Kernel does not rule out USD 51/t crushing margin — Concorde Capital

Kernel provided several indirect indications, including during an Oct. 23 conference call, that its sunflower seed crushing margin might drop to as low as USD 51 per ton of bulk oil. This level, if realized, would be substantially below the USD 77/t for FY2017.

This is reported by the Concorde Capital's analysts.

"We see some chance that the margin will be better, so we will wait until the 1Q FY18 results before changing our base case FY 2018 EBITDA estimate of USD 330-340 mln," the analysts note.

The company’s chairman, Andrei Verevskiy, revealed during the call that he sees the USD 50-60 per ton margin range as the threshold for the operations of Ukraine’s independent seed crushers becoming cash negative after debt service. Furthermore, regarding the expectations for Kernel’s current and FY2018 margins, he said he thinks that achieving the FY2017 level of USD 77/t would be very challenging. In its FY2017 financial statements disclosed the same day, Kernel provided the range of USD 51-108 per ton of oil as the most recent goodwill impairment test assumptions for 2018-2022.

According to the analyst of the investment company Concorde Capital Dmitry Khoroshun, The USD 51/t lower bound of Kernel’s oil margin range assumption for 2018-2022 could be used as a worst-case scenario already for FY2018. Notably, in Kernel’s history of impairment test assumptions, the reality appeared to be below Kernel’s assumed range. For example, in its FY2016 financial statements Kernel assumed USD 115/t flat for 2017-2021, and USD 77/t was the actual value for FY2017.

"The USD 50-60 per ton range, discussed by Andrei Verevskiy during the call as the cash-neutral threshold for Ukrainian crushers, might be a feature of Kernel’s strategic exercises and not necessarily indicative of the current market situation. Nevertheless, because Verevskiy also discussed expectations of the crushing sector being ripe for consolidation, and because he also said that "…without a doubt, the current level of the crushing margin is not sustainable…", we think that the current margin levels might be close to the USD 51/t value," the expert says.

Earlier it was reported that Kernel in FY 2017 increased revenue by USD 180.4 million (9.1%) to USD 2.17 billion, while the company's net profit for FY 2017 was USD 176.2 million, which is 21.7% less than in the same period last year. EBITDA decreased by 7.8% to USD 319.2 million.