Kernel reports 1HFY13 financials, slightly revises FY2013 guidance

Kernel, Ukraine’s leading sunflower oil producer, reported its financials for 1HFY13, with its top line growing 49% yoy to USD 1,474 mln. EBITDA rose 6% yoy to USD 158 mln, being traditionally in line with operating cash flow (before working capital changes) at USD 152 mln. The company’s bottom line declined 25% yoy to USD 69 mln, caused mainly by an increase in interest expenses.

Important changes occurred in the company’s balance sheet, as it built up high inventories (up 2.2x, compared to USD 908 mln at the year’s start). The increase was financed by loans, which was reflected in nearly doubled net debt (compared to both Dec. 2011 and June 2012) to USD 1,169 mln. As for the reason behind its high inventories, Kernel reported it intensely purchased grains and sunflower seeds in anticipation of higher prices.

Meanwhile, the company slightly revised its forecast for FY2013: it upgraded its revenue outlook to USD 2,800 mln (vs. 2,400 mln forecasted earlier), while downgrading bottom line forecast to USD 200 mln (from USD 215 mln forecasted earlier). Its EBITDA forecast remained intact at USD 350 mln. The revised outlook suggests the company plans to raise profit 30% yoy and EBITDA 9% yoy, and expects about a 3% decline in profit.

Alexander Paraschiy: The company’s 1HFY13 operating results are in line with market expectations, while its declined bottom line is just a reflection of the company’s changed strategy in its grain-trading business. The company secured credit lines to be able to take big positions in commodities, a new practice that would make its bottom line more volatile, but potentially would create the ability to earn extra profit on the seasonality of commodities.

At the same time, it’s clear from the company’s revised FY2013 outlook that it doesn’t explicitly forecast any gains on its increased position in commodities. This approach of forecasting conservative gains, as part of its new practice, prompts a high probability of a positive surprise. Otherwise, the company’s new strategy looks value-destructive: increased working capital and financial costs at the same level of operating profit is clearly not what the company should be promising its shareholders.