3 June 2016
Financial performance of Kernel in Q3 2016 has been slightly better than expected despite continuing slide of crushing margins in Ukraine. As main part of Kernel production is exported, which provides natural hedge of FX risk related to foreign currency nominated indebtedness, while debt burden historically has never been high, financial standing of Kernel remains rather good.
Total revenues in Q3 2016 made USD 607.5M, approximately on the level of both previous quarter and corresponding quarter of previous year. EBITDA made 98.9M (by approximately USD 25-30M higher vs. our expectations because of better performance in Grains and Farming segments), operating cash inflow - at USD 200.3M (due to generally good performance and seasonal factors), which was directed to bank loans repayments and investment activity (notably, first installment related to purchase of ex-Kreativ crusher ).
Quarterly oilseeds crushing volumes have been on the level of Q3 2015, but in a view of large volumes in previous quarter, total bulk SFO realization in reporting quarter made 320k tons, by 28% higher than in Q3 2015 and by 8% higher than in Q2 2016. Due to 10% average realization price decline vs. Q3 2015, in money terms sales grew by 13.6% (up to USD 317M). EBITDA margin in oilseeds crushing made 10.6% in reporting period (for 9m – 11.4%, so margin continues its slide, as competition for raw materials in current season is high, while sales of sunflower seeds by farmers is rather slow). In a view of increase of sunflower seeds plantation in new season in Ukraine, currently record-high harvest of this crop is expected, along with it, market crushing capacities are also growing, so that competition for raw materials is to be high as well. On the other side, full integration of ex-Kreativ crusher into Kernel group will have positive effect on the margin (as tolling operations have been less profitable).
Total grains trading volume in Q3 2016 made record-high 1.4M tons, driven by increase of Kernel transshipment capacities in Ukraine and accelerated grains sales following reinstatement of VAT refunds on grains export since 01.01.2016. VAT regime changes also led to short-term improvement in grains trading margin (EBITDA per 1 ton in last reporting quarter made USD 15 vs. USD 10.8 in previous one), so that total Grains segment EBITDA (USD 21.3M) was higher than previously anticipated by us (USD 10-12M).
Despite main part of Kernel harvest was sold by Farming direction (mainly Intragroup) in previous quarters (along with profits for crops sold, EBITDA of Farming direction in Q2 comprised USD 74.2M), so that total volume of Farming direction revenues in last reporting quarter made just USD 10M, EBITDA of this direction was much higher than expected (at USD 32.8M). Explanation is vague – reversal of unrealized profit provision booked in the preceding quarter.
As was noted above, general financial standing of Kernel remains good with Equity (USD 954M) being main source of assets financing. Taking into account quite moderate debt burden of the company (USD 437.6M as of 31.03.16), vertical integration of its operations and FX risk hedge, we see rather good margin of safety in business of Kernel.