Kernel lowers projection of FY2016 crushing margin

Kernel’s management (KER PW) adjusted its guidance on FY2016 crushing margin to USD 100-115 per ton of sunflower oil during a conference call with investors held on May 31, down from USD 120-130/t it guided previously. The company attributed its decision to farmers’ unusually slow sales of sunflower seed this year and tolling payments for a 560 kt production facility that diluted the margins. According to management, the profitability of sunflower oil production may recover in the next financial year from a strong sunflower harvest expected in FY2017 and the normalization of farmers’ selling patterns.

The company left its FY2016 EBITDA guidance for its farming segment unchanged at USD 130 mln (+33% yoy), after it earned USD 123 mln in 9MFY16, having sold most of its agricultural produce harvested in FY2016.

Kernel CEO Andrey Verevskiy admitted during the call that the company is underleveraged currently, in his view, having a net debt/EBITDA ratio at around 0.8x compared to an optimal level of 1.5-2.0x. Kernel will be searching for new M&A opportunities, aiming to increase its crushing capacities or land bank, he said. Kernel may sign another tolling agreement for an additional 264 kt crushing capacities in FY2017, he said.

Roman Topolyuk: Accounting for management’s new projections, we now see the company’s EBITDA at USD 357 mln in FY2016 (-10% yoy), 3% lower from our previous estimate of USD 370 mln. This also implies a forward EV/EBITDA multiple of 3.7x for Kernel’s stock based on FY2016 EBITDA, which offers quite an attractive valuation, in our view. We affirm our BUY recommendation for Kernel stock.