Kernel – Challenging 2019/2020 Season
Ukraine is expected to harvest 6% less of sunflower seeds in the 2019/2020 season than in the season before. indicating tightened access to seeds for domestic sunflower oil producers. with the ratio of seed supply to crushing capacity expected to drop to 71% from 76% last year. Consequently. on a 2% lower crush volume, we believe Kernel is facing contraction in the FY2019/2020 EBITDA of the Vegetable Oil segment to $99 million from $107 million posted in FY2018/2019. Furthermore, Kernel's Farming business in the season ahead is also facing downward margin pressure stemming from a 5% lower total crop (due mainly to a lower corn harvest), combined with a 9% rise in costs. As a result, we anticipate a drop in segmental EBITDA from $162m to $97m (ex-IFRS16 effects), underpinned by a lower volume of crops protected by price hedging (16% of total vs. 62% this time last year) despite a recent retreat in grain prices in the wake of mounting trade tensions between the US and China. With 2019/2020 CAPEX budgeted at $300m, after an 11% drop in EBITDA, Kernel is set for zero free cash flow this reporting year, and it faces an increase in the net debt/EBITDA ratio to 2.7x. After adjusting our outlook for weaker expected crush margins, lower hedging gains, and higher CAPEX, we downgrade KER from buy to reduce with the price target cut from PLN 58.63 to PLN 42.70 per share.
Kernel Holding is a holding company. Co.'s is a diversified agribusiness engaged in the production and sale of bottled sunflower oil (sold under brand names Schedry Dar, Stozhar and Chumak Zolota), the production and subsequent export of bulk sunflower oil and meal, the wholesale trade of grain (mainly wheat, barley and corn), farming, and the provision of logistics and transshipment services n the ports of Ilyichevsk, Taman and Mykolaiv. The majority of Co.'s manufacturing facilities are primarily based in Ukraine and Russia. In addition, Co. is a private provider of inland silo services in Ukraine.
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