So, what’s wrong with Kernel?Landscape in the agricultural sector could not be much more favourable for Kernel than it is nowadays. Grains Price Index is at its highest level since 2013 and the company has managed to fix most of its sale prices for the 2021/2022 season. According to the U.S. Department of Agriculture, global grain yields in 2021 will be remarkably high mostly thanks to the very impressive yields in Argentina and Ukraine. The other major producers like the United States, Brazil, Canada, and China faced unfavourable weather conditions in 2021. China is especially relevant in the context of Kernel as its agricultural products import increased in the first two quarters of 2021 by 34% y/y. Moreover, the key agricultural region of China, Henan province, experienced severe floods that are likely to facilitate the upward trend in the grains import. Let’s be more specific. Rather conservative DCF and comparables suggest a valuation of around 78PLN per share. Quite optimistic given the current 57.
So, what’s wrong with Kernel? The positive indicators I described have been widely known for quite some time however the share price does not display an upward trend. The late July price jump was caused by the buyback announcement. What is the market afraid of? One thing that comes to my mind is July’s Ukrainian tax authorities tax compliance check. Given the position of Kernel’s owner Andriy Verevskyi, I don’t believe that the firm can get busted on taxes. (Kernel is a huge VAT recipient*; more about Ukrainian oligarchs' power**). Donbas war could be considered another “risk factor” however, based on the media reports, the conflict smoulders rather than burns. Lastly, at the beginning of July Kernel announced the amendment of the expense plan regarding the new oilseed processing plant. Additional costs usually do not make shareholders particularly content although given the record yields this year, plant expansion seems to be justified.
Summing up, my valuation suggests that the business is undervalued and I can’t think of risks strong enough to justify current capitalization. Thus, I am optimistic.
*latifundist.com/en/novosti/56563-nazvany-krupnejshie-poluchateli-vozmeshcheniya-nds-v-agrosektore-za-avgust-2021-g
**chathamhouse.org/2021/07/ukraines-system-crony-capitalism/05-agriculture-counterexample
