Kernel intends to construct second grain terminal in Illichivsk

Ukraine’s leading sunflower oil producer and grain trader Kernel (KER PW) is planning to construct a second grain transshipment terminal in the port city of Illichivsk on the Black Sea, CEO Andrey Verevskiy told investors during an Oct. 22 conference call. The investment will require USD 100 mln in CapEx; construction will start in six months, to be possibly completed in another 12-18 months, according to preliminary plans. The capacity of the new transshipment facility will be 3 mmt of grain annually, and Kernel expects volumes will surpass 2.5 mmt shortly after the terminal’s launch.

Verevskiy said that the company is considering new acquisitions, worth USD 100-150 mln, though he doesn’t expect any M&A deal to be closed in FY2016.

Currently, Kernel operates two deep-water sea export terminals, with its Illichivsk operations having 4.0 mmt capacity and Taman operations in Russia, in which Kernel has 50 percent equity, having an attributable capacity of 1.5 mmt. In FY2015, Kernel reloaded 3.6 mmt of grain through its Illichivsk terminal, having earned USD 10/t.

CapEx in FY2016 will reach USD 40 mln, compared to USD 25 mln in FY2015, while estimated working capital outflows might reach USD 60-70 mln, Verevskiy said during the conference call.

Previously, in its annual report, management stated it expects total FY2016 seed crushing volumes to increase 7% yoy to 2.7 mmt, while it expects grain trading and export terminal reloading volumes to remain in line with its FY2015 results.

Roman Topolyuk: The new terminal, once constructed and timely launched, might contribute to the company’s EBITDA starting FY2017. In addition to cash flows generated from transshipment, we expect the project will enable Kernel to boost its grain trading volumes. Based on our rough estimates, the discounted payback period of this project would be below four years.

Accounting for USD 70 mln in working capital investment and USD 40 mln in CapEx, we project Kernel’s net debt of USD 186 mln by the end of FY2016 (-47% yoy). Than means Kernel is set to continue its deleveraging process and improve its capital structure before making possible acquisitions of new assets. Meanwhile, we project Kernel’s net debt-to-EBITDA will drop to 0.5x next year from 0.9x as end-FY2015. Overall, we reiterate our bullish view of the stock.