Kernel EBITDA more than doubles in July-Sept. 2018

Ukraine’s largest sunflower oil producer Kernel (KER PW,
KERPW) reported EBITDA of USD 100.6 mln in 1QFY19 (July-Sept. 2018), a 2.18x
yoy jump and 3.46x qoq surge, according to its financial report published on
Nov. 29. The company’s key segment, bulk oil production, generated EBITDA of
USD 13.9 mln (a 17.3% yoy drop and 9.7% qoq decline), while its bottled
sunflower oil segment contributed USD 2.2 mln to EBITDA (a 47.6% plunge yoy and
21.4% qoq drop) in 1QFY19. Also, Kernel’s EBITDA per ton of bulk sunflower oil
decreased 13.3% yoy (and  6.9% qoq) to USD 37.1/t in 1QFY19. The company’s
farming segment generated EBITDA of USD 52.8 mln (a 3.9x yoy and 34.4% qoq
increase), while its grain trading segment contributed USD 24.2 mln to EBITDA,
or a 15.1x yoy surge.

The company’s net profit advanced 3.3x yoy to USD 75.5
mln in 1QFY19. Its net debt was USD 686.1 mln on Sept. 30 (vs. USD 506.5 mln a
year ago) and its net debt-to-LTM EBITDA ratio stood at 2.5x as of
end-September.

Kernel also updated on the results of its farming
campaign. Its corn yield surged 45.7% yoy to 9.8 t/ha, while its wheat yield
rose 5.8% yoy to 5.2 t/ha. Its sunflower yield rose to 3.2 t/ha, or a 36.7% yoy
advance, and its soybean yield jumped 70.1% yoy to 3.0 t/ha.

Andriy Perederey: The
company’s key EBITDA drivers were its farming and trading segments, which
generated 77% of its EBITDA in 1QFY19. Its oil segment’s EBITDA margin
decreased due to a supply gap of sunflower seed with the previous high-deficit
season. For the current season, the company had estimated a record sunflower
seed harvest at around 16.0 mmt, though the actual harvest is around 13.8 mmt
of sunflower seed, according an Agrarian Ministry report.
We expect an improvement of Kernel’s sunflower oil EBITDA margin to 40-45 USD/t
in 2QFY19, but we see its EBITDA margin ceiling at about 50 USD/t for FY2019.
So we expect that company’s oil segment will generate about USD 70-75 mln in
FY2019 (vs. USD 76 mln in FY2018).

And based on the company’s expectation of its
farming segment EBITDA reaching USD 160 mln, we see that Kernel will be able to
generate about USD 300-310 mln of total EBITDA in FY2019, which is USD 10 mln
higher than our previous expectations and much higher than Kernel generated in
FY2018 (USD 222 mln). We also warn about the poor predictability of the results
of Kernel’s trading subsidiary (an important contributor to EBITDA in 1QFY19)
due to the high risks inherent in trading operations with derivative
instruments.