Figure 10 . The main oil-processing companies, Ukraine
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CFA Institute Research Challenge
Hosted by
CFA Ukraine Society
Taras Shevchenko National University of Kyiv
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December 24, 2012
Recommendation
Kernel Holding S.A. (Kernel)
Price: 66.0 PLN
Price target: 69.5 PLN
| This report is published for educational purposes only by students competing in the CFA Institute Research Challenge. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Whether the market’s optimism is reasonable | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| No rush is necessary. We initiate coverage on Kernel with a rating HOLD and a 12 month price target of 69.5 PLN, calculated using combination of DCF approach and peers valuations with weights of 70% and 30% respectively. Target price suggests 5.3 % upside, which perfectly reflects the fulfillment of gap from the current overvalued market price by the bright growth opportunities. Russia: gaining the foothold. We expect the newly discovered Russian resource market to be the most crucial driver to ensure the availability of space for future company’s growth. Although we do believe that Kernel’s actions will succeed, we have to outline the challenging character of the expansion and possible drawbacks for investors. The main uncertainty which arises is whether Kernel will be able to complete the goals set by management to the full extent. A charge for optimism. Currently Kernel appears to be significantly overvalued 15.3% over its peers. In our opinion, it’s a denotation of investors’ positive response to the company’s dash on Russia. However, Q1 2013 performance displays quite mediocre results. Therefore open question remains, whether the market expectations are grounded. Successful implementation of synergy effect. One of the key Kernel’s competitive advantages is optimally structured vertical business integration that allows capturing the margin through the whole value chain. Although, this business model puts additional pressure on company’s logistics to be fully implemented. Some Kernel’s entities have already been experiencing provisioning disruption that caused additional losses due to bottleneck in the logistics chain. Growing demand projected all over the Kernel markets. Two key trends are boosting the demand: population growth and household income increase. Latter also causes the change in diet habits. All the aforementioned results in augmentation of per capita consumption of main agricultural products and ensures stable demand for Kernel’s commodities. Resilience. Kernel is perceived by the market as a company which can successfully evade or mitigate the risks, typical for the whole Ukrainian agricultural sector. Our analysis has shown that two main groups of Ukrainian agro-risks: weather and regulatory, historically had no substantial effect on the company’s operations. | Figure 1. Market Profile
Source: Bloomberg
Figure 2. Price performance chart
Source: Bloomberg | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Figure 3. Key Financial Data
Source: Company data, Bloomberg, KNU estimates
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Company Profile
Figure 4. Public offerings
Kernel`s IPO and SPOs on the WSE
Source: Company data
Figure 5. Shareholding Structure
Kernel`s shareholders, 2012
Source: Company data
Figure 6. Revenue Breakdown
Structure by segments, 2012
Source: Company data
Figure 7. Geography of Kernel
USD thousands, 2012
Source: Company data, KNU estimates Figure 8. Kernel in Ukraine Ranking in agriculture, 2012
Source: Company data, KNU estimates | Kernel Holding S.A. is one of the leading agricultural companies in the Black Sea region. Kernel Holding S.A. is a public limited company incorporated under the laws of Luxembourg. Production assets, infrastructure and logistics of the holding are located on the territory of Ukraine. Furthermore, there are plants and terminals in Russia. Several controlling enterprises and traders that are holding’s members, are registered in Netherlands, Switzerland, British Virgin Islands and Cyprus. In November 2007 Kernel was listed on the Warsaw Stock Exchange which resulted in offering 16 671 000 new shares and attracting USD 160 M. During 2008-2011 the company placed SPO worth USD 304 M. (see Figure 4). Andrii Verevskiy, owner of Namsen Ltd., is a founder of the company. The structure of shareholders is represented in Figure 5. From a private company to a vertically-integrated holding. Kernel started its activity in 1995 as an exporter of Ukrainian agricultural products. In the early stages the company provided transport services of delivering goods to seaports and sold agricultural products to the world traders. Kernel eventually began to purchase grain elevators. Thus, in 2002 the first oil extraction plant was bought in Poltava (Ukraine). Afterward expansion of activities was carried out by acquiring production assets in the oil industry, elevators and seaport terminals, and by simultaneous constant increase in the land bank. In 2011 the company obtained sugar business and entered the Russian market by acquiring Russian Oil Group and the Taman terminal through a 50%-50% joint venture with Glencore International PLC. Therefore, expansion performed by acquisitions of manufacturing companies provided Kernel with an opportunity to complete creation of a large-scale production and logistics chain in the Ukrainian agricultural market and to become one of the largest holdings in the Black Sea region (see Appendix 2, 9 and 10). Main activities of Kernel Holding S.A. are represented by 3 aggregated business segments that generated USD 2 157.4 M revenue in 2012 (see Figures 6-8). The holding formed a complete production chain for its key industry – bulk oil. Kernel’s essential business segments are as follows: 1. Farming and purchase of raw materials. According to the data of 2012 Kernel is an owner of large-scale sown land bank that totals 248 562 hectares. This land bank is used by the company for growing crops, namely wheat, soybeans, sunflower, maize, sugar beets, barley, rapeseed, and is used for further processing of raw materials and trading. The holding’s crop yield exceeds the country’s average figures not taking into account crop yield of sugar beets. Manufacturing crops with different sowing and harvest seasons bring the company an opportunity to spread its income and outgoings throughout the whole year to avoid their significant concentration. Moreover, Kernel buys 78% of the total amount of grains from more than 2000 farmers across the country. 2A. Sunflower oil production. Own production and purchase of sunflower (6% and 94% correspondingly) form a raw material base for oil production (bulk oil and bottled oil) that is carried out by 7 plants in Ukraine and 3 plants in Russia with overall crushing capacities of 3.0 MMT per annum. The holding produces 7.2% of the world sunflower oil output. Furthermore, the company produces one third of Ukrainian consumption of bottled oil under the three brands (Chumak Zolota, Schedryi Dar, Stozhar) and private labels. 2B. Sugar production is accompanied by further domestic sales, and is provided by 4 plants that were acquired in 2011. Kernel’s market share in Ukraine equals to 7%. Nevertheless Kernel’s low crop yield of sugar beets (17.4% below the country’s average) and small profitability comparing to other business segments explain the company’s current attempts to sell sugar production. 3А. Silos and logistics. Kernel has the largest private elevator network with a total capacity of 2.5 MMT (7.1% of the country’s capacities). Elevators are located next to railroads and are used for own needs and for farmers (2/3 and 1/3 of the volume of services correspondingly). In addition, Kernel possesses 2 terminals in Ukraine and newly bought one in Russia in 2012. The terminals with annual capacities of 6.0 MMT are situated on the Black Sea and satis own export needs of grains and sunflower oil. 3В. Product sales. Kernel sells its production on the domestic (15%) and foreign (85%) markets. Indeed, the holding was the third largest exporter of grains in 2012 that provided 8% of exports, and the biggest bulk oil producers in the Black Sea region. Kernel exports grains and sunflower oil to Egypt, India, Turkey, EU etc. Regional distributors and national trade network provide 56% and 44% of bottled oil sales on the domestic market correspondingly. Sugar is sold in B2B segment. The company’s strategy stipulates the following expansion of its activities, namely: extensive expansion – growth of the land bank up to 400-450 Ths ha accompanied by building and acquiring new plants, elevators and terminals (planned CapEx in Ukraine amounts to USD 300-350 M, in Russia – USD 350-400 M); intensive expansion – implementation of modern technologies and abidance by operational discipline to provide efficiency of each element of the production chain. Kernel’s social responsibility is aimed at: 1. Environment protection as a result of using mini-till and no-till farming technology to reduce land erosion and to preserve land humidity; generating green energy from sunflower husks (83 M m3 of natural gas were saved in 2012); using present-day harvesters to save 7-10% of sunflower seed; waste water treatment during storage and transshipment. 2. Support to agricultural regions where Kernel operates by assisting schools and local communities, creating new workplaces (1050 units in 2012). Direct donations stood at USD 0.6 M in 2012. 3. Employer’s responsibility: Kernel employs about 17000 people and conduct different staff training programs. Thus, USD 173 M were invested in training in 2012. |
Industry Overview & Competitive Positioning
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| Ukraine is one of the major exporters in the region. According to forecasts of the USDA Ukraine will provide more than 50% of the world’s sunflower oil exports, 14% of maize, 12% of barley and 5% of wheat in 2012/2013. Ukraine produces one third of the sunflower output in the region and above 25% of grains if combined with Russia. Nevertheless we assume that the Ukrainian agricultural market will only grow qualitatively in the midterm outlook due to limited arable land. | |||||||||||||||||||||||||||||||||||||||||||
| Figure 9. Ukraine and Russia are major players in the world’s exports Companies with largest capacities and sales by segments
Source: ISI Emerging Markets, APK Inform, KNU estimates |
Figure 10 . The main oil-processing companies, Ukraine
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