Valuation
To estimate the fair price of Kernel we used the discounted cash flow model and applied discounted cash flow to firm approach. The company’s strategy disclosure is limited with 3-4 years, accounting for the expansion in the Russian market. We think that after this crucial period company’s figures will reach relative stability. This fact denoted the forecasting period of 5 years. Revenue. The revenues are calculated on the segment basis. On the volume side, the bulk oil volumes are expected to grow up on par with the company’s crushing capacities. The FY2013 stands out, representing appreciable 41%yoy leap, 13% of which accounts for the weak sales and high inventories in FY2012. We think that the bottled oil segment has moderate market capacity, and therefore the rise of 12% in FY2012 and 7% in FY2013 is to be replaced by stagnation at 1-2%yoy. (Despite the mediocre industry outlook / Considering inspiring industry outlook), our analysis suggest that Kernel will be able to accomplish its goals in Russia to the full, and both the grain sales and export terminal throughput will grow for additional 2.5mt up to FY2016 (please, see Apendix с табличками) The prices for the oil and grain products are calculated using the FARPI-ISU 2012 World Agricultural Outlook. The discount rate was applied to the forecasts, obtained by comparing historical FARPI prices to the Ukrainian grain and oil price indices reported by the UkrAgroConsult. The revenues from the export terminals, silos and farming are going up extremely slowly as we mainly suppose them to benefit to the intersegment sales of fast-expanding grain segment. We also supposed that the sugar beet plant will be sold in the nearest future, and therefore, will not bring additional revenue after first quarter of FY2013. Costs. The raw material used accounts for around 71% of the sales. We expect this ratio to stay constant as we are sure that Kernel will be successful in passing COGS increase on the final consumer. Rental expenses are based on the land lease rights the company poses and calculated with respect to them. The payroll and other expenses are supposed to grow with the rate of company’s asset expansion. Change in working capital. We projected the inventories using the inventory turnover ratio (6.0), obtained on the basis of company’s historical data with adjustments made to FY2012 because of the unusual record-high values. More than 95% of biological assets consist of crops, beans and seeds. So, we assume that their value is mostly preconditioned by the land the company rents. Other components of the working capital were calculated with an assumption of constant WC/Sales proportion.
CapEx. The company’s CapEx plan has a time horizon of 3 years. Kernel plans to spend around 100$mln on the acquisition/constructions of new silos and approximately 120$mln. for building a crushing plant in Voronezh. The acquisition of Taman terminal has brought135mln.$ CapEx in 2013FY and infusion of 20$mln. is expected annually for the two subsequent years aimed at its expansion. On the other hand, Kernel has announced the plans of selling sugar plants. According to our estimation will be sold approximately at their book value, which will create an additional cash inflow of 60$mln. Therefore, considering the estimated expenses on maintaining the PP&E, we suppose CapEx in tangible assets accounts for 200$mln. in FY2013 and 150$mln. in FY2014 and FY2015. We also expect that in FY2016-FY2017 it will represent 105% of depreciation (5% of which accounts for long-term Ukrainian inflation) plus additional 34% (calculated on the basis of historical data) spent on building of new capacities which are then transferred to constructions and production equipment at 2:1 ratio. Increase in intangible assets is supposed to stay constant, equal to 37$mln. spending on purchase of land lease rights and 0,5$mln. on other assets annually. WACC. The WACC was calculated using the market Debt/Equity ratio of the FY2012 which is equal to 0.46. We also suppose that the book ratio won’t change dramatically in the future. The cost of debt was taken as a 9,6% average interest paid FY2006- FY2012. Taking into account the positive line of the company’s taxes, we are obliged to assume effective tax rate of 0%. The estimated Cost of Equity is 15,80%, which includes the following items: ü Based on 10 years USA government bonds risk-free rate of 1,7% ü Equity risk premium, calculated using supply-side model with income return of 3,3% (10-year US Treasury notes interest) and supply of equity return of 2,2% (average annual P/E growth of S&P index) ü Unlevered beta of 0.65 for the companies which operate in agricultural sector. ü Size risk premium of 1,56% as a yield premium of S&P MiddleSmallCap over S&P 500 for the previous year ü Country risk premium using yield on Ukrainian dollar-denominated bonds, equal to 5,9% ü Currency risk premium based on the IMF forecasts of the inflation rates of US and Ukraine.
Terminal growth rate. We assumed the terminal growth rate of 3.00%, 1,9% of which accounts for long-term US inflation and 1,1% for the annual world population growth rate. Uses of FCF: Kernel has approved that the dividends are to be paid from 2013FY. Moreover, the company considers the dividends as a main option to deal with the excessive cash. WIG index presents the dividend yield of 3.8%, which accounts for approximately 30% dividend payment ratio for Kernel in 2013FY. We assume this ratio will stay constant for further periods.
We understand that the result can be influenced by a lot of factors which we are not able to take into account. Given the fact that grain and oil prices on both Ukrainian and Russian market is a subject of appreciable volatility, we provide the sensitivity matrix for the changes in costs of raw materials and the external price of grain and o
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Thus, we assume constant WACC of 13,83%.
