28 July 2022

FML HY2022 Results: Higher Input Costs Leads to Losses

In brief

Fan Milk Plc (“FML”) released its unaudited HY2022 financial results yesterday and, in line with our expectations, remained in the red. FML posted a loss of GHS 4.8m on the back of rising input costs. The increase in input costs reflects the rising global commodity prices, high inflation and the continuous depreciation of the Cedi. In spite of the above, we are impressed that FML’s strategy of growing its outdoor business and accelerating its indoor channel is paying off, as revenue increased in double digits for both quarters of the year.

Performance: Higher input costs compress margins 

  • FML reported a net loss of GHS 4.8m in HY2022 as against a profit of GHS 6.9m in HY2021
  • Management attributed the loss to higher input costs spurred by rising commodity prices and the depreciation of the Cedi
  • Input costs increased by 23.1% y/y, driven by a rise in the price of FML’s key input materials such as skimmed milk powder (28.0% y/y), sugar (35.0% y/y), palm kernel oil (69.0% y/y), cocoa powder (72.0% y/y) and poly sacks (56.0% y/y) on the global market
  • The rise in input costs was also supported by a 16.9% and 9.9% depreciation of the Cedi against the Dollar and Euro, respectively, in HY2022. As a result, gross margin dipped by 6.5pp y/y to 27.5%.
  • Revenue increased by 12.1% y/y, driven by the upward price adjustments implemented in 1H2022 and improved trade networks
  • FML controlled its OPEX in HY2022 as it increased by 8.0% y/y, lower than inflation growth. Despite OPEX’s single-digit growth, operating margin decreased by 5.3pp y/y to –1.8%
  • EBITDA margins also decreased from 10.2% in HY2021 to 4.1% in HY2022
  • Resultantly, net loss margin decreased by 4.7pp to –1.8% in HY2022

Outlook: Margins to deteriorate further on the back of prevailing inflationary pressures

  • We expect cost of sales to remain elevated throughout the year due to the rising commodity and fuel prices, as well as the continuous depreciation of the Cedi. As a result, we expect margins to compress further in the coming quarters
  • We also believe that, given the upside risks to inflation and price increases across all brands in HY2022, FML’s sales volume will be impacted in the near term as consumers’ purse strings remain under pressure
  • In a bid to drive sales, FML has launched the “FANICE Y33KOR DUBAI PROMO” sales promotion. This sales promotion rewards consumers with instant airtime and rewards upon the purchase of GHS 20.0 worth of FanIce products in selected stores. It also gives consumers the opportunity to win an all-expense-paid trip to Dubai. This promotion runs from the 8th of July to the 8th of October 2022
  • We expect this sales promotion to pique consumer interest in the company and help boost revenue while increasing OPEX in the coming quarters

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 an EV/EBITDA of 35.4x and EV/SALES of 1.4x