with the farming segment and Avere generating 91% of the company’s EBITDA (vs.
39% a year ago). Most likely, in the next year, the key growing segments will
be oilseed and infrastructure, while the company’s EBITDA in farming and prop
trading will “normalize” significantly. We estimate Kernel’s FY2022 EBITDA will
be close to USD 560 mln, excluding Avere operations. We keep our neutral view
on KERPW bonds.