Emitents -> Kernel Holding

Business description

Kernel Holding is the world's largest producer of sunflower oil and one of the leading companies in Ukraine as a whole.

Kernel logo

In the agricultural market of the country, in almost every nomination, Kernel is number one. The number one exporter of grain and sunflower oil, the largest land bank in the country, grain storage facilities, private fleet of grain carriages.

And all this was developed by the owners and management of the company practically from scratch.

Kings of the fat and oil industry

Andrey Verevskiy started his activity in the grain market of Ukraine back in 1993 in Poltava and until 2002 he worked in various positions in Ukrainian and international companies (notably as consulter for Louis Dreyfus). In 2002, the Poltava oil extraction plant was acquired, and in 2004 the company named Kernel was created and more active development of the sunflower processing business began. At first, oilseeds crusher in the Luhansk region was acquired (as well as trade mark "Shchedryi Dar"), and then - in 2006 - the assets of Evrotek group of Mikhail Veselsky (including TM "Stozhar").

In those years, new acquisitions were financed mainly by reinvested profits and bank loans. At the end of the 2007 financial year (June 30, 2007), the group's leverage was significant - total debt amounted to about $ 155 million against revenues of $ 350 million and assets of $ 275 million.

It was risky to further increase leverage, but sources of financing were needed to grow in the high-margin markets, and in 2007 Kernel conducted an IPO on the Warsaw Stock Exchange, selling 38% of the company's shares for $ 218 million (of which $ 152 million was invested into the company). Thus, the group, which owned three oil extraction plants, 56 thousand hectares of land and two dozen elevators, was valued at more than $ 570 million. In early 2008, Kernel made an additional placement of shares, during which it raised another $ 82 million.

Of course, as we now understand, the end of 2007 and the beginning of 2008 was almost the best time for an IPO in the last 20 years, and Kernel was lucky to have high valuation and to attract equity financing, spent on the purchase of grain terminal in Ilyichevsk (with a transshipment capacity of 4 million tons of grain per year), construction of a new MEZ (Bandurka), and the land bank expansion (from 56 thousand hectares to 85 thousand hectares at the end of 2009 financial year). Finally, in 2010, the Allseeds group's sunflower processing business was acquired (purchase price - about $ 70 million), as a result of which Kernel's total oilseeds crushing capacity increased to 2.2 million tonnes of sunflower per year.

Kernel sunflower seeds crush

As a result, Kernel has become the largest sunflower processor and grain exporter in Ukraine.

And again we note the timing of Kernel investments. From 2010 to 2015, the Ukrainian sunflower harvest almost doubled, and sunflower oil began to conquer Asian markets. Sunflower processing in Ukraine was very profitable, which means that the return on Kernel investment was high.

Leading agricultural holding in the country

In 2011, Kernel acquired the Ukrros group, which allowed to increase the company's land bank from 85 thousand hectares to 210 thousand hectares (as well as take a leading position in the Ukrainian sugar market, however, two years later Kernel got rid of the sugar assets). To finance this transaction, as well as the purchase of the Ilyichevsk Oil Extraction Plant and of oil refining assets in Russia, Kernel continued to raise equity capital having made two additional stock placements on the stock exchange (in 2010 - for $ 81 million, in 2011 - for $ 140 million).

Note again that the company did not raise significant amounts of debt to finance investments, and its debt burden remained at an acceptable level. At the same time, Kernel became the only Ukrainian public company whose owner did not retain a controlling stake (Andrey Verevsky had 41% at the end of the 2011 financial year).

Kernel land bank

2012-13 years were very favorable both for grains growing segment (a significant increase in world prices for grains happened in those years) and for oilseeds crush (still good profitability due to not very high competition), which positively affected the payback of the acquired assets. But since July 2013 situation changed.

However, even before that, Kernel carried out perhaps not the most successful acquisition - the Druzhba Nova company was bought with a land bank of 106 thousand hectares. We consider this investment as not the most successful because it was made almost at the peak of the market (Druzhba Nova was bought in April 2013, and in the middle of the same year the global grain market collapsed), also there have been some operational problems during the integration of the new asset into the Kernel structure.

In 2014, the annexation of Crimea by Russia took place, and a military conflict began in the east of Ukraine, which was accompanied by a significant economic crisis. The country risk of Ukraine has grown significantly, so it has become much more difficult for Ukrainian companies to attract new loans and to renew existing ones. In this situation, Kernel froze its development and directed its entire operating cash flow generated by the business to pay off the debt. During the 2015-2016 fiscal years, the company paid off about $ 400 million in debt, reducing it by more than a half.

Another negative market factor was a significant decrease in the sunflower crush margin in Ukraine, which was due to an increase in processing capacity while sunflower crop stopped growing (Ukraine has reached a certain limit on expanding the land bank for sunflower seeds in terms of normal crop rotation).

 sunflower crush margin

However, despite this, its financial year 2017 Kernel started in a good shape (operational and financial). The company began to look for new investment opportunities - firstly, (fruitless) negotiations were held on the purchase of assets of the bankrupt Mriya, but then, two agricultural holdings were purchased - Ukrainian Agrarian Investments (190 thousand hectares) and Agro-Invest Ukraine (28 thousand hectares of land). As a result, Kernel's land bank increased to 600 thousand hectares, and according to this indicator, the group became number one in Ukraine.

To finance new acquisitions, the company issued $ 500M in Eurobonds in 2017. The issue was the first for Ukrainian companies since 2013 and it enjoyed rather good demand among investors.

Funds from the issue of Eurobonds were also used to invest in other segments - in the 2018 financial year, Kernel began construction of new oilseeds crushing plant in Western Ukraine (where the share of sunflower in the crop rotation of farmers is much less vs. other regions of the country, the total planned investment was $ 180 million), as well as the expansion of its grain terminal in Ilyichevsk ($ 140 million investment). Also, Avere, a grain trading company headquartered in Switzerland, began its operations in 2018.

In general, the 2018 fiscal year was not an easy one for Kernel - the profitability of sunflower processing decreased to the lowest level in Ukrainian history, the yields of major grains and oilseeds decreased, while world prices for grains and oilseeds remained at relatively low levels. Kernel ended that year with the lowest profit since 2011.

Kernel profit

* - EBITDA - operating profit excluding depreciation

At the same time, in addition to the construction of a new oil extraction plant and the expansion of the port terminal, the company actively integrated new assets into its structure and was engaged in the restructuring of existing ones.

First, the land bank was optimized, as a result of which it decreased from 600 thousand hectares after the acquisition of UAI and Agro-Invest to 514 thousand hectares. Secondly, the reorganization of the elevator capacities - several elevators were sold and purchased, four more new silos were built. Thirdly, Kernel began to actively develop pre-financing of farmers, as well as all kinds of partnership programs with farmers (for example, Open Agribusiness platform was launched). Finally, the company invested in grain railcars (500 brand-new railcars were purchased in fiscal 2018, then 2,950 old wagons - in 2019). So the group tried to build efficient logistics chains - from the fields to the vessels.

Operating and financial results have already improved in 2019. The profitability of sunflower processing slightly recovered, in the farming yields of major crops increased to record levels, Kernel also significantly increased its grain exports - from 4.6 million tons in the previous financial year to 6.1 million tons. The group's total revenue in FY2019 reached $ 3.9 billion, EBITDA - $ 346 million, net profit - $ 179 million.

New age

2020 has been quite successful for the company.

Sunflower seeds crush reached a record level of 3.4 million tonnes, crushing margin increased from $ 67 per ton of oil sold to $ 100 / ton, as a result, the segment's EBITDA increased to $ 152 million.

Kernel launched its new grain terminal, which increased the company's port terminals throughput capacity to 8.8 million tonnes per year (while the group got rid of its Russian port assets). In 2020, Kernel handled 6.7 million tons of grain through its terminals, while total exports amounted to 7.9 million tons (with a market share of 14%). Segment EBITDA doubled from the previous fiscal year to $ 216 million.

In the segment of grain growing, the results have slightly deteriorated compared to last year. Due to a slight decrease in yields, as well as a gradual increase in the cost of growing grain, the segment's EBITDA decreased by 26% compared to last year to $ 134 million.

Key financials of Kernel Holding for the 2020 financial year (July 2019 - June 2020): revenue of $ 4.1 billion, EBITDA of $ 443 million (which is also a record for the entire history of the company), net profit of $ 118 million.

2021 also promises to be successful, despite declining yields of major grains and oilseeds in Ukraine. First, the yield decline for Kernel was lower compared to many competitors and the average for the country. Secondly, the rise in prices on the world grain and sunflower oil market in Q4 2020 - Q1 2021 should positively affect the profitability of all segments of the group.

Due to significant investments in recent years, the debt burden has grown - at the beginning of 2021 the company's net debt was around $ 1 billion (excluding land lease obligations). So in our opinion, it is very important for the group now to maintain a focus on business efficiency and to adequately balance the speed of its development with the overall financial stability (historically Kernel coped with this task excellently).

Key operating figures

2020 2019 2018 2017
Sunflower seeds crush, k tons 3 436 3 164 3 136 2 959
Sunflower oil sales, k tons 1 518 1 619 1 420 1 207
Grains export, k tons 7 902 6 094 4 646 5 060

Sown area and key crops yield:

Season 2020/2021 2019/2020 2018/2019 2017/2018 2016/2017
Sown area, ha 255 000231 000222 000204 000138 300
Yield per 1 ha, tons
Sown area, ha 73 00097 000100 000146 00082 000
Yield per 1 ha, tons
Sunflower seeds
Sown area, ha 149 000137 000132 000134 00081 400
Yield per 1 ha, tons
Total land bank, ha 510 000514 000550 000600 000390 000

Kernel belongs to the middle cost agro-producers, which means a fairly average cost of growing products per hectare, as well as average yields of main crops compared to competitors.

Financial information*

$ mln 2020 2019 2018 2017
Net revenues 4 107 3 960 2 403 2 169
Gross margin 462 334 160 443
EBITDA 443 346 223 319
EBITDA margin, % 11% 9% 9% 15%
Net profit 123 179 56 176
30.06.20 30.06.19 30.06.18 30.06.17
Total Assets 3 165 2 464 2 211 2 009
Fixed Assets 1 634 1 207 1 006 888
Current assets 1 531 1 256 1 204 1 120
Inventory 555 667 675 643
Cash 369 77 132 143
Equity 1 494 1 346 1 178 1 157
Debt 966 769 751 655
2020 2019 2018 2017
Operating CF 269 199 82 77
Financing CF 226 30 77 173
Dividends -21 -20 -20 -20
Net borrowings 246 50 97 193
Investing CF -203 -241 -156 -223

*-Financial year of Kernel starts in July and finishes in June

Latest Kernel Holding financial report


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