Description

NB: I can't get images to paste-see attachment

Investment recommendation:
Are you a glutton for punishment? Kernel SA bonds could be interesting with a starter position in the low 40s but there are so many unknowns here, it is hard to have conviction to make this a massive position. They are the largest private agricultural company in Ukraine with farms and facilities spread throughout the country. The bonds are creating the Company at <20% of where it was trading a few weeks ago and 0.2x LTM EBITDA. Tangible assets cover all liabilities 2x and they have spent +$1Bn in capex over the past 5 years so there are potentially real sources of value depending on how the war shakes out. Needless to say there are lots of risks here.

Company Description:
Kernel is the largest crop producer and grain exported in Ukraine. They are also the largest sunflower oil producer in the world and control the largest grain storage network and private rail hopper fleet in Ukraine as well as 2 deepwater transhipment facilities. They produce corn, sunflower seeds, wheat and soy on 530K hectares leased from over 4,000 counterparties. Much of their sunflower production is then processed in one of their 9 crushing facilities and they also operate a trading arm that manages their infrastructure and international distribution of their production.

One month ago, the Company had a $2Bn enterprise value but given the destruction/dislocation in Ukraine, the bonds are creating the Company at <$400MM. Compare their footprint to where Russian forces are and it seems like many of their facilities are (currently) not in major conflict areas.
https://graphics.reuters.com/UKRAINE-CRISIS/zdpxokdxzvx/

• Farming segment (9% of revenue and 45% of EBITDA but closer to ~12% and ~35% historically):

• Largest crop producer in Ukraine producing corn, sunflower seeds, wheat and soy on 530K HA of land leased from over 4K counterparties.

• Corn is 51% of acreage, sunflower 31% and 13% is wheat

• Avg lease term ~13 years (13% <5 years, 41% 5-10 years, 31% 10-15 years, 10% 15-20 years and 5% >20 years)

• ~90% of the area they farm is owned by private individuals with the balance from the state.
• Note ~75% of the land in Ukraine is owned by tiny land parcels <10 hectares and for the past 2 decades, sale of farmland has been under moratorium (Kernel has ROFR if that changes though)

• Oilseed Processing segment (~23% of revenue and 5% of EBITDA in ’21 but closer to ~35% and ~28% respectively over past 4 years):

• Largest processer of sunflower seeds and largest producer of sunflower oil in the world (~7% of global production and ~12% of global exported market).

• They have 8 plants throughout the country with 3.7MM tons of capacity and they are (or had been planning to) open a new plant with 1MM tons of capacity in Q222 on which they have spent $130MM

• Sunflower oil mostly sold in bulk to international markets but ~10% of produced sunflower oil is further refined and bottled/sold under the Groups own brand or private label (both domestically and internationally)

• Infrastructure and Trading segment (67% of revenue and 49% of EBITDA but closer to ~52% and ~35% over past few years):

• Largest grain exporter in Ukraine (accounting for ~16% of total grain exports)
• Largest and most advanced grain export infrastructures in Ukraine

• Largest private silo network with aggregate capacity of 2.5MM tons
• Largest private grain railcar fleet with 3400 hopper cars
• 2 deepwater terminals in the Port of Chornomorsk with 10MM tons of transhipment capacity

• Transbulk terminal bought in ’08 for $100MM (~5x EBITDA when throughput of the terminal was 3MM tons)

• They had owned 50% of Taman export facility in Russia on the Black Sea (JV partner is Glencore) but sold their stake to VTB in ’20 and they haven’t been involved in grain trading in Russia since

• Their trading subsidiary (Avere which is 60% owned by Kernel with the balance owned by Avere mgmt.) purchased 76% of Kernel’s sunflower oil production in ’21 at market prices and then re-sells it in addition to engaging in hedging as well as merchandising/marketing of grains and oilseeds. 

• Bonds issued under English law

Balance sheet notes/sources of value:

• $134MM in secured short term bank loans secured by $319MM in inventory and $255MM of future sale receipts and $221MM in LT bank borrowings were secured by $313MM in PPE
• Unclear what % of consolidated revenue/EBITDA the guarantors represent but their ’22 Eurobond which matured earlier this year had initial guarantors represented 99.6% of revenue and 85% of EBITDA and net assets when those bonds were issued in ’17 (guarantor list slightly different bw those and existing paper)

• As of Sept 20 ‘2021 they had $1.029Bn in undrawn credit lines. As per above, drawn lines were substantially overcollateralized, but we don’t know how recent events have impacted undrawn credit 

• The Company has ~$4.3Bn in assets against $1.6Bn in liabilities. On a tangible asset basis, tangible assets still ~2x liabilities.

• They have invested ~$1Bn in greenfield capex and M&A over the past 5 years.

Miscellaneous:

• 40% owned by Andrii Verevskyi who founded the business in ’95 and has grown it to what it is today.

• In ’06-’10 he was a parliamentary deputy of Yulia Tymoshenko’s bloc (not pro-Russia)
• In ’10 he switched to the Stability and Reform Coalition (led by Party of Regions which is more pro-Russia)

• Rail infrastructure still largely govt controlled. Tariffs for locomotives and using rail infrastructure set by govt. The govt also leases out railcars but that has been partially deregulated and Kernel satisfies 80% of their railcar needs with their own cars.
• 95% of sales dollar denominated while ~85% of expenses were in USD
• The Group limits its exposure by largely holding its cash and cash equivalents in Austria, France, the Netherlands and Switzerland

Catalyst

End of hostilies in Ukraine