In brief
- Topline Growth Overshadowed by Cost Pressures: Fan Milk Plc (FML) posted a 3.7% y/y decline in net profit to GHS 42.4mn for 9M2025, coming in 10.0% below our expectations. The profit dip stemmed from a 55.7% y/y surge in cost of sales to GHS 473.8mn, a 41.2% rise in operating expenses to GHS 194.6mn, and a 66.6% plunge in finance income to GHS 9.4mn. Although revenue grew strongly by 50.6% y/y to GHS 726.6mn, driven by a focus on outdoor sales, rising input costs and OPEX compressed gross margin by 2.2pp to 34.8% and operating margin by 0.9pp to 8.1%.
- Foreign Exchange-Linked Cost Pressures to Cap Margin Upside: FML’s local sourcing, currently below 50%, keeps its cost structure vulnerable to foreign exchange volatility and global commodity price swings, particularly for imported inputs such as skimmed milk powder. While the cedi’s appreciation in 2025 has eased inflationary pressure, advance procurement contracts continue to delay cost relief. We forecast input costs to expand at a five-year CAGR of 21.0%, nearly double the historical average, capping gross margin improvement at an estimated 33.2% over the forecast period.
- Cold-Chain Expansion to Support Revenue Growth Amid Near-Term Margin Pressure: Project Kilimanjaro marks a strategic push to expand cold-chain capacity through new refrigerated trucks, vendor freezers, and cold rooms. This initiative enhances last-mile distribution and product availability, complementing ongoing efforts under Project SANKOFA. While these investments underpin long-term revenue growth, reflected in our five-year revenue CAGR forecast of 18.9%, we expect short-term margin to remain under pressure due to higher operating costs, with operating margin forecast to decline to 8.1% by FY2026.
- Optimised Distribution Backbone to Drive Volume Recovery: The “Bring Back the Pride” roadmap and Project SANKOFA are strengthening route-to-market efficiency through vendor empowerment and execution discipline. Fan Milk now operates an extensive distribution network of 800 agents, 21 primary distributors, and nearly 7,000 vendors. Initiatives such as the Fan Academy and Right to Dream programme are enhancing partner capability and brand visibility, supporting sustainable volume recovery and reinforcing medium-term revenue growth.
- Key risks to valuation: Unexpected upward reversal in inflation, foreign exchange volatility, elevated interest rates, utility tariff hikes, rising energy prices, price surge in skimmed milk powder and other key raw materials, intensified competition, unfavorable tax policy shifts, water scarcity and execution risk in route-to-market optimisation
Rating Summary:
We revise our rating on Fan Milk PLC to a HOLD (from “ACCUMULATE” at HY2025) as we see limited near-term upside from the current price of GHS 8.00, following a 116.2% year-to-date rally that, in our view, has already priced in the company’s strategic initiatives. Our medium-term outlook anticipates sustained support from productivity investments and commercial revitalisation under the “Bring Back the Pride” roadmap (2024 – 2029). Key growth catalysts include Project SANKOFA, which reinforces vendor empowerment and execution discipline, and Project Kilimanjaro, which expands cold-chain infrastructure to strengthen last-mile delivery and distribution capacity.
We forecast revenue to grow at a five-year CAGR of 18.9%, driven by improved route-to-market efficiency and enhanced product availability. However, profitability remains constrained by elevated input costs and foreign exchange exposure, as less than 50% of raw materials are sourced locally. CAPEX increased by 76.5% q/q to GHS 17.3mn in 9M2025, with a portion of related expenses recognised as exceptional items.
We expect near-term margin pressure, with operating margin projected to decline from 11.6% in FY2024 to 10.4% in FY2025 and further to 8.1% in FY2026, reflecting cost absorption from expanded infrastructure. While we view these structural investments as critical to long-term competitiveness and revenue growth, we believe the current valuation fairly reflects the company’s value at current levels, warranting a neutral stance. We derived our fair value estimate using a blended valuation approach, assigning weights of 40% to discounted cash flow, 30% to the price-to-earnings multiple, and 30% to the price-to-book multiple. The intrinsic value reflects a risk-free rate of 15.69%, a weighted average cost of capital (WACC) of 19.4%, and a terminal growth rate of 5.0%.