Analytics -> Kernel (WSE:KER)

10 November 2015

Kernel: strong results in FY2015, question is how far they are sustainable

Key Financials

USD k 2015 2014 2013 2012
Sales 2 329 507 2 393 251 2 796 752 2 071 810
Gross Profit 512 234 408 167 450 621 457 374
EBITDA 396 600 223 000 287 500 318 800
EBITDA margin, % 17% 9% 10% 15%
Net Profit 95 533 -107 406 105 253 210 782
30.06.15 30.06.14 30.06.13 30.06.12
Total Assets 1 465 618 1 919 022 2 361 632 2 116 393
Fixed Assets 807 060 1 046 493 1 271 547 997 992
Current Assets 658 558 872 529 1 090 085 1 118 401
Inventory 305 327 482 363 517 229 563 520
Cash 129 121 65 400 78 819 82 529
Equity 890 844 1 030 686 1 352 269 1 210 701
Debt 462 518 743 167 725 244 692 830
2015 2014 2013 2012
Net Operating CF 404 723 82 472 303 871 -23 991
Financing CF -309 824 6 868 -47 432 225 480
Investing CF -24 305 -83 210 -266 053 -229 236

As expected after interim financials publications Kernel demonstrated quite good operating and financial results in its FY2015 (which ended 30.06.15). The company keeps to its leading positions as the largest oilseeds crusher in Ukraine and one of the leading grains traders in Black Sea region. Having made significant investments into infrastructure and built vertically integrated business structure, as debt burden of the company has never been on higher than average level, up to the moment the company seems to be resilient to negative developments: either to weak operating performance of some of its business directions (like negative results of farming business in FY2014) or to negative macro/market developments.

In FY2015 Kernel revenues in money terms were close to the level of previous year (at USD 2.3 bln), two main business direction – bulk sunflower oil (SFO) production and grains trade accounted for close to 47% of total realization each, while realization in other directions – farming, port terminals and silo services – have been mainly Intragroup. For main business directions increased volumes in natural terms compensated for decline in realization price, resulting in stable in money terms sales.

Following good sunflower seeds (SFS) harvest in Ukraine in Y2013 and lower than expected (taking into account increase of crushing capacities during last years) competition (due to lack of WC financing sources availability for some market players), SFS crushing volumes of Kernel increased from 2.3mt in previous year up to 2.5mt. As a rule crushing volumes grow in a season following to the season of good harvest, so their volatility is the highest in 2nd and 3rd calendar quarters (1st and 4th quarters of corresponding marketing years). It is proven by considerable decrease of Kernel production in Q12016 (-17% in crushing volumes to Q1 2015): as MY2014/15 harvest made 10.1mt vs. 11.1mt in previous year, ending stocks of MY2014/15 have been relatively low. Despite this fact (low crushing volumes in Q1 2016) management of Kernel expects total crushing volume to grow to 2.7mt in FY2016. It is to be achieved mainly by signing of tolling agreement with 3rd party crusher (reportedly Kreativ, which de-facto has bankrupted not so long ago).

Profitability of SFS crushing operations significantly increased in FY2015 vs. previous year:
FY2015 2H2015 1H2015 FY2014 FY2013 FY2012 FY2011
EBITDA margin 17.5% 16.2% 19.0% 14.0% 11.3% 14.0% 15.2%

Increase of Kernel crushing margin and, correspondingly, EBITDA margin for SFO business direction took place amid increased total production capacities on the market. Main reasons of such growth have been ample raw materials and mentioned lack of working capital for certain competitors. Also margin increase can be partially related to UAH devaluation. In any case we do not expect reported in last season margin to be fully sustainable, forecasting it to be in 10-15% range, similar to FYs2011-14. EBITDA of bulk SFO direction made USD 192.6M; assuming EBITDA margin at 14% as “normal” margin on this market, under stated sales volumes EBITDA would be USD 154M (so that close to USD 38.5M of EBITDA in FY2015 can not be regarded as sustainable).

Grains trading business. Against a background of record harvests in both Ukraine and Russia, volumes of Kernel grains trading business increased from 4.2mt in FY2014 up to 4.7mt in last season (with stable revenues in money terms, as grains prices in USD terms declined by 10-12% on average). Dynamics of trading volumes during last years looked as follows:
FY2015 FY2014 FY2013 FY2012 FY2011
Grains sales, k tons 4744 4244 3022 2123 1810
Export terminals capacity 4822 3926 3209 1809 2114

Generally grains sales in natural terms increased in line with export terminals capacities.

More than 30% of total volumes to grains trading business in FY2015 was supplied by own farming division.

During last two years grains trading EBITDA margin has been stable at close to 5.6%. Margin has been supported by good availability of grains in both countries (good harvest) and both (Russian and Ukrainian) national currencies devaluation. We do not expect margin at close to USD 13 per ton (which was the case during last two FYs under favorable business environment) to be sustainable (under average assumptions, assuming trading positions of the company are hedged), most likely to is to decrease to below USD 10 per ton level. Assuming EBITDA per ton at USD 8, total EBITDA of Grains Trading direction (assuming stable realization volumes) in FY2015 would be close to USD 40.0M (-USD 21.5M to actually demonstrated level).

Farming division showed significantly better results vs. previous year with EBITDA reaching USD 97.9M (vs. -44.3M in FY2014). One should mention that low result of previous year was mostly connected with aggressive accounting applied to biological assets revaluation in Y2013 (profits reallocation from FY2014 to FY2013) and high drying expenses following rainy weather in autumn of 2013 calendar year (profit reallocation from Farming to silo direction, as drying services were provided by own silos):
Silo services FY2015 FY2014 FY2013 FY2012
Grains and oilseeds received in inland silos 2523 2586 1737 2059
Revenues, USD M 42.4 74.5 46.4 51.0
Intragroup revenues, USD M 34.7 46.9 27.4 19.7
Share of Intragroup in total 81.8% 63.0% 59.1% 38.6%
EBITDA, USD M 18.3 39.2 19.4 18.0

As for accounting policy in Farming, in a view of favorable market during FYs2012-13 the company made more optimistic assumptions for biological assets revaluation in both FY2012 and FY2013 (vs. FY2011):
FY2013 FY2012 FY2011
ha value, USD M per 1 ha ha value, USD M per 1 ha ha value, USD M per 1 ha
Corn 162k 119 730 59k 45 760 27k 16 590
SFS 104k 57 550 38k 21 550 28k 15 540
Soybeans 61k 34 560 55k 27 490 29k 10 340
Wheat 33k 18 550 58k 27 470 54k 21 390
TOTAL 389k 240 620 245k 147 600 181k 93 510
Cash cost 183 480 107 440 77 430

As a result, the company overstated its Farming division EBITDA for FYs2012-13 and understated EBITDA for FY2014, profit was redistributed to previous years as profit from biological assets revaluation. We see that this redistributed profit was close to USD 35.0M, which, along with higher drying expenses in FY2014, means close to zero real EBITDA of farming operations in FY2014 (influenced by low yields reported by the company and by decrease of market prices). During last two years the company returned to more conservative policy of biological assets revaluation, which resulted in more sustainable financial results.

As one can see in two last seasons the company increased its yields per 1 ha vs. previous two years:
Season 2015/2016 2014/2015 2013/2014 2012/2013 2011/2012
Sunflower seeds

With estimated average cash cost per 1 ha at close to USD 600 we see such operating performance during last two seasons as acceptable. The company relates to middle-cost producers with average expenses on inputs and, therefore average yields. Basing on current market prices and stated average cost per 1 ha, we expect total EBITDA at close to USD 120M for Kernel Farming division in new season with wheat and sunflower seeds being the most profitable crops (because of good harvest).

Financial results of Export Terminals business direction during last years have been good and in line with terminals throughput increase:
FY2015 FY2014 FY2013 FY2012 FY2011
Terminal throughput, k tons 48223926320918092114
Revenues, USD M 5546492933
EBITDA USD M 3727271814

EBITDA per 1 ton has been close to USD 10 and relatively stable, so results can be seen as sustainable.

Performance of Silo direction depends on weather conditions during harvesting campaign, at that, taking into account the fact that in FY2015 share of revenues reached 82% of total, it is just redistribution of profits from Farming business direction. Moreover, taking into account actual cash cost of silo services, for the company in general dry weather with lower Farming direction expenses on silo services (and lower result of Silo division) is more beneficial vs. reverse situation (high drying expenses and lower profit of Farming, at that better result of Silo services). Along with it extensive silo network remains important part of vertically integrated structure of the group, which is one of its competitive advantages.

So, coming back to consolidated figures, general profitability of the company (on EBITDA level) during last years have been as follows:
FY2015 FY2014 FY2013 FY2012
EBITDA margin, % 17.0% 9.3% 10.3% 15.4%

Basing on separate business units of Kernel profitability analysis, we can conclude that out of total value of EBITDA in FY2015 at USD 396.6M close to USD 60-65.0M can not be regarded as sustainable, so adjusted in such a manner EBITDA would be USD 330.0M, EBITDA margin – 14%. Even taking into account such downward adjustment we see operating and financial performance of Kernel in FY2015 as rather strong.

Balance sheet structure of the company remains acceptable as historically debt burden of the company has never been high, while FX risk (loan portfolio of Kernel is fully denominated in USD) is hedged by export operations, which comprise major part of total sales of the company.

In FY2015 the company was concentrated on its liquidity and debt repayment (during financial year Kernel repaid around USD 310M of its debt), while new investments were minimized (which is perceived as right strategy, first of all taking into account generally unstable situation in Ukraine).

As of 30.06.15 main financial ratios of Kernel looked as follows (all ratios are acceptable):

  • Net Debt/ adj. EBITDA – 1.0x
  • Debt/Equity – 0.5x
  • Debt/Sales – 20%

Future plans of the company imply two main points: consolidation of oilseeds crushing industry in Ukraine and increase of grains export volumes. Actually Kernel has already started to realize its first objective in new season: basing on available information one of the largest oilseeds crusher in Ukraine – company Kreativ – experienced significant financial difficulties (factually bankrupted). Not so long ago basing on open market information official owners of this company have changed and new ones (represented by Mr. Rysbek Toktomushev) started to find partners to resume operations of crushing facilities. Firstly Kreativ signed tolling agreement with Kernel for crushing of 200k tons of oilseeds, but according to latest information tolling operations will be continued during the whole season.

Moreover we see Kernel as main potential buyer of Kreativ assets, in case new owners of latter company will manage restructuring of its debts to Ukrainian state banks and pull of international creditors. Until that time, as direct involvement of Kernel into operations of Kreativ is unlikely (first of all from Kernel reputation point of view), crushing operations will be realized on tolling scheme.

As for second objective – to double export volumes vs. FY2014 level – fulfillment, the company is working on the project to expand its export terminal facilities in Ukraine (taking into account favorable middle- and long- term outlook on Ukrainian potential to increase general grains yields, development of export infrastructure can be seen as one of main factors of future export volumes increase).

As a summary, taking into account strong balance sheet structure and quality of the company, good assets base and orientation on export operations (which hedges FX risk) makes us believe in good perspectives of Kernel, we see good potential for future development of the company.

Company Price, USD Market Cap Change,%

Type Price Weekly change,% Annual change,%
Wheat CBOT
Iron Ore
Crude Oil

Currency Rate Weekly change,% Annual change,%