Ukraine Markets Daily (May 29, 2015)

Market news

  • Kernel’s revenue down 10% y/y, EBITDA up 54% y/y in Q3 FY2015
  • Ferrexpo launched a consent solicitation for USD 285 mn of its remaining 2016 Eurobonds outstanding; reported a 41% y/y drop in EBITDA in 1Q2015

Market comment

The UX Index was up by 1.1% on Thursday, and up by 1.6% in the US dollar terms, while the PFTS index was down by 0.7% in UAH terms. Five out of ten companies in the UX index were up in UAH terms, with the largest increase in prices observed for Donbassenergo (3.5%), Motorsich (2.3%) and Azovsteel (2.0%).

On the interbank exchange market, the USD/UAH spot rate was down by 0.5% to 21.00 (mid price) on Thursday according to Bloomberg. The official exchange rate reported by the NBU was 21.04.

Ukraine 5-year CDS grew by 2.1% on Thursday.


Kernel’s revenue down 10% y/y, EBITDA up 54% y/y in Q3 FY2015

Yesterday Kernel [KER PW], one of the biggest Ukrainian grain traders and sunflower oil producers, published its financial results for Q3 FY2015 (ended March 31, 2015). The company’s revenues were down by 10% y/y to USD 607 mn in Q3 FY2015, mostly due to lower agricultural commodity prices. At the same time, Kernel’s EBITDA improved by 54% y/y to USD 115 mn as a result of higher profitability of the sunflower oil sold in bulk (segment’s EBITDA grew by 38% y/y to USD 69 mn) and the farming operations (segment’s EBITDA was positive at USD 12 mn compared to negative USD 22 mn in Q3 FY2014). The company reported a net profit of USD 7.3 mn for Q3 FY2015 compared to a net loss of USD 29 mn in Q3 FY2014, however it also included a non-cash FX loss of USD 49 mn (adjusted net income: USD 57 mn).

The company’s operating cash flow before WC charges increased by 30% y/y to USD 92 mn in Q3 FY2015, while net operating cash flow improved by 88% y/y to USD 253 mn due to a seasonal decrease in working capital and lower finance costs. Kernel’s capital expenditures in Q3 FY2015 were just USD 3.4 mn compared to USD 26.4 mn in Q3 FY2014. At the same time, the company’s net financing cash flow amounted to negative USD 220 mn as a result of virtually no proceeds from borrowing during the period (USD 5 mn). The company reported a cash balance of USD 106.7 mn as of end-March 2015 compared to USD 77.7 mn as of end-December 2014.

Our view:

The news is POSITIVE for the company. The increased profitability of the sunflower oil sold in bulk and the farming segments, as well as the rising volumes of terminal throughput had a positive effect on the company’s financial performance, which allowed Kernel to offset some of the negative influence of low commodity prices. At the same time, we should note that the company’s bottled sunflower oil segment was hit by the UAH devaluation as most of sales were domestic.


Ferrexpo launched a consent solicitation for USD 285 mn of its remaining 2016 Eurobonds outstanding; reported a 41% y/y drop in EBITDA in 1Q2015

On May 28, 2015, Ferrexpo announced an exchange offer and consent solicitation on the USD 285 mn outstanding amount from its USD 500 mn 7.875% guaranteed notes due in 2016. Ferrexpo offers to exchange all or any of the existing notes on a par for par basis. Note holders are proposed to extend the maturity of the note up to 2019, increasing the coupon value to 10.375%. A 35% cash consideration of the aggregate principal amount of existing notes is also included (increased from 25% in an earlier offer). An early consent fee of USD 20 per USD 1,000 principal amount of the existing notes is granted for voting instructions received at or prior to the early consent and exchange deadline, and of USD 5 per USD 1000 for voting instructions received at or after the final consent and exchange deadline. The company engages to redeem 50% of the notes by April 7, 2018, and the other 50% on maturity by April 7, 2019. The early exchange and consent deadline is set for June 15, 2015, whereas the final exchange and consent deadline is on June 30, 2015. The noteholders’ meeting is scheduled for July 2, 2015.

In connection with the exchange offer and consent solicitation, Ferrexpo has unveiled its unaudited financial results for 1Q2015. The company’s revenue fell by 38% y/y to USD 258 mn in 1Q2015, while EBITDA decreased by 41% y/y to USD 112 mn, mainly as a result of lower prices of iron ore. Ferrexpo reported a net profit of USD 58 mn in 1Q2015, down by 53% y/y. The company’s net operating cash flow for the past quarter was also down by 56% y/y to USD 46 mn. At the same time, Ferrexpo spent just USD 12 mn on capital expenditures in 1Q2015 compared to USD 78 mn in 1Q2014. The company reported a cash outflow from financing activities of USD 151 mn in 1Q2015 as Ferrexpo did not attract any new loans during the period, while the company paid USD 38 mn of dividends and USD 120 mn in finance costs and arrangement fees. Ferrexpo’s cash balance amounted to USD 494 mn as of end-March 2015. 

Our view: 

The news is NEGATIVE for the company, as the consent solicitation was triggered by anticipation of adverse market conditions and deficient future cash generation. The solicitation is targeted towards bond holders, which have rejected debt restructuring solicitation of February 2015. Nevertheless, we see the company to have the chance to increase the level of support to the offer, taking into account the increased cash consideration. We estimate the fair value of the 2016 issue at around 93 cents on the dollar, considering the reprofiling terms and the early exchange fee (applying the discount rate of 16%, close to the yield of Ferrexpo’s new 2019 issue).



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