13 June 2022

FML 1Q2022 Results: Margins Deteriorate on Higher Input Costs

In brief

Fan Milk Plc. (“FML”) released its unaudited 1Q2022 financial results yesterday, posting a loss of GHS 1.0m on the back of a deteriorating 1Q2022 operating environment. In line with our expectation, FML’s margins deteriorated considerably owing to the rise in input costs spurred by the rising commodity prices and the depreciation of the local currency in 1Q2022. Despite the challenging operating environment, we were impressed by the decent increase in FML’s top-line and the company’s success at containing operating costs.

Performance: Margins come under pressure on higher input costs

  • FML reported a net loss of GHS 1.0m in 1Q2022 as against a profit of GHS 5.5m in 1Q2021
  • Management attributed the loss to higher input costs spurred by rising commodity prices and the depreciation of the Cedi
  • Input costs increased by 24.2% y/y, driven by a 21.9% y/y rise in the price of skimmed milk powder on the global market as well as a 15.6% and 13.6% depreciation of the Cedi against the Dollar and Euro respectively in 1Q2022. As a result, gross margin dipped by 6.7pp to 30.6%
  • Revenue increased by 12.1% y/y, driven by the upward price adjustments implemented in 1Q2022 and improved trade networks. FML increased its GHS 1.20 pouches by 25.0%, GHS 1.50 pouches by 20.0% and GHS 1.80 pouches by 11.1%
  • Despite the single-digit growth (8.6% y/y) in operating expenses amid a high inflationary environment, the operating margin decreased by 5.8pp to near zero (0.1%) in 1Q2022, due to the weaker growth in EBIT
  • Consequently, FML reported a net loss margin of -0.7% in 1Q2022 from a net profit margin of 4.5% in 1Q2021

Outlook: More margin pressure ahead

  • We expect revenue growth to remain positive in the subsequent quarters due to improvements in route-to-market, upward price adjustments, and export sales
  • However, we anticipate that rising inflation will have some impact on sales volume and we expect FML to activate the necessary sales campaigns to drive revenue
  • We expect cost of sales to be elevated throughout the year due to a general increase in the cost of production spurred by rising energy and food costs linked to the Russia-Ukraine conflict. As a result, we expect margins to come under pressure
  • The above notwithstanding, we expect FML to narrow its losses in FY2022 relative to FY2021
  • Our forecast is hinged on the assumption that FML will embark on aggressive sales campaigns to drive sales, strengthen distribution channels and continue to work at containing operating expenses

Valuation: Under Review 

  • FML is currently trading at an EV/EBITDA of 49.9x and an EV/SALES of 3.0
  • We intend to re-initiate coverage in 2H2022