Tuesday, May 21, 2013

Analysis of Kernel



A Russian/Ukranian agricultural, storage and logistics company


Company: Kernel Holding S.A.

Business: Agriculture. Has the entire chain from farmland (owned as well as leased), silos for storage, oilseed crushing plants, logistics both inland as well as deep-sea harbour for further transport. They also have their own brands of for instance sunflower oil.

Active: Ukraine and Russia is where the farmland is. The company it is traded in the Warsaw stock exchange.

P/E: 10.5
I think I have mentioned before that I have been trying to find companies in especially southern Europe for making good and cheap buys of companies. What I found in most cases was that all the good companies have kept their value and the really bad ones are the ones that have been severely punished during this financial crisis. Probably they will, out of pure speculative purposes, also go up significantly once the crisis is passed however it is not in my interest to be the owner of bad companies. But for instance it would be a perfect moment to invest like John Templeton did. Buy all the stock on the Italian, Spanish, Portuguese and/or Greek stock exchange and watch the value increase within the next five years. Some will of course crash and burn but most of them will survive and their stock prices will increase. But for me I do not find that interesting. I at least want to try to find good companies with high value. I therefore started to look more towards the east instead and found some fairly interesting companies on the stock exchange in Warsaw. One of them I directly decided that I wanted to be the owner of and that was Kernel Holding S.A.

I have previously heard about a company called Black Earth Farming that are active within especially Russia however they seem to have had serious problems to get and keep a profit running. For that reason Kernel was so interesting. They have since many years been making a profit and their focus has not been on the farmland and the potential value increase of that but on owning the entire chain including the ports/harbours for shipping the agricultural products from the black sea.

The founder is still in the company with a fairly large quantity of shares almost 39% however it is not so large that he can squeeze the other shareholders. I also like the structure of the board. The people sitting there is based on important functions and knowledge and not a bunch of old geezers helping each others out, many times, at the cost of the company/shareholders.

I bought 115 shares at a price of almost 14 € per share including the fees.


The running P/E for Kernel is 10.5 which is only slightly above my favourite value of below 10 and the price to book is also very low with 1.4. This gives according to Grahams formula a direct buy situation. The earnings per sale is fairly low with its 7% but if I compare that to Black Earth Farming that made a small profit last year but before that had five years of losses I guess 7% is ok. The book to debt is also excellent. The growth they have had for the last five years have been 25% per year which according to Graham gives a motivated P/E of over 60. In this case I left the Lynch formula according to an expected growth rate of 5% which will be more reasonable in the future. Then the motivated P/E will still be 16 which is far from its current value. They are not paying any dividends and have lately been using the money to buy out the farm leases that they had and they are currently trying to concentrate their farmland. They are reporting in three different currencies: USD, EUR and PLN which is why I could keep all the values in EUR.


Conclusion: I found the company to be a direct buy and therefore I bought it. I´m looking forward to owning this company for many years. I hope they will manage to increase the harvest yields as well as that they one day will start to pay dividends to me.

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