European Investments And Sustainability Focus Will Strengthen Future Operations

Key Takeaways

• Divesting the US site improves financial flexibility, while European investment promises higher profitability and future profit growth.
  
• Focus on sustainability and strategic growth in key segments could enhance customer perception and boost long-term revenues.
  
• The divestment of the Hillside plant and dynamic market conditions reflect inefficiencies that may impact growth, margins, and future earnings.

Catalysts

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

• The divestment of the Hillside Foodservice site in North America will generate a one-time cash flow of roughly SEK 600 million, potentially improving cash flow positions and financial flexibility for future investments or strategic initiatives.
  
• Capital investment in European Foodservice operations is expected to enhance profitability, as European sites have higher EBIT per kilo margins compared to the divested US site, which could drive future operating profit growth.
  
• Continued focus on sustainability with increased deforestation-free palm oil, driven by enhanced verification and monitoring, may improve customer perception and potentially lead to higher revenues or market share, especially as sustainability regulations evolve.
  
• In the Chocolate & Confectionery Fats segment, favorable market conditions and the ability to offer solutions that provide cost efficiency can lead to increased demand and potentially higher operating profit margins, even amidst potential consumer demand fluctuations.
  
• Strategic initiatives to leverage growth in the Bakery and Dairy segments within Food Ingredients could enhance operating profit, evidenced by improved profitability even with volume fluctuations, potentially driving long-term revenue growth.

AAK AB (publ.) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AAK AB (publ.)'s revenue will grow by 1.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.9% today to 8.2% in 3 years time.
• Analysts expect earnings to reach SEK 3.8 billion (and earnings per share of SEK 14.58) by about December 2027, up from SEK 3.5 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as SEK 4.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.8x on those 2027 earnings, up from 23.4x today. This future PE is greater than the current PE for the GB Food industry at 20.5x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.5%, as per the Simply Wall St company report.

AAK AB (publ.) Future Earnings Per Share Growth

Risks

• The divestment of the Hillside plant in the U.S., despite offering a one-time cash flow, is driven by the lack of synergies and challenging profitability, which could reflect ongoing inefficiencies and negatively impact net margins and future earnings.
  
• Dynamic market conditions and tougher year-on-year comparisons could challenge AAK's ability to sustain growth, posing risks to revenue and operating profit growth.
  
• The potential delay in EU deforestation regulation adds uncertainty to raw material costs, which could affect working capital, elevate operational risks, and strain margins.
  
• Elevated raw material prices, especially in palm and Shea, could increase costs and negatively affect margins, given existing inventory and contract commitments.
  
• The infant nutrition segment faces ongoing challenges, particularly from declining birthrates in China, which could limit volume growth and impact segment profitability.

Valuation

• The analysts have a consensus price target of SEK 343.0 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 SEK 420.0, and the most bearish reporting a price target of just SEK 250.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be SEK 46.3 billion, earnings will come to SEK 3.8 billion, and it would be trading on a PE ratio of 26.8x, assuming you use a discount rate of 4.5%.
• Given the current share price of SEK 314.0, the analyst's price target of SEK 343.0 is 8.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.