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Kernel returns to profit, despite Ukraine, Russia headwinds

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Shares in Kernel Holding rose close to a 16-month high after the silos-to-sunflower oil group unveiled a return to the black, despite headwinds from Ukrainian unrest and Russia's grain export levy.

The Kiev-based group reported earnings of $7.2m for the January-to-March quarter, compared with a loss of $25.1m a year before, and despite a $82.8m hit from the tumbling hryvnia.

The return to the black - on revenues down 10.0% at $607.0m, largely a reflection of the weaker hryvnia – was led by a sharp rise in profits in sunflower oil, as Ukraine's financing difficulties, stemming from its political and economic crisis, caught out some smaller rivals.

"As access to capital remains restricted in Ukraine, several competitors stopped procuring sunflower seed… which resulted in lower competition and higher lock-in margin," Kernel said.

The group's own margins in bulk sunflower oil soared to 25%, from 16% a year before, on an earnings before interest, tax, depreciation and amortisation (ebitda) basis, lifting the division's ebitda by 38% to $69.4m.

Farming profit

However, Kernel Holding also said that it managed a 2% rise, to 1.3m tonnes, in its grain exports despite Russia's decision from February to impose a levy of at least E35 a tonne on wheat shipments.

"The increase in production volumes from our own farming division and higher grain export pace in Ukraine were the major drivers behind the underlying growth," the group said.

And the volume of grain shipped through export terminals at the group, which part owns a transhipment venture in Taman, Russia, rose 18% year on year to 1.2m tonnes, reflecting strong Ukrainian volumes.

Group ebitda rose by 54% to $115.2m, also reflecting a return to the black at the farming division, after a change in technology and agronomy practices helped lift yields by 16-28%.

"Hryvnia devaluation and drier weather conditions during the harvesting campaign also decreased our production costs," the company said.

'Fertilizer application is up'

It underlined its decent start to the 2015-16 production campaign too, despite the concerns over financing squeeze and the expense of imported inputs, thanks to hryvnia weakness, which have surrounded Ukraine's production prospects this year.

"Fertilizer application… is up by 8-43% year-on-year, while seed quality continues to improve following the launch of our own seed facility a year ago," Kernel said.

"Additionally, during this spring planting campaign, for the first time we conducted all our sowing and spraying operations with large-scale 24-row planters and sprayers."

The group also added that it had "completed its spring planting campaign in favourable weather conditions", adding to the improving ideas for Ukrainian grains output.

Earlier this week, the European Commission's Mars agricultural meteorology unit said that, for Ukraine "the yield outlook for winter wheat remains positive, with a forecast above the five-year average".

And UkrAgroConsult raised by 2.6m tonnes to 54.9m tonnes its estimate for Ukraine's grains harvest this year.

Market reaction

Kernel Holding shares, which are listed in Warsaw, touched 39.80 zloty in early deals, just short of their highest since January last year.

The stock stood at 38.82 zloty in lunchtime deals, a gain of 4.0%.


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