Kernel Q1 2016 financial report in line with expectations

As was expected basing on recent Q1 operating report of Kernel, financial performance of the company worsened vs. corresponding period of previous year, which mainly resulting from high base effect along with decrease of agricultural commodities prices vs. corresponding period of previous year.

Total revenues decreased by 35% vs. Q1 2015 to USD 377.7 mln with relatively stable EBITDA margin at close to 14% resulting in EBITDA of USD 55.1M (vs. USD 80.5M in Q1 2015). As before bulk sunflower oil (SFO) production and grains trading accounted for main part of proceeds (close to 45% each). Realization of bulk SFO in Q1 2016 made USD 170M, by 27% lower than in corresponding period of previous year, mainly driven by decrease of crushing volume in naturals terms, resulted from relatively low stocks in the end of last marketing year. The company plans to compensate it in further periods of FY2016 by tolling operations at Kreativ assets (Kreativ one of the largest Ukrainian crushers, which factually bankrupted in current year). In addition total sunflower seeds harvest in Ukraine made close to 11.0mt vs. 10.1mt in previous season, so availability of seeds on the market should be higher (along with it crushing capacities keep growing). EBITDA margin of crushing operations after significant growth in previous year (17.5% for the whole FY2015, we see main reasons as effect from UAH devaluation and ample raw materials, while part of crushers had working capital shortages) returned to more sustainable levels of close to 13%, so was fully anticipated.

Total grains trading volume in Q1 2016 made 927.4kmt, by 24% lower than in Q1 2015 (due to prices decline realization in money terms decreased by 39%). The company explains it by lower availability of grains supply by farmers (largely due to devaluation expectations), along with it, total grains export statistics for Ukraine and Russia was better, so we can assume also more company-specific reasons of significant trading volumes decrease. EBITDA of trading operations has been at USD 11.2 per 1 ton, which we see as rather good level (EBITDA margin at 5.9%), close to previous season levels. Such profitability can be not fully sustainable in the future (especially bearing in mind good harvest in both Russia and Ukraine in last two years).

As for Farming operations, in its report the company confirmed level of its yield for late crops at 7.3 tons per 1 ha for corn, 2.7 tons per 1 ha for sunflower seeds. It is positive, taking into account influence of negative weather conditions for late crops in August. EBITDA of farming operations in 1Q2016 made USD 16.0M. Also quite important factor is the fact that winter crops of FY2017 are mainly in good conditions (according to report), which is not the case for Ukraine in general (because of draught during sowing campaign in several regions).

So, in general financial results of the group in Q1 2016 have been in line with our expectations. Balance Sheet structure remains relatively stable with no significant changes during Q1. Having good market positions, the company is posed to demonstrate acceptable results in the future.

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Company Price, USD Market Cap Change,%
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Kernel
Ferrexpo
Astarta
Ovostar

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Corn CBOT
Wheat CBOT
Iron Ore
Crude Oil

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