Kernel the year to survive or too much ambitions?

4 December 2022

Financial year for the company can be divided into two parts before and after. Before the full-scale russian invasion financial year 2022 promised to be one of the most successful in the history of Kernel.

Before

High grains yields in own farms, record-high grains and oilseeds crop in Ukraine in general and relatively high global prices were supposed to bring high export volumes and good profits.

Kernel started realization of its strategy-2026, which targeted oilseeds crush of 6M tons, grains export of 15M tons and growing of own grains at 4M tons (on 700k ha land bank).

During July-December 2021 (H1 FY2022) Kernel exported record-high 5.7M tons of grains (+26% y-o-y), while oilseeds processing volumes made 1.5M tons (-12% y-o-y).

Financial performance was in line with good market situation. In H1 FY2022 Kernel revenues made $3.2bln, +41% y-o-y), EBITDA - $608M (higher y-o-y as well, while FY2021 was the most successful in the history of the company).

The company was quite aggressive in its grains and oilseeds purchases. Inventory stock as of 31.12.21 made $1.5bln (vs. $961mln a year ago). In parallel Kernel continued its investment activity ($90M was spent in July-December), repurchased its shares at WSE ($96M), purchased different financial assets including crypto-currency.

Additional working capital needs have been financed by credit lines total debt burden made almost $1.5bln (disregarding land lease liabilities in accordance with IFRS 16), with quite high share of short-term lines ($840mln). After record-high results of previous financial year, Kernel was very aggressive in the new one.

After

Full-scale invasion happened exactly at the moment when Kernel had peak inventories and debt. Blockade of Ukrainian ports was a shock, while new export routes were slow and expensive.

As a result in the last quarter of financial year (April-June) Kernels grains export made just 4% of October-December figure, sunoil export 15%. Right after invasion Kernel suspended all crushing operations. Poltava oilseeds crushing plant resumed operations in April and it worked mainly for the local market, while other five plants gradually resumed its work by the beginning of September. Another two plants remained at the occupied territory of Kharkiv region.

In its financial report Kernel estimates its loss related to the war at more than $500M (including revaluation of inventory stock, biological assets and impairment loss related to real estate).

To improve situation with liquidity in April the company made decision (supported by majority of shareholders) to sell part of grains growing business. It is clear that because of the war there was no demand for these assets, so the buyer were the companies related to the principal Kernel owner Andriy Verevskiy. Total land bank to be sold is 134k ha, amount of the deal is $210M.

Taking into account as of 31.03.22 Kernels cash made $373M we consider this decision as quite questionable. By the end of financial year the deal was not executed yet (while amount of cash at the balance sheet of the company increased to $448M).

As a result total land bank of Kernel decreased from around 500k ha to 363k ha.

In the table below you can see Kernel financial performance by segment.

$M H1 FY2022 H2 FY2022 FY2022 FY2021
Grains export, k tons 5 710 2 259 7 969 8 013
Oilseeds crush, k tons 1 468 719 2 187 3 183
Total revenues 3 225 2 107 5 332 5 595
Total EBITDA 608 -388 220 806
EBITDA Oilseeds crush 74 -144 -70 51
EBITDA Grains trading 245 -8 237 359
thereof Avere 138 -4 134 385
EBITDA Grains growing 359 -140 219 461

In oilseeds crush financial result in H2 FY2022 was impacted by impairment of $185M. Without this impairment, segments EBITDA in January-June would make $41M.

In trading and Infrastructure segment results were much better (partially because of Avere in H2 Averes result was close to zero, while for the whole year it made $134M). In this segment impairment made $82M.

To provide for grains export operations for the case Ukrainian ports will be blocked, Kernel considers possibility of investments into infrastructure of up to $170M. The company even mulls over purchase of port terminal outside of Ukraine.

Total Kernel EBITDA in FY2022 made $220M, but operating cash flow was negative at -$305M. The reason impossibility of grains and sunoil export, which led to significant increase of inventory stock of the company.

With gradual increase of export after opening of grains corridor out of Ukrainian ports we expect that Kernel inventory will reduce, while export proceeds can be partially directed to repay credit lines and finance current working capital needs of the company.

The news about prolongation of grains corridor operations for another 120 days are extremely positive for both short-term Kernel perspectives and general financial stability of the company in middle-term.

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

Type Price Weekly change,% Annual change,%
Corn CBOT
Wheat CBOT
Iron Ore
Crude Oil

Currency Rate Weekly change,% Annual change,%
USD/UAH
EUR/USD
USD/RUR