15 December 2022

In reporting quarter Kernel financial performance was ambiguous – significant increase of export, good profitability of activity on one side, but some questions to cash flow and balance sheet structure on another.

Opening of grains corridors out of Ukrainian ports led to improvement of operating performance of the company.

During July-September total volume of oilseeds crush made 461k tons – almost flat y-o-y. Segment’s revenues made $263M (-28% y-o-y due to decrease of sales in tons at -8% and decrease of average sales price).

Profitability of oilseeds crush increased. Due to significant fall of sunflower seeds domestic prices (due to slump of export in March-July which led to excessive farmers stocks), crush margin made record-high for the last years $223/t (a year ago - $61/t).

Oilseeds crush segment’s EBITDA in Q1 FY2023 made $45M (vs. $13M in corresponding period of previous year).

In its report Kernel notes that decrease of sunseeds harvest in Ukraine in Y2022 (from record-high 16.4M tons as per official data in Y2021 to 10M tons) and significant sunseeds export activization negatively impacts sunseeds supply to crush.

But taking into account that a number of crushing plants are not operating because of the war, while farmers’ sunflower seeds stock from previous year harvest pushed down the market positively impacted their supply, we expect that in the coming months crushing margins will remain on a quite decent levels.

In grains trading and infrastructure segment, grains export in reporting quarter made 732k tons (-67% y-o-y, as grains corridors out of Ukraine opened just in the end of August), revenues decreased to $517M (-54%), EBITDA made $60M ($92M a year ago). Despite decrease in absolute value, profitability of trading operations per 1 ton increased.

We note as well that in the last year segment’s profitability was positively impacted with good results of Avere - Kernel’s trading arm based in Geneva (its current year’s performance is much worse).

In Farming segment we note rather good results as well – EBITDA made $82M (vs. $208M in Q1 FY2022, decrease is related to high base effect, as it is Q1 FY2023 EBITDA is quite good).

Due to the sale to related with principal shareholder companies of part of Kernel’s grains growing business (134k ha of land lease rights, as of reporting date the deal was not closed yet), Kernel’s sown area in Y2022 made 363k ha (vs. 500k ha a year ago). Current season’s sunflower seeds yield made 2.5 t/ha, wheat – 4.7 t/ha, expected corn yield (60% is harvested as of the date of report) – 7.9 t/ha.

As of September 30 book value of 1 ha of unharvested corn made $800 (vs. $1200 in previous year). Taking into account expected yield and current corn price, we can expect Farming segment to be profitable going forward (if Kernel will be able to harvest the grains and if grains corridor out of Ukrainian ports will continue to operate).

The same situation is with sunflower seeds.

In reporting period operating cash flow before changes in the working capital made $181M (rather stable y-o-y), but negative fact is significant increase of trade receivables (by $190M during July-September). Because of it total Kernel’s operating cash flow was close to zero.

It means Kernel’s profits in Q1 FY2023 did not lead to cash inflows. Kernel explains such situation by growing operating and cash cycle of trading business.

We think that if grains corridor will continue to operate (officially it was prolonged till mid-March 2023), the company is able to generate quite significant cash flows. We do not expect trade receivables to further increase (the only negative factor is long period of Ukrainian grains vessels inspection in Istanbul).

As of September 30 Kernel’s cash position made $268M, debt (disregarding land lease obligations under IFRS 16) – about $1.5 bln. Debt burden remains quite high, which is the risk for the company’s middle-term perspectives.

For the future reporting periods we expect quite good profitability of Kernel’s activity, but attention should be paid also to cash generation ability and balance sheet structure (mainly debt burden dynamics).

Key financial and operating Kernel performance figures are presented in the following table:

$ mln	Q1 FY2023	Q1 FY2022
Grains export, k tons	732	2 227
Oilseeds crush, k tons	461	482
Revenues	655	1 340
EBITDA	168	281
EBITDA oilseeds crush	45	13
EBITDA Trading	60	92
EBITDA Farming	82	208