On Tuesday, UBS initiated coverage on AAK AB (AAK:SS) stock, a key player in the fats and oils sector for the food and chocolate industries, with a Buy rating and a price target of SEK350.00.
The firm highlights the company's potential for sustainable volume growth and anticipates that AAK's earnings before interest and taxes (EBIT) will surpass consensus estimates for the years 2024 and 2025.
AAK has recently seen its EBIT double over the past two years, yet the market remains skeptical regarding the sustainability of its current profitability and future earnings growth.
This skepticism is reflected in AAK's shares trading at a slight discount, with a forward 12-month enterprise value to EBITDA (EV/EBITDA) multiple of 13.9 times, which is 2% below its five-year average of 14.1 times. UBS, however, forecasts an average EBIT growth of 9% per annum from 2024 to 2028, driven by strong operating leverage on volume growth and a better product mix.
The firm also notes the potential for AAK to provide greater shareholder returns and engage in accretive bolt-on mergers and acquisitions (M&A). These possibilities offer additional optionality beyond what is assumed in UBS's base case for the company.
UBS's positive outlook is based on the belief that AAK will meet their higher-than-consensus EBIT estimates and that this will lead to a re-rating of the company's shares. The firm sees AAK's SKU rationalization and cost savings as key factors that will prove the current market concerns unfounded.
In conclusion, UBS's initiation of coverage on AAK AB comes with a confident outlook on the company's financial performance and growth potential over the next few years, suggesting that the current market valuation does not fully reflect AAK's improved profitability and prospects for earnings growth.
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