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