Kernel purchases 6% stake in sunflower crusher

Ukrainian farmer and leading sunflower oil producer
Kernel (KER PW, KERPW) purchased a 5.85% interest in ViOil Holding Ltd (ViOil),
according to the company’s Feb. 19 announcement. ViOil controls two multi-crushing
plants with a total annual capacity of 1.1 mmt of sunflower seeds and silo
facilities in western Ukraine. The company also said it has “entered into
a customary shareholder agreement in relation to ViOil with its existing
shareholders.”

Andriy Perederey: This is the
second acquisition that Kernel has announced this week. The event may have
important consequences for Kernel’s expansion strategy in its core segment,
sunflower oil. Recall, Kernel had two alternative expansion strategies, with
the first one being the construction of a crushing plant in western Ukraine
with a capacity of 1 mmt, and the second (and more logical) being the
acquisition of a seed processor with total capacities of 1.0-1.5 mmt in western
Ukraine (i.e. ViOil).

In mid-2018, the company announced its intention to
construct a new plant, meaning that the probability of a ViOil purchase nearly
vanished at that time. Moreover, by the end of 1QFY19, Kernel reported that a
large part of its USD 152 mln in supplier commitments is related to the
crushing plant’s construction. However, we believe Kernel is beginning a
long-term acquisition of ViOil, and the key question now is whether the company
will pursue both projects (new capacity and the acquisition of existing ones)
or will choose the ViOil deal as its priority.

At first glance, the deal looks encouraging, but the
information provided by the company so far does not allow us to estimate
whether the potential ViOil acquisition will significantly add value to the
company. Therefore, we expect a neutral reaction from the market to this news.