Investment Summary

After careful analysis using different methods of valuation we initiate coverage of Kernel with a HOLD rating and target price of (Zlotih). The rating is defined not only by the valuation done, but also by mixed industry development results and unequivocal effect of expansion to Russia.

The last one is the cornerstone of the estimation. According to our research, it is the main cause of huge discrepancy between the peers comparison price and DCF model evaluation. In the DCF model we supposed that the Kernel will be successful in pursuing its goals given almost flawless management guidance history (Appendix), and the high current share price is the evidence of the fact that market also treats the company’s opportunities very optimistically. On the other hand, peers comparison indicates them to be more overvalued than average on the market. Clearly, we have to take both assessments into account.

Stability in operating activities proven by impeccable financials also implies that management will be able to complete the goals have been set. Therefore we have implied the weights of 70% DCF to 30% peers comparison, which have given us the aforementioned price.

Moreover, the share value obtained is close to the resistance level found during technical analysis (Appendix). (И дальше про технический аналіз)

However, if the 2013 years result will be weaker than the management guidance, we are obliged to downgrade our rating to SELL.

Hereinafter we are to disclose our additional reasons for the HOLD rating more precisely:

► Upside

· Stable markets growth in key sectors of activity (increase in grain prices and increasing demand for oil) will allow the company to keep its market positions and ensure during 2012/17 FY stable value operating margin of at 14,6% CARG. The optimal company structure will provide additional revenue growth due to positive synergy at 30-35 $ per ton, and minimum tax burden and high crop yield create an additional strong competitive advantages.

· Additional financial resources received by accretion of retained earnings and access to external borrowing (in the form of the shares, bonds issuing, and loans on international markets) provide the foundations of realizing investment plans of the company and ensure to maintain the existing optimal capital structure (30/70 - Debt/Equity).

· The scourge of the Ukrainian agrarian market – the export quotes and government interference seems to have little or even no impact on Kernel’s activity. The company has no problems with VAT refund and constantly gets enough export quotes for sufficient realization of its production abroad.

► Downside

· Entrance to the new unknown market.

· Extreme vertical integration may be a veiled threat because of the accumulation of supply chain disruption risk that could destabilize the whole company and cause the loss of the synergy effect. The existing problems with

· Ukraine has exhausted its opportunities for Kernel for sustainable growth and its market development cannot act as a groundbreaking driver in the future, as our analysis doesn’t give any reasons to believe in long-term impetuous market boost. Therefore our expectations about company’s growth rely almost solely on the Russian expansion.