21 August 2023

Kernel published updated information on the current situation in the company's business and relations with shareholders and creditors.

On August 18, Kernel released an update on the current situation in the company's operational and financial activities.

First, the company notes a significant drop in the volume of exports of grains. As a result of the suspension of the grain corridor from Ukrainian Black Sea ports, in July Kernel exported only 10,000 tons of grain, 84,000 tons of sunflower oil, and 33,000 tons of meal. For comparison, during the period from April to June, the company exported 755,000 tons of grain and 313,000 tons of sunflower oil.

During the last weeks, Russian shelling of the Ukrainian grain infrastructure had a significant impact on the company's activities. During the second half of July - the beginning of August, from this point of view, Kernel suffered almost the most among all Ukrainian companies.

In July, Russian shelling damaged the infrastructure of the Kernel grain terminal in Chornomorsk, as well as the river oil transshipment terminal in the port of Reni. At the beginning of August, one of the company's largest silos in Starokostyantynov, Khmelnytskyi region, was significantly damaged by a missile attack (65,000 tons of grain storage capacity, as well as grain intake and drying equipment, were destroyed or damaged). In addition, on August 16, as a result of another attack, the company's river grain terminal in Reni suffered significant damage.

According to the company, the minimum estimate of damages from the attacks is currently $32 million.

On the other hand, like almost everywhere in the country, in 2023 Kernel received a fairly good crop of early grains. The average yield of wheat in the current year was 6.6 t/ha (harvesting area of 60,000 ha), rapeseed – 3.3 t/ha (10,000 ha). Yield expectations for late grains and oilseeds are currently good, even though the group previously said it had significantly reduced fertilizer application rates for most crops.

We expect that in the new season, as in the previous one, due to logistical constraints (and also considering the damage to assets due to recent missile attacks), the Kernel will focus more on oilseeds processing and exporting of oil, while grain exports will not be very active (most likely, Kernel will primarily export its own harvest, there will be no active purchase of grain from third parties, at least in the first half of the season).

Regarding financials, we note that, as we expected, the group continues to improve its liquidity position. As of July 31, the amount of cash in Kernel's balance sheet was $1,148 million, an additional $327 million is unrealized finished products (including 1.3 million tons of grain and 147,000 tons of sunflower oil).

The company's total debt (excluding land lease obligations) is $1.445 million. Currently, the group has not yet completed the process of short-term obligations due June 30, 2023 prolongation, which began in the spring. As a reminder, Kernel plans to roll over all short-term credit debt (about $900 million) until June 30, 2024.

As for cash, the company primarily plans to use it to finance working capital needs, as well as to continue the investment program. Kernel will direct an additional $40 million for the completion of the sunflower processing plant in Starokostyantinov, as well as $50 million for the development of new logistics routes for the grains export (investments will be directed to the wagon fleet, barges and a river terminal, the goal is to increase the volume of grain exports to 300,000 tons per month).

Also, in the published report, the group also notes that there are currently no changes in the status of the company's request for delisting from the Warsaw Stock Exchange, which it submitted to the Polish financial supervisory authority in May of the current year - it remains under review by the PFSA.

At the same time, the company announced plans for a new potentially unfriendly step towards its minority shareholders - to support its activities, Kernel plans to raise an additional $60 million from its shareholders. It is difficult to understand the reason behind it, as the company's cash is more than $1.1 billion. So we consider this one as a rather symbolic step to push minority shareholders. If the minorities do not agree to participate in this round of financing, their share in the company may be further diluted, accordingly, the share of the majority shareholder will increase.