Cost Optimization And Specialty Oils Will Improve Efficiency

Key Takeaways

• Strategic shift to value-added specialty oils aims to improve profitability by enhancing operating profit per kilo, despite declining volumes.
  
• Cost optimization and diversified production model will enhance margins by reducing costs, improving efficiency, and mitigating global trade risks.
  
• AAK's focus on higher-margin products faces risks from cash flow pressures, cost optimizations, and trade challenges impacting competitiveness and financial stability.

Catalysts

Develops and sells plant-based oils and fats in Sweden and internationally.

• AAK is undertaking a cost optimization program expected to yield SEK 300 million in annual cost reductions by mid-2026, which will enhance net margins by improving efficiency and cutting costs.
  
• The company is focusing on a strategic shift to more value-added specialty oils, improving its operating profit per kilo, which should positively influence earnings by increasing profitability despite declining volumes.
  
• AAK is optimizing its production process and supply chain, which will support margin improvement by reducing operational costs and enhancing efficiency, impacting net margins favorably.
  
• AAK is capitalizing on its diversified production model to mitigate risks from global trade dynamics, aiming to protect margins through strategic sourcing and maintaining operational reliability, thus supporting stable net margins.
  
• The appointment of a new President of Global Operations is anticipated to bring fresh perspectives and efficiencies to AAK’s operations, potentially boosting revenue growth and operational efficiencies.

AAK AB (publ.) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AAK AB (publ.)'s revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.7% today to 8.8% in 3 years time.
• Analysts expect earnings to reach SEK 4.4 billion (and earnings per share of SEK 15.72) by about May 2028, up from SEK 3.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK3.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.6x on those 2028 earnings, up from 18.5x today. This future PE is greater than the current PE for the GB Food industry at 21.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.76%, as per the Simply Wall St company report.

AAK AB (publ.) Future Earnings Per Share Growth

Risks

• AAK experienced a decline in volumes, particularly in non-specialty oils and Bakery, driven by strategic decisions to focus on higher-margin products. This decline could impact future revenues if not compensated by higher sales of specialized products.
  
• Despite optimization efforts, operating cash flow was negative due to higher raw material prices and restructuring of sourcing agreements. Continued pressure on cash flow could affect overall financial stability and ability to invest in growth.
  
• The company is launching a cost optimization program that includes a workforce reduction, which could have an impact on operational efficiency and employee morale, potentially affecting net margins if not managed effectively.
  
• Tariffs and global trade dynamics pose a risk to AAK’s sourcing strategy, particularly in palm oil, which might affect its competitiveness and profit margins if alternative sourcing strategies don't mitigate cost increases.
  
• Challenges in the U.S. end markets and potential customer inventory adjustments could continue to pressurize volume sales, affecting both revenue and earnings in the short term.

Valuation

• The analysts have a consensus price target of SEK330.625 for AAK AB (publ.) based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK420.0, and the most bearish reporting a price target of just SEK245.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK49.4 billion, earnings will come to SEK4.4 billion, and it would be trading on a PE ratio of 22.6x, assuming you use a discount rate of 4.8%.
  
• Given the current share price of SEK252.4, the analyst price target of SEK330.62 is 23.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.