26 February 2016
Basing on report of Kernel, financial performance of the company in Q2 2016 improved vs. previous quarter with increased realization volumes (mainly due to oilseeds tolling operations at Kreativ asset) and operating margin (explained by high share of own farming production intragroup realization in reporting period). Expectedly crushing margin remains much lower vs. previous year.
Total revenues in Q2 2016 made USD 621M (vs. USD 377.7M in previous quarter and USD 652.5M in corresponding period of previous year). EBITDA made 145.1M, operating cash outflow - at USD 60.2M (due to seasonal factors – sunflower seeds purchasing campaign, a year ago operating cash outflow made USD 80M). Main event after reporting date has been indirect purchase of the largest asset of bankrupted Kreativ (through purchase of Kreativ entity debt to state-owned Ukrgazbank), which is considered as not fully transparent transaction on the side of sellers.
Quarterly oilseeds crushing volumes reached 915.4k tons vs. 700.4k tons in corresponding period of previous year (+31%) and 417.9k tons in previous quarter. Partially it took place because of tolling operations on a/m Kreativ crusher. Along with it SFO (sunflower oil) sales increased just by 7% (vs. Q2 2015), which resulted in larger ending SFO stocks. Crushing margin made just 11% (13% in Q1; 17.5% in Y2015), main reasons – influence of tolling operations (which are logically less marginal vs. general operations) and rather tight market conditions with seeds shortage at the beginning of season and as farmers preferred not to sell its harvest hedging its FX risks with USD-denominated assets. In any case previous year’s margin has been considered by us as not sustainable. As total current season’s sunflower seeds harvest in Ukraine made close to 11.0M tons (vs. 10.1M tons in previous season), in following quarters availability of seeds on the market should be higher (potentially resulting in somewhat higher crushing margins).
Total grains trading volume in Q2 2016 made 1.323M tons, just by 6% lower than in Q2 2015 (due to prices decline realization in money terms decreased by 17%, in Q1 2015 decline made 39%, so sales dynamics improved) with lower EBITDA margin (4.3% in reporting quarter, which means USD 8.5 per 1 ton). Market situation remains rather challenging in a view of general grains oversupply on the world market and Ukrainian domestic problems (large share of grey market and a/m unwillingness of farmers to sell their crops hedging FX risks with grains and oilseeds stocks).
Farming operations made the largest effect on EBITDA of the company in last reporting period, as management of the group decided to increase sales of internally produced grains and oilseeds. Traditionally intragroup share of Farming division revenues is more than 85%, in Q2 2016 total (including intragroup) Farming realization made USD 285.3M (vs. USD 144.7M in corresponding period of FY2015 and USD 56.2 in previous quarter). Taking into account total Farming division sales in FY2015 made USD 310.4M, it means that unlike previous seasons, Farming direction realized almost all its crops in 1H of financial year, boosting 1H EBITDA. As Farming division EBITDA margin (26% in Q2 2016, no changes vs. Q2 2015) is relatively (vs. Grains trading or Oilseeds crushing) high, it made significant positive influence on Kernel’s EBITDA in general. So, in Q2 2016 total EBITDA of Kernel made USD 145.1 M (thereof USD 74.2M – provided by Farming division), in Q2 2015 corresponding figure was USD 142.3 M (Farnimg - USD 43.6M, so Farming result had much lower impact on total EBITDA). So basing on our analysis we expect that total profitability of the company will decrease in following quarters. Our estimation of target EBITDA for FY2016 is USD 350-360M.