Performance: Still in the red

• FML reported a net loss of ~GHS 20.9m as against a profit of GHS 0.5m in FY2020
•  Management attributed the loss to higher input cost and an increase in administrative expenses, prompted by a restructuring exercise that occurred in 2H2021
• Administrative expenses grew by 48.8% y/y to GHS 52.1m, owing largely to a GHS 15.2m restructuring cost in 3Q2021
•  According to our rudimentary analysis, admin expenses decreased by 25.0% q/q in 2Q2021, increased by 271.4% q/q in 3Q2021 largely due to the restructuring cost, then decreased again by 26.2% q/q in 4Q2021, signaling that the restructuring cost is a one-off item
• Top-line continued its growth momentum as it increased by 25.3% y/y to ~GHS 468.1m. The yuletide season supported revenue growth, as revenue increased by 21.8% q/q in 4Q2021, after decreasing by 3.6% q/q and 12.0% q/q in 2Q2021 and 3Q2021 respectively
• This strong growth is as a result of recovery of FML’s outdoor business and increase in export business to affiliated companies
• Notwithstanding the strong growth in revenue, higher material prices dipped gross margin from 32.1% to 26.3% in FY2021
• Cost of sales increased by 36.0% y/y to ~GHS 344.8, owing to input cost inflation and a 23.0% y/y rise in the price of skimmed milk powder on the global market
• Meanwhile, operating expenses grew by 22.3% y/y, contracting operating margin by 4.4ppts to close FY2021 at -4.3%
•  FML’s finance costs grew by 61.0% y/y to GHS 3.3m, owing to a GHS 40.0m loan facility the company took up in 2H2021

Outlook: Cautiously Optimistic

• We remain bullish on the company’s revenue growth on the back of a sustainable strategy, improved visibility and accessibility of indoor operations, a growing export business and an increase in vendor numbers
• Our optimism is also hinged on the recovery of FML’s outdoor operations as well as improved innovations, which saw the debut of new products in premium ice cream (Go Slo), frozen pouches (Fanyogo punchie peach) and dairy drinkables (NutriDay Yoghurt)
• Furthermore, we anticipate that FML’s gross profit margin will improve in the coming years, on the basis of a stable price outlook for skimmed powder milk. Our thesis is based on the Agricultural Outlook 2021 – 2030 report from the OECD* and FAO* of the UN*
• The report indicates that skimmed milk powder prices will remain stable in real terms throughout 2021 – 2030 period due to the complete disposal of intervention stocks in the European union which will increase supply
• We remain concerned about the restructuring cost given that, in 2019, management chalked its poor performance to a similar reason. The above notwithstanding, we expect some savings to be realized from this exercise in the medium to long term, from a muted growth in Opex to a better operating efficiency. Management also indicated that the restructuring exercise was done to ensure that the company’s operations are leaner and more agile in the light of the new post-COVID environment
• Ghana has so far managed the COVID-19 pandemic effectively with the country’s vaccination roll-out programme on track. However, the potential of new COVID-19 variants emerging and the possibility of a re-imposition of movement restrictions remains a key risk, as it will have an adverse impact on sales

Valuation: Under Review 

• We are in the process of re-initiating coverage on FML and have therefore placed our recommendation under review