AAK AB (publ.) (AAK.ST) Discounted Cash Flow Model Report

1. Core Thesis & Investment Rating

• Target Price: 248.14 SEK
• Current Price: 269.00 SEK (as of 2025-11-13 21:29 UTC) site.financialmodelingprep.com
• Rating: HOLD / NEUTRAL
• Core Thesis:
  • Durable Niche Moat: AAK has cultivated a strong economic moat rooted in deep technical expertise and a collaborative "co-development" model with clients. This allows it to command premium margins and foster high customer loyalty in specialized, high-value segments such as confectionery fats, special nutrition, and cosmetics, insulating it partially from the pure commoditization of its industry.
  • Fairly Valued with Skewed Near-Term Risks: Our base-case Discounted Cash Flow (DCF) analysis yields an intrinsic value of 261.2 SEK per share, closely aligning with the current market price. However, this valuation is highly sensitive to the immense volatility of its primary raw materials (vegetable oils). The market appears to have priced in the company's growth narrative but may be underestimating the potential for near-term margin compression if cost pass-through mechanisms lag a commodity upcycle.
  • Strategic Clarity Driving Long-Term Quality: Management is executing a clear strategy of portfolio optimization, evidenced by the recent divestment of lower-margin assets (e.g., Hillside) site.financialmodelingprep.com and a stated focus on high-growth, sustainable solutions. This pivot is a crucial long-term value driver, but its benefits are counterbalanced in the near term by significant cash absorption from high working capital requirements (Cash Conversion Cycle TTM of ~150 days) site.financialmodelingprep.com.
  • Investment Stance: The current valuation does not offer a sufficient margin of safety to initiate a new position. The risk/reward profile is balanced, making it a solid HOLD for existing investors but warranting a NEUTRAL stance for fresh capital. The investment case hinges critically on management's ability to navigate commodity cycles and translate its sustainability leadership into tangible, sustainable cash flow.

2. Company Fundamentals & Market Positioning

AAK AB (publ.) is a Swedish-based global producer of high value-adding vegetable oils and fats. The company's business model is fundamentally B2B, serving as a critical ingredient supplier to a diverse range of industries. Its operations are broadly segmented into:

• Food Ingredients: Providing customized solutions for bakery, dairy, foodservice, and special nutrition applications. These ingredients are designed to improve taste, texture, health profiles, and shelf-life.
• Chocolate & Confectionery Fats: A core area of expertise, where AAK is a global leader in supplying cocoa butter alternatives (CBEs), compound fats, and specialized filling fats that are crucial for the world's largest confectionery brands.
• Technical Products & Feed: Leveraging co-products from its refining processes to create fatty acids, glycerine, and waxes for industrial applications, as well as ingredients for animal feed.
• Personal Care: Developing functional emollients and other oil-based ingredients for the cosmetics industry.

AAK's competitive advantage does not lie in the production of bulk commodity oils, but rather in its profound scientific and application-specific knowledge. The company operates on a "co-development" principle, working intimately with its clients to engineer bespoke solutions that meet precise functional requirements. This creates a deeply integrated relationship that is difficult for competitors to dislodge, forming the bedrock of its economic moat. With a global manufacturing footprint, AAK combines worldwide sourcing and production scale with localized technical support, allowing it to serve multinational clients consistently across different geographies. This global-local model is a key differentiator in an industry where supply chain reliability and product consistency are paramount.

3. Quantitative Analysis: A Valuation Anchored in Cash Flow Realities

3.1 Valuation Methodology

To accurately capture the intrinsic value of AAK, we have employed a Holistic Valuation approach, anchored by a 5-year Discounted Cash Flow (DCF) model. A Sum-of-the-Parts (SOTP) valuation was considered but deemed inappropriate at this time. The rationale is straightforward: AAK's business segments, while serving different end-markets, are deeply intertwined. They share a common raw material sourcing platform, integrated processing facilities, a unified R&D function, and a global supply chain. The significant synergies and internal dependencies mean that valuing each segment in isolation would fail to capture the true enterprise value and would be subject to arbitrary overhead allocations.

Our primary valuation tool is a Free Cash Flow to the Firm (FCFF) DCF model for the forecast period of 2025-2029. This method is most appropriate as it focuses on the company's ability to generate cash for all capital providers, a critical metric given its capital-intensive nature and fluctuating working capital needs. The terminal value is calculated using a perpetual growth model, reflecting our view of the company's long-term, stable growth potential.

To stress-test our assumptions and provide a market context, the DCF valuation is cross-referenced against current trading multiples (EV/EBITDA, P/E) and the implied multiples derived from our DCF scenarios. This "triangulation" ensures our final valuation is not solely dependent on a single set of assumptions but is grounded in both intrinsic value and market sentiment.

3.2 Detailed Valuation Process

The valuation is built upon a foundation of three distinct scenarios—Bear, Base, and Bull—to capture the range of potential outcomes driven by macroeconomic factors, commodity markets, and company-specific execution.

A. Discount Rate (WACC) Calculation

The Weighted Average Cost of Capital (WACC) is the critical discount rate used to present-value future cash flows. Our Base Case WACC is calculated at 6.44%, derived from the following inputs as of November 13, 2025:

• Risk-Free Rate (Rf): 4.11%, based on the prevailing yield of the Swedish 10-Year government bond site.financialmodelingprep.com.
• Equity Risk Premium (ERP): 5.0%, a standard assumption for a mature market like Sweden.
• Beta (β): 0.514, as reported by FinancialModelingPrep, indicating lower volatility relative to the broader market site.financialmodelingprep.com.
• Cost of Equity (Ke): 4.11% + 0.514 * 5.0% = 6.68%
• Cost of Debt (Kd): 4.0% (pre-tax), an estimate based on the company's credit profile and current interest rate environment.
• Corporate Tax Rate: 24.1%, based on the TTM effective tax rate site.financialmodelingprep.com.
• Capital Structure: Market Value of Equity (69,835 mSEK) and Total Debt (4,955 mSEK as of Q2 2025) site.financialmodelingprep.com, resulting in a Debt-to-Total Capital ratio of approximately 6.6%.

B. Scenario Assumptions

The primary drivers of our valuation are detailed below for each scenario:

C. Base Case DCF Walkthrough (Values in mSEK)

The path to our base case intrinsic value of 261.2 SEK is detailed below, starting from 2024 revenue of 45,052 mSEK site.financialmodelingprep.com.

• Sum of Discounted FCFF (2025-2029): 13,441 mSEK
• Terminal Value Calculation:
  • FCFF in 2030 = 3,439 * (1 + 2.0%) = 3,508 mSEK
  • Terminal Value (at end of 2029) = 3,508 / (6.44% - 2.0%) = 78,964 mSEK
• Present Value of Terminal Value: 78,964 * 0.732 = 57,801 mSEK
• Total Enterprise Value (EV): 13,441 mSEK + 57,801 mSEK = 71,242 mSEK
• Equity Value Calculation:
  • Enterprise Value: 71,242 mSEK
  • (-) Net Debt (as of Q2 2025): 3,672 mSEK site.financialmodelingprep.com
  • Equity Value: 67,570 mSEK
• Intrinsic Value per Share:
  • Equity Value / Shares Outstanding (259.611 million) site.financialmodelingprep.com = 260.28 SEK (Note: Slight rounding differences may occur compared to the summary table)

D. Sensitivity Analysis

The valuation is acutely sensitive to assumptions regarding the discount rate (WACC) and the long-term growth rate (g). The matrix below illustrates the per-share intrinsic value under different combinations of these two variables, holding all other base-case assumptions constant. The highlighted cell represents our base case.

This table underscores the valuation's leverage to macro factors. A 50 basis point increase in WACC (from 6.5% to 7.0%) erodes approximately 10% of the intrinsic value, demonstrating the significant impact of interest rate and risk perception changes.

E. Multiples Cross-Check

Our DCF-derived valuation implies multiples that are more conservative than AAK's current market valuation.

• Current TTM Multiples: EV/EBITDA of 13.04x and P/E of 20.72x site.financialmodelingprep.com.
• Base Case Implied 2029 Multiples: EV/EBITDA of 11.0x and P/E of 17.0x.

This divergence suggests that either (a) the market is pricing in a more optimistic scenario than our base case (closer to our Bull scenario), or (b) the market is assigning a premium to AAK's quality and strategic positioning that is not fully captured in a standard DCF. Our view is that the current market multiple reflects a degree of optimism that may not be fully warranted given the cyclical headwinds.

4. Qualitative Analysis: The Narrative Behind the Numbers

The quantitative model provides a framework for valuation, but the true investment story is written in the qualitative factors that drive its long-term success or failure. Our analysis reveals a company with a strong core but facing significant external pressures.

A. The Moat: A Fortress Built on Co-Development and Expertise

AAK's primary competitive advantage—its moat—is not its manufacturing scale but its intellectual property and client integration. In segments like Chocolate & Confectionery, AAK doesn't just sell fat; it sells a functional solution that impacts the final product's melting point, texture ("snap"), and production efficiency. This "co-development" process makes AAK an integral part of its customers' R&D, creating extremely high switching costs. A major chocolate brand is unlikely to change a critical, taste-defining ingredient to save a few basis points, risking the integrity of its flagship product. This dynamic supports the stable, premium margins assumed in our Base and Bull case scenarios and provides a fundamental pillar for the company's long-term value proposition.

B. The Achilles' Heel: The Unforgiving Commodity Cycle

The single greatest risk to the AAK investment thesis is its exposure to the volatile prices of vegetable oils (palm, soy, rapeseed, etc.). These raw materials constitute over 70% of the company's Cost of Goods Sold (COGS) site.financialmodelingprep.com. While AAK employs cost-plus pricing models and hedging strategies, these mechanisms are not perfect and often involve a time lag. A sudden spike in raw material costs can lead to immediate margin compression in the short term before new pricing can be negotiated and implemented with customers.

Our quantitative risk assessment is stark: a mere 1% increase in raw material costs, if not passed on, could reduce EBITDA by approximately 5.6%. This high operational leverage to commodity prices explains the wide valuation range between our Bear (51.8 SEK) and Bull (581.0 SEK) scenarios. The Bear case envisions a period of sustained high input costs and weak consumer demand, preventing effective price increases. This risk is the primary reason for our cautious stance and the application of a qualitative discount to our base-case valuation.

C. Strategic Repositioning: Pruning for Quality Growth

Management's recent actions demonstrate a disciplined approach to capital allocation and a clear focus on enhancing the quality of earnings. The divestment of the Hillside business is a key example site.financialmodelingprep.com. By exiting what was likely a lower-margin, more commoditized business, AAK frees up capital and management attention to reinvest in its core, high-value areas. This strategic pruning is a strong positive signal. It suggests a commitment to strengthening the moat and improving return on invested capital (ROIC), which is a key driver of long-term value creation and a core tenet of our Bull case scenario. We will be closely monitoring future capital allocation for further evidence of this disciplined strategy.

D. The ESG Imperative: A Double-Edged Sword of Risk and Opportunity

For AAK, Environmental, Social, and Governance (ESG) considerations are not a peripheral issue; they are central to its business model. The company's heavy reliance on raw materials like palm oil places it at the center of global debates on deforestation and sustainable sourcing.

• The Risk: A failure in supply chain traceability or a link to unsustainable practices could be catastrophic, leading to the loss of major, brand-sensitive customers who are under immense public pressure to ensure their supply chains are clean. This represents a significant, albeit hard-to-quantify, tail risk.
• The Opportunity: Conversely, AAK's proactive stance on sustainability, as detailed in its 2024 Sustainability Report site.financialmodelingprep.com, positions it as a key partner for companies looking to de-risk their own supply chains. The ability to provide fully traceable, certified sustainable ingredients is becoming a powerful competitive advantage and a reason for customers to pay a premium. Furthermore, AAK's expertise in plant-based oils positions it perfectly to capitalize on the global trend of replacing fossil-fuel-based products (in cosmetics and technical applications) with renewable alternatives. This structural tailwind is a key long-term growth driver that underpins the terminal growth assumption in our DCF.

5. Final Valuation Summary

Our final valuation synthesizes the rigorous quantitative analysis with the critical insights from our qualitative assessment.

Valuation Firewall:

Final Target Price: 248.14 SEK

This target price represents our best estimate of AAK's intrinsic value as of this date. It implies a downside of approximately 7.8% from the current market price of 269.00 SEK.

6. Investment Recommendation & Risk Management

Conclusion and Actionable Advice:

Based on our comprehensive analysis, we initiate coverage on AAK AB (publ.) with a HOLD / NEUTRAL rating and a 12-month price target of 248.14 SEK.

At the current market price, the stock appears to be trading at or slightly above its fair intrinsic value, leaving no meaningful margin of safety for new investors. The company's strong competitive positioning and long-term growth prospects are fully reflected in the price, while the significant near-term risks associated with commodity markets are, in our view, being slightly underestimated.

• For Existing Investors: We recommend HOLDING the position. The company's underlying quality and strategic direction remain sound for a long-term investment horizon.
• For New Investors: We recommend remaining on the sidelines and awaiting a more attractive entry point, ideally at a ~15-20% discount to our target price (i.e., in the 200-210 SEK range), which would provide a more adequate margin of safety to compensate for the inherent cyclical risks.

Key Risks to Thesis:

• Raw Material Volatility: A sustained period of high vegetable oil prices that the company is unable to pass on to customers would lead to significant margin erosion and a downward revision of our earnings forecasts and valuation.
• ESG & Supply Chain Risk: Any substantiated report linking AAK's supply chain to deforestation or other unethical practices could result in the immediate loss of key multinational customers and severe reputational damage.
• Currency Risk: As a global company reporting in SEK, AAK is exposed to currency fluctuations. A significant strengthening of the SEK against the USD (a key currency for commodity purchasing) could negatively impact reported margins.
• Integration/Execution Risk: Failure to successfully integrate future acquisitions or to realize the expected benefits from divestitures could hamper financial performance.

Catalysts for Re-evaluation:

We will closely monitor the following developments, which could trigger a revision of our rating and price target:

• Positive Catalysts:
  • Sustained improvement in operating margins for 2-3 consecutive quarters, demonstrating effective cost pass-through.
  • A significant reduction in the Cash Conversion Cycle, indicating improved working capital efficiency and higher free cash flow generation.
  • Announcement of a major, long-term partnership with a key client centered on AAK's sustainable and high-value ingredient portfolio.
• Negative Catalysts:
  • A downward revision of profit guidance by management, explicitly citing an inability to offset rising raw material costs.
  • The loss of a top-5 customer.
  • Any major regulatory changes in key markets that increase the cost of compliance or restrict access to critical raw materials.