Fan Milk Plc (“FML”) released its unaudited 1Q2025 financial results on 02 May 2025, reporting an impressive profit outturn. The large ice cream producer churned out a net profit of GHS 24.1mn, representing a 65.9% y/y improvement. The profit outturn was mainly underpinned by a 56.7% y/y increase in revenue to GHS 242.2mn and an 80.4% y/y plunge in finance cost to GHS 1.3mn. The impressive topline growth in the current period suggests a potential recovery in export performance, indicating that prior challenges impacting export sales may have been effectively addressed, thereby supporting overall revenue expansion. However, we await topline performance in the quarters ahead for sustainability. Gross margin declined by 1.0pp to 37.5%. This suggest that cost pressures may have outweighed potential gains from material price negotiations, product mix optimization, and targeted sales promotions strategies which Fan Milk Limited has historically employed to mitigate cost volatility. Input costs surged by 59.2% y/y to GHS 151.5mn, while operating expenses rose by 30.2% y/y to GHS 60.3mn. We attribute the sharp increase in input costs to a 17.1% y/y depreciation of the Cedi against the US Dollar and a 9.3% y/y rise in the price of skimmed milk powder. Additionally, the uptick in operating expenses was largely driven by higher utility costs and increased spending on promotional and advertising activities. Overall, we are impressed by the significant surge in earnings, mainly supported by the focus on productivity initiatives and topline growth.  With FML’s 1Q2025 topline and earnings exceeding our estimates by 19.8% and 66.8% respectively, we believe this performance sets a solid foundation for a positive outturn in FY2025 as macroeconomic conditions improve.

Outlook: We are optimistic about FY2025 top-line performance but cost containment is necessary for earnings sustainability

• We expect management to maintain stringent cost control measures, as previously demonstrated, to support margin expansion and cushion potential bottom-line pressures in 2025. While input costs are likely to remain contained in the near term amid moderating inflation, the risk of rising skimmed milk powder and cocoa prices could exert upward pressure. In this context, we believe effective cost containment will be crucial in protecting margins and sustaining profitability amid ongoing market volatility.

• We anticipate that FML’s revenue momentum will be sustained in FY2025, supported by the robust 1Q2025 topline growth of 56.7% y/y, which exceeded our estimates by 19.8%. The surge in revenue suggests a potential recovery in export sales. However, we await further clarity from management at the upcoming AGM on 16 May 2025. In the near term, we expect the company to leverage its enhanced distribution network and strategic promotional activities to drive topline expansion.

• Fan Milk is advancing its vendor automation initiative to enhance sales visibility and strengthen its direct-to-market reach. The company’s data automation strategy serves as a critical tool for enabling data-driven decision-making to drive growth. By piloting the vendor automation process, FML aims to gain deeper insights into vendor sales locations, optimizing its sell-out strategy. We expect this initiative to support the company in expanding its distribution network and deepening market penetration across key local markets.

• We anticipate that the company will intensify its local sourcing efforts to mitigate foreign exchange risk, a strategic move that could cushion margins against currency volatility and reduce dependency on imported raw materials. For the 2025 financial year however, the improved prospect of FX stability will ease the FX impact on input cost and support a recovery in gross margin

Valuation: Under Review

• We are in the process of re-initiating coverage on FML and have therefore placed our recommendation under review
• FML is trading at a TTM P/E of 5.6x and EV/SALES of 1.3x