26 October 2021

FML 9M2021 results

In brief

Fan Milk Plc. (“FML” or the “Company”) released its unaudited 9M2021 results yesterday and held an investor meeting today. While the Company reported a loss, the top-line continued to grow, confirming our thesis that FML’s strategy to improve outdoor sales, diversify the product portfolio and accelerate indoor operations is yielding returns. Management attributed the Company’s loss to an increase in administrative expenses due to a GHS 15.2m restructuring cost that occurred during the period under review.

Performance: In the red

  • FML reported a net loss of ~GHS 13.6m versus a loss of ~GHS 2.4m in 9M2020. Management attributed the loss to an increase in admin expenses
  • Administrative expenses increased by 97.3% y/y to ~GHS 35.9m on the back of a restructuring exercise that occurred in July and August 2021
  • Despite the elevated costs, top-line continued its growth momentum as it increased by 28.2% y/y to ~GHS 342.3m
  • According to management, this was driven by a recovery in the Company’s outdoor business, an 83.0% y/y growth in indoor sales, and an 8.0% y/y increase in exports business to affiliated companies
  • Notwithstanding the strong growth in revenue, gross margin reduced by 354bps to 31.9% y/y due to the rising cost of sales
  • Cost of sales increased by 35.2% y/y owing to forex exposures as FML is a heavy importer of skimmed milk powder
  • Meanwhile, operating expenses grew by 28.0% y/y, contracting operating margin by 297bps to close the period at -4.0%

Outlook: Still positive

  • Although management attributed the loss to administrative expenses, we believe the rising cost of sales has significantly impacted the business leading to declining gross margins despite efforts to boost revenue
  • Management indicated that the restructuring exercise was done to ensure that the Company’s operations are leaner and more agile in light of the new post-COVID environment. In the short-to-medium term, we expect some savings to be realized from this exercise, from a muted growth in Opex as well as better operating efficiency
  • With restructuring cost being a one-off expense, we are positive that FML’s Opex will see some reduction in the coming quarters
  • Management also indicated that the move to a new office complex, investments in the biomass boiler and solar panels will save the Company ~GHS 2.0mn annually
  • We are bullish on the Company’s revenue growth on the back of improved visibility and accessibility of the Company’s indoor operations and increased vendor numbers
  • In addition to the above, we anticipate stronger revenue growth as we enter the festive season
  • We also expect the addition of the very well received Fanyogo Punchie Peach and premium brands such as Go Slo and NutriDay yoghurt to contribute significantly to margin expansion
  • While we are of the view that the performance of the outdoor business is correlated to how well COVID-19 is managed, we believe the recalibrated compensation structure for FML’s sales force is a sustainable approach to maintaining outdoor sales

Valuation: Under Review

  • We are in the process of re-initiating coverage on FML and have therefore placed our recommendation under review
  • FML is, however, trading at a P/E of 85.4x and EV/EBITDA of 53.1x