Fixed Income Analysis /
Ukraine

Kernel: Good results, mixed outlook

    Kiti Pantskhava
    Kiti Pantskhava

    Senior Credit Analyst

    Tellimer Research
    30 May 2019
    Published by

    Kernel reported strong financials with the top line driven by expanding trading operations, and EBITDA supported by high yields in the farming segment. A seasonal decrease in inventory and corresponding release of working capital alongside a 45% surge in EBITDA helped to reduce net leverage to 2.5x. Both short- and long-term funding is ready for the new season and US$340mn capex is planned in the financial year starting July 2019. We like Kernel’s credit profile, but we don’t expect KERPW 22s to outperform MHPSA despite an optically wide spread. Kernel’s earnings volatility is higher than MPH’s, while both companies are in the middle of investment cycles and are unlikely to focus on deleveraging in the next 12-18 months. We reiterate our Hold.

    Revenues continue to grow on trading

    As Kernel’s financial year is coming to an end, the company continues to show what its new turnover will look like. In nine months, Kernel increased grain trading volume from 3mt to 8mt after the company launched its proprietary trading unit Avere. Consolidated revenue almost doubled yoy as a result, but not without the contribution of the oilseeds processing and farming segments. The latter has seen a strong year due to substantially higher yields achieved on the new acreage added in 2017. In the nine months ended Q1 19, Kernel’s revenues came to US$3.1bn and were rearranged into three enlarged segments: infrastructure and trading, oilseed processing, and farming, with the latter earning US$0.5bn in revenues for the business.

    Farming and oilseed processing drive EBITDA

    Kernel’s EBITDA for the nine months ended 1Q 19 increased 45% yoy to US$285mn and is likely to reach US$320-340mn in FY 19. The EBITDA margin was diluted by a major expansion of trading operations, but the farming segment delivered outstanding results, doubling its profitability and emerging as the key drive of consolidated performance. The outlook for the next financial year is mixed, as positive sentiment in corn and wheat has yet to show in the numbers sufficiently to offset tightening sunflower crushing margins.

    Seasonally lower net leverage

    The net debt to EBITDA ratio reduced to 2.5x due to a seasonal release of the working capital and higher EBITDA. The company’s access to liquidity is sufficient to meet its operating and investment requirements. Out of US$306mn in long-term loans raised at the end of 2018 and early 2019, US$256mn remain unutilised. On top of that, cUS$200mn are available under the revolving working capital facilities due 2021.  

    Leverage could increase on capex next year

    Kernel expects to spend US$350mn on capex in July 2018-June 2019, which is lower than the US$400mn guided previously. The shortfall will be moved to the following year when the company expects to invest US$350m in a grain export terminal, a new oilseed crushing plant and the upgrade of its existing crushing facilities. Total debt is likely to increase by up to US$200mn as the company gradually utilises long-term debt facilities to finance capex. Operating cash flows should cover the balance of required financing, even if profitability is challenged by soft commodity prices and crushing margins in 2019-20