Kernel - A Cash Flow Powerhouse Ahead of Strong Earnings
Kernel reported strong volumes for the second quarter of fiscal 2020/21, ended 31 December 2020, indicating that the quarterly EBITDA might top our original estimate by 9% at $550m, with net profit likely coming 23% ahead at a projected $277m. Furthermore, after the latest rally in grain markets, we see Kernel as upgrading its FY2020/21 full-year guidance for the grain export business, represented among others by the Avere trading unit. An upgraded outlook might also be issued for the farming business considering how much grain prices have gone up since September 2020, when Kernel had still not hedged between 20% and 25% of its future sales. Kernel is due to complete a five-year investment program this year, and with more free cash we see the Company as exceeding its FY2020/21 EBITDA target of $495m. Thanks to lower CAPEX, higher cash flow (with FCF/EV Yield upwards of 15% expected in the next two years), and relatively low debt (2.1xEBITDA at year-end FY2020/21E), Kernel’s dividend capacity is about to increase substantially. Meanwhile on our 2021-2023 estimates KER stock is currently trading at discounts of no less than 30% to average sector P/E and EV/EBITDA multiples. We raise our target price for Kernel from PLN 57.39 to PLN 62.93 and we maintain our buy call on the stock.
Kernel Holding is a holding company. Co.'s is a diversified agribusiness engaged in the production and sale of bottled sunflower oil (sold under brand names Schedry Dar, Stozhar and Chumak Zolota), the production and subsequent export of bulk sunflower oil and meal, the wholesale trade of grain (mainly wheat, barley and corn), farming, and the provision of logistics and transshipment services n the ports of Ilyichevsk, Taman and Mykolaiv. The majority of Co.'s manufacturing facilities are primarily based in Ukraine and Russia. In addition, Co. is a private provider of inland silo services in Ukraine.
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