Kernel
Emitents -> Kernel (WSE:KER)
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  • 20 April 2017 - Q3 FY2017 operating report
  • 30 May 2017 - Q3 FY2017 financial report

Business description

Kernel is the largest sunflower oil producer in the region, one of leading grains exporters from Russia and Ukraine and also one of the largest Ukrainian farming groups. The company owns and operates extensive agricultural logistics assets base including silos and port terminal facilities, its land bank is 390k ha.

Total sunflower seeds (SFS) crushing capacity of the company is about 3.5M tons per annum (8 crushing plants). After purchase of a new crusher in Ukraine and sell of two crushers in Russia, at the moment all crushing facilities of Kernel are located in Ukraine. Crusher purchased in FY2016 - asset which belonged to bakrupted group Kreativ. Kernel purchased debt of one of Kreativ entities to state-owned Ukrgasbank (with crusher as collateral), transaction can be seen as not fully transparent.

In FY2016 (July’15-June’16) total crushing volume made 2.7M tons, sunflower oil (SFO) production – 1.2M tons (more than 7% of total world SFO production). 90% of total SFO produced is exported in bulk to India, China, Middle East and other destinations, sunflower meal (SFM) is exported mostly to EU countries (For information: on average 1 ton of SFS contains 440kg of SFO and 390kg of SFM). Approximately 10% of Kernel SFO production is bottled and realized in Ukraine by three own brands and private labels.

In Grains trading positions of Kernel are also quite strong, as with 4.4M tons of grains exported in FY2016 the company accounts for 9-10% of total export from Ukraine and 4% from Russia. In Ukraine Kernel owns grain export terminal with annual capacity of 4M tons, while in Russia it owns 50% stake in Taman grain terminal (Kernel’s share of capacity – 2.0Mt; partner for this project is Glencore). Both ports are deep water facilities.

With land bank of 390k ha (FY2016), Kernel is number two farming company is Ukraine (after Ukrlandfarming, with MHP close behind). Main cultivated crops are corn (40-50% of total), sunflower seeds, soybeans and wheat. Because of natural restrictions on maximum share of sunflower seeds in total sown area (up to 20%), Farming division provides only 6-7% of total SFO production division necessity in raw materials. Along with it with close to 1.6M tons of grains produced, own crop production secures more than 35% of total annual grains export. In addition, 2.8M tons of silo capacity provide significant support to both farming division and in grains trading business as origination units.

As for geography of business, large oilseeds crushing plants are situated in Poltava, Kharkiv, Mykolaiv, Kirovograd and Odessa regions, land bank – mainly in Kharkiv, Poltava, Khmelnitskiy, Chernigiv and Kiev regions. The company has no assets in zone of conflict in the East of Ukraine.

Since November’07 Kernel has been listed on WSE under the ticker symbol KER. Current free float is – 61%. Shares of Kernel Holding are included into main index of WSE - WIG30.

Operating Figures

H1 2017 H1 2016 .. 2016 2015 2014 2013
SFS crushing volumes, k tons 1 188 1 333 2 685 2 523 2 315 2 300
Sales of bulk SFO, k tons 503 455 984 1 030 920 1 040
Grains export sales, k tons 2 706 2 250 4 409 4 744 4 244 3 022

Sown area distribution and yields for main crops are represented in table below:

Season 2016/2017 2015/2016 2014/2015 2013/2014 2012/2013 2011/2012
Corn
Sown area, ha 138 300157 112185 016162 00057 00027 500
Yield per 1 ha, tons 8.97.37.15.54.67.1
Wheat
Sown area, ha 82 00072 80830 79234 00060 50053 400
Yield per 1 ha, tons 6.05.15.44.33.43.7
Sunflower seeds
Sown area, ha 81 40057 48069 744103 00038 00028 000
Yield per 1 ha, tons 3.02.72.52.11.72.1
Soybeans
Sown area, ha 58 20065 14466 54461 00054 00029 000
Yield per 1 ha, tons 2.81.81.81.41.31.9
Total sown area, ha 380 400383 200372 852389 000246 776182 333

Kernel is middle-cost producer with average cost per 1 ha and therefore average yields, basing on company information focus of Farming division is on cost efficiency.

Land bank of the company increased substantially in FY2013 following acquisition of sizable Ukrainian farming producer Druzhba Nova (with close to 110k ha land bank).

Financial information

USD k H1 2017 H1 2016 .. 2016 2015 2014 2013
Sales 1 043 344 998 693 1 988 520 2 329 507 2 393 251 2 796 752
Gross Profit 251 792 239 796 460 180 512 234 408 167 450 621
EBITDA 202 200 200 200 346 400 396 600 223 000 287 500
EBITDA margin, % 19.4% 20.0% 17% 17% 9% 10%
Net Profit 161 298 141 817 226 844 95 533 -107 406 105 253
31.12.16 .. 30.06.16 30.06.15 30.06.14 30.06.13
Total Assets 1 920 548 - 1 509 355 1 465 618 1 919 022 2 361 632
Fixed Assets 765 497 - 788 888 807 060 1 046 493 1 271 547
Current Assets 1 155 051 - 720 467 658 558 872 529 1 090 085
Inventory 644 066 - 390 525 305 327 482 363 517 229
Cash 68 906 - 60 372 129 121 65 400 78 819
Equity 1 091 972 - 997 055 890 844 1 030 686 1 352 269
Debt 619 183 - 319 666 462 518 743 167 725 244
H1 2017 H1 2016 .. 2016 2015 2014 2013
Net Operating CF -217 619 -100 730 133 723 404 723 82 472 303 871
Financing CF 273 050 113 257 -134 469 -309 824 6 868 -47 432
Dividends paid 0 0 -19 921 -19 921 0 0
Net Borrowings 266 793 113 257 -114 548 -289 903 6 868 -45 061
Investing CF -50 441 -23 761 -60 732 -24 305 -83 210 -266 053

Latest financial report of the company

Comments to financials:

  • During last three years Kernel revenues have been declining (main reason of this fact – decrease of grains&oilseeds prices on the world market, while in natural terms volumes of operations grew).
  • Oilseeds crushing and Grains trading directions remain main revenues generators of Kernel (more than 90% of total proceeds of the company are export sales), but during last period of time changes happened in the structure of profit centers:
    USD mln H1 2017 H1 2016 .. FY2016 FY2015 FY2014
    Oilseeds crushing
    Sales 544 541 1 134 1 214 1 211
    EBITDA 47.4 68.3 128.8 213.1 177.8
    EBITDA margin, % 9% 12% 11% 18% 15%
    Grains trading
    Sales 477 435 822 1 053 1 053
    EBITDA 15.3 21.6 46.3 59.4 59.4
    EBITDA margin, % 3.2% 5.0% 5.6% 5.6% 5.6%
    Farming
    Sales 271 342 358 310 290
    EBITDA 133.6 90.2 146.0 97.9 -44.3
    EBITDA margin, % 49.3% 26.4% 40.8% 31.5% -15.3%
    Export terminals
    Sales 28.9 26.6 57.3 55.3 45.5
    EBITDA 24.0 17.0 37.5 36.8 27.3
    EBITDA margin, % 83.0% 63.9% 65.4% 66.5% 60.0%
    Silo
    Sales 42.7 31.2 38.2 42.4 74.5
    EBITDA 30.1 20.6 23.4 18.3 39.2
    EBITDA margin, % 70.5% 66.0% 61.3% 43.2% 52.6%
  • Despite record-high crushing volumes in FY2016 (reached due to purchase of ex-Kreativ crusher), sales of sunflower oil in bulk decreased vs. previous year (from 1 030k tons to 984k tons). Main reason – management decided to shift realization of oil from Q4 FY2016 to Q1 FY2017 (so in Q4 FY2016 sunflower oil sales in tons declined by 26% y-o-y). Total segment’s revenues in FY2016 made USD 1 134M vs. USD 1 214M in previous year.
  • Because of significant competition among crushers which led to shortage of raw materials (sunflower seeds) on the market, in the first quarter of new financial year crushing volumes of Kernel have been rather low. In Q2 situation improved – with new harvest of sunflower seeds coming to the market (sunflower seeds in Ukraine are mainly harvested in September-October), raw materials supply largely increased, so that total volume of sunflower seeds crush has been close to record-high level of Q2 FY2016:

    Kernel quarterly sunflower seeds crushing Q2 FY2017

  • In last quarter crushers of the group worked with almost 100% capacity utilization. Segment’s revenues in H1 FY2017 remained on the level of previous year (at slightly above USD 540M).
  • High competition among crushers for raw materials (in current marketing year crushing capacities in Ukraine are estimated at above 18M tons, while record-high sunflower seeds harvest in Y2016 made 13.6M tons) led to decrease of margins as well. In FY2016 segment’s EBITDA margin made 11% vs. 17% a year ago, in Q1 FY2017 – 7.2%, which is the lowest margin for the last years. In Q2 after new sunflower seeds crop came to the market, margin grew up to 9.4%, but we do not expect its further growth.
  • Management of Kernel as well expects that margin is to be low for extended period of time until small producers will be forced to leave the market (factually Kernel plans to participate in market consolidation process, intending to purchase additional crushing capacities of up to 1.5M tons). On the other side, as raw materials stock of the company as of 31.12.16 has been significantly higher vs. last year’s (USD 237.2M vs. USD 113.3M), we expect that crushing volumes in Q3 can be better y-o-y, which should provide for general improvement of operating performance.
  • Volume of Kernel grains realization in H1 FY2017 made 2 707k tons, by 20% higher y-o-y. It positively influenced sales volume in money terms as well – they made USD 476.8M (by 9.6% higher y-o-y), though EBITDA margin decreased to 3.2% vs. last year’s 5%. Grains sales dynamics in Ukraine has been better vs. Russian one (despite record-high grains crop in Russia, pace of export is below expectations, largely because of RUR revaluation, which led to decline in grains prices nominated in RUR).
  • Results of Terminals business direction during last reporting periods have been good, they represent stable source of income for the company. In H1 FY2017 total export terminal throughput volume of the company made 3.055M tons of grains (2.863M tons a year ago). Dynamics during last years looked as follows:
  • Kernel export terminals grains transshipment volumes
  • As for financial results, segment’s EBITDA in H1 FY2017 made USD 24M, by 41% higher y-o-y. In general we expect certain decrease of port terminals profitability in Ukraine, as quite a lot of new capacities is to be launched in short- and middle-term. Despite this fact terminals remain key for grains trading business and despite expected decrease of margins this business segment remains attractive for new investments in Ukraine. Kernel itself starts large expansion projects for its facilities, aiming to double capacities of its terminal in Chernomorsk from current 4.0M tons of grains per annum.
  • Good results were shown by silo segment as well (in H1 FY2017 EBITDA made USD 30M vs. USD 20.6M a year ago), reasons – good grains&oilseeds harvest in Ukraine in current season along with more rainfalls during harvesting period vs. previous seasons.
  • Because of good harvest Farming division will be main profits-generator of the Group in the current financial year. During H1 FY2017 sales of the segment have been somewhat slower vs. previous year (USD 271.2M vs. USD 341.5M in H1 FY2016). Despite this fact EBITDA was higher – USD 133.6M (vs. USD 90.2M a year ago).
  • On positive side for the company is the fact that it sold part of its harvest before start of the season on forward terms (as an example, pre-season corn prices have been by USD 10-20/t higher vs. prices during the season), which should positively influence profitability of operations. On negative side – as of 31.12.16 16k ha of corn (more than 10% of total corn planted area) has not been harvested yet, which can negatively influence segment’s financial performance. In any case we maintain our view that EBITDA margin of Kernel Farming segment in current season will be not lower than 40%. EBITDA of the segment in money terms is to make about USD 160-170M.
  • We also expect that total EBITDA of the company in new financial year is to make close to USD 350M. For the future we expect some worsening of Farming division performance (vs. current season records), terminals performance can also somewhat worsen, along with it, in medium-term oilseeds crush margin can increase. As a result, under base case conditions in FY2018 we can preliminary forecast EBITDA at about USD 300-320M.
  • Main y-o-y changes in Kernel assets structure in last reporting period were related to higher Inventory and VAT Receivables volumes. As of 31.12.16 Inventory (including biological assets) made USD 644M vs. 463M a year ago, main reason of increase - higher sunflower seeds stock (most likely as a reaction to increased competition for raw materials among Ukrainian oilseeds crushers). VAT Receivables grew by close to USD 50M y-o-y (up to USD 200M), mainly as a result of changes in Ukrainian VAT legislation in Y2016.
  • Other important constituents of Current Assets as of 31.12.16 were Trade Receivables (USD 125.4M) and prepayments to suppliers (USD 81.2M).
  • Important for assets quality estimation is the fact that as of 31.12.16 non-current assets of the company included about USD 120M of goodwill.
  • Financing structure of the company remains quite good. After recent Eurobonds issuance (USD 500M with 5 years tenor) maturity profile of Kernel debt improved as well. Current Debt/Equity ratio (noting debt is on its seasonal peak level) of Kernel is close to 0.6x, Equity (USD 1 091M as of 31.12.16) exceeds Fixed Assets and is main source of assets financing in general, financial position of the company is clearly good. In addition current adjusted Net Debt/EBITDA ratio Is close to 1.6x.
  • The company is well-posed for new investments (plans involve twofold increase of grains terminal capacities, land bank extension (up to 200k ha), purchase of new oilseeds crushing capacities).

As a summary, we see current financial standing of Kernel as acceptable. On positive side – good balance sheet structure and quality, dominance of export proceeds in total sales (hedging FX risk), good fixed assets base. Main risks are increase of competition between Ukrainian crushers, volatility of crops yields in future years and country risk.

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