Shares in Kernel Holdings eased after the sunflowers-to-silos group ditched hopes of a return to profits growth, citing the impact of 2012's disappointing Ukraine havests, which had slashed profits in its farming operations, and fostered "strong competition" among grain merchants.

The Ukraine-based group, which accelerated its expansion into Russia in October through a ports tie-up with Glencore, lowered to $200m, from $215m, its guidance for earnings in the year to the end of June.

Earnings at that level would represent a second successive year of decline, and come in below the $226m expected by analysts.

The downgrade came despite better hopes for revenues, which Kernel forecast reaching $2.8bn, $400m more than had been forecast, and ahead of market expectations.

Change of strategy

However, the group revealed that margins in bulk edible oils division, its top revenue source, had eased in the July-to-December half, the first half of Kernel's financial year, "due to a lower sunflower seed harvest", although a shorter maintenance period fostered a 74% jump in the unit's sales.

In the grains business, the second biggest division by revenue, the ebitda (earnings before interest, tax, depreciation and amortisation) margin dropped to 2.7%, below a historical target of 6-8%, as it rejigged its aim towards prioritising quantity over the quality of business.

"This season, facing continuously strong competition for the volumes in Ukraine and margins being under pressure, we have moved our focus to the volumes," Kernel said.

A disappointing harvest, which saw wheat volumes drop nearly 30%, has curtailed Ukraine's export potential for many grains, increasing rivalry for what volumes there are.

However, separately  on Friday, Ukraine's Agrarian Federation said that Ukraine wheat exports could restart in April, estimating that 2m tonnes was available to ship, on top fo the 6.1m tonnes already exported in 2012-13 before government moves to quell trade.

'Lower autumn crop yields'

Last year's poor harvest was also blamed for a halving in ebitda at the farming business, which fell into the red in the October-to-December quarter, blamed largely on "lower autumn crop yields [that] came in below management's expectations."

"Our performance reflects unfavourable weather conditions and the prolonged integration of the newly-added landbank," said Kernel, which in April bought two farming businesses with a combined 119,000 hectares of farmland.

The group was "gradually implementing the new management structure and strengthening management control" in the farming business, while revamping the land portfolio to get shot of farms in areas with riskier climates, a strategy also being followed by peers such as Alpcot Agro.

Sugar pain

Group ebitda for the half year rose 6.1% to $157.7m, helped by a tripling in the contribution from export terminals.

But, with finance costs swollen by last year's deals, earnings dropped 32% to $69.7m.

Net debt near-doubled to $1.19bn over 2012, swollen by borrowings undertaken to complete the Russian port deal, and by a rise in sugar inventories, despite Kernel's efforts to run down production "in response to a prolonged sugar oversupply and depressed market prices" in Ukraine.

Viktor Ivanchyk, the chief executive of Ukraine sugar giant Astarta, warned on Wednesday that "2012 posed strong challenges to Ukrainian sugar producers", following a second consecutive season of "overproduction".

"The situation is painful for the sugar industry, but one which strongly promotes its consolidation and encourages strategic players," Mr Ivanchyk said.

Kernel shares, which are listed in Warsaw, closed 3.8% lower at 62.60 zloty.