1 March 2017
Financial performance of Kernel Holding in Q2 FY2017 has been in line with our expectations following good volumes of oilseeds crushing and grains trading. On negative side is the fact that part of corn has not been harvested by the end of December.
1 043 344
EBITDA margin, %
Main business segments
Following goods volume of sunflower oil realization in natural terms (+15% vs. Q2 FY2016) and despite y-o-y realization price decline, sales volume of sunflower oil segment in latest reporting quarter grew by 5% (vs. corresponding period of previous year).
As a result, despite weaker results of Q1 (mainly from the point of view of crushing volumes, but as for oil realization as well), total segment’s revenues in H1 FY2017 remained on the level of previous year (at slightly above USD 540M).
Because of significant competition between oilseeds crushers for raw materials (current marketing year crushing capacities in Ukraine are estimated at above 18M tons, while record-high sunflower seeds harvest in Y2016 made 13.6M tons), crushing margins remain subdued. In Q2 EBITDA margin of the segment made 9.4% which is slightly higher vs. 7.2% in Q1 (which can be related to higher than average availability of raw materials right after sunflower seeds harvesting period in Ukraine (though during last seasons farmers are rather slow with their crops realization)).
Taking into account current situation on sunflower seeds and oil market of Ukraine, management of Kernel expects that margin is to be low for extended period of time until small producers will be forced to leave the market (possibly one of the reasons they remain competitive on the market is usage of grey schemes). On the other side, as raw materials stock of Kernel as of 31.12.16 has been significantly higher vs. last year’s (USD 237.2M vs. USD 113.3M), we expect that crushing volumes in Q3 can be better y-o-y, which should provide for general improvement of operating performance.
Volume of Kernel grains realization in Q2 FY2017 made 1 525k tons, by 29% higher vs. previous quarter and by 15% - vs. Q2 FY2016. It positively influenced sales volume in money terms as well – they made USD 277.1M (by 7.2% higher y-o-y). Origination margin increased up to last year’s level of 4% (vs. just 2% in Q1). Good results were shown by silo segment (EBITDA of USD 23M vs. USD 15.5M a year ago and USD 7M in Q1), reasons – good grains&oilseeds harvest in Ukraine in current season along with more rainfalls during harvesting period vs. previous seasons.
Performance of export terminals segment direction (disregarding of Russian joint venture with Glencore) has been good as well – its EBITDA in Q2 made USD 13.5M with more than 80% margin (67% a year ago).
As was already noted before because of good harvest Farming division will be main profits-generator of the Group in new financial year. Yields dynamics for last seasons look as follows:
8.9 7.3 7.1 5.5 4.6 7.1
5.8 5.1 5.4 4.3 3.4 3.7
3.0 2.7 2.5 2.1 1.7 2.1
2.9 1.8 1.8 1.4 1.3 1.9
During reporting period realization of Farming segment production has been somewhat slower vs. previous year (on our opinion, partially because of changes in VAT tax regulations, partially because of better origination from 3rd parties). On positive side for the company is the fact that it sold part of its harvest before start of the season on forward terms (as an example, pre-season corn prices have been by USD 10-20/t higher vs. prices during the season), which should positively influence profitability of operations. On negative side – as of 31.12.16 16k ha of corn (more than 10% of total corn planted area) has not been harvested yet, which can negatively influence segment’s financial performance. In any case we maintain our view that EBITDA margin of Kernel Farming segment in current season will be not lower than 40%.
Balance Sheet structure
1 920 548
1 647 976
1 155 051
1 091 972
Main y-o-y changes in Kernel assets structure related to higher Inventory and VAT Receivables volumes. As of 31.12.16 Inventory (including biological assets) made USD 644M vs. 463M a year ago, main reason of increase - higher sunflower seeds stock (most likely as a reaction to increased competition for raw materials among Ukrainian oilseeds crushers). VAT Receivables grew by close to USD 50M y-o-y, mainly as a result of changes in Ukrainian VAT legislation in Y2016.
Financing structure of the company remains quite good. After recent Eurobonds issue maturity profile of Kernel debt improved as well. Current Debt/Equity ratio (noting debt is on its seasonal peak level) of Kernel is close to 0.6x, Equity (USD 1 091M as of 31.12.16) exceeds Fixed Assets and is main source of assets financing in general, financial position of the company is clearly good. In addition current adjusted Net Debt/EBITDA ratio Is close to 1.6x.
The company is well-posed for new investments (plans involve twofold increase of grains terminal capacities, land bank extension (up to 200k ha), purchase of new oilseeds crushing capacities).