Performance: Losses increase on rising costs 

• FML reported a net loss of GHS 49.7mn in FY2022 as against a loss of GHS 13.4mn in FY2021
• Management ascribed the higher loss to higher input costs caused by the adverse economic climate
• Input costs increased by 22.1% y/y to GHS 421.1mn, mainly driven by inflation which jumped from 13.9% in January 2022 to hit 54.1% in December 2022, and partly due to the Cedi’s 30.0% and 25.3% depreciation against the US Dollar and Euro, respectively
• For more colour, the Cedi depreciated by 54.4% and 49.7% in the year to November 2022, against the US Dollar and Euro, respectively, before cooling off to 30.0% and 25.3% in December 2022
• According to management, the company suffered a net exchange loss of GHS 39.4mn due to the steep depreciation of the local currency against the USD and the EURO in FY2022
• As a result of these macroeconomic pressures, revenue which increased by 14.7% y/y to GHS 536.9mn did not help much as cost of sales outpaced total revenue by 7.4pps, causing gross margin to fall by 4.8pps y/y to 21.6% in FY2022
• The growth in revenue was mainly driven by the year-end festivities in 4Q2022 (revenue grew by 25.7% q/q in 4Q2022), upward price adjustments and improved trade networks
• FML controlled its OPEX in FY2022, keeping it flat at GHS 116.2mn. This was spurred by a 0.7% y/y decrease in distribution cost to GHS 96.4mn and a 2.2% y/y marginal increase in administrative expenses to GHS 53.2mn
• Despite the OPEX containment, operating loss margin increased by 1.3pps y/y from -4.3% in FY2021 to -5.6% in FY2022, largely due to the 6.0% y/y fall in gross profit
• In spite of the loss, a tax bill of GHS 16.1mn was incurred owing to a tax re-assessment resulting from tax audits
• Resultantly, net loss margin increased from -2.9% in FY2021 to -9.3% in FY2022

Outlook: Cost to remain jacked up, revenue to grow sluggishly

• In our previous publication, we indicated that we did not expect FML to post profits in FY2022. Our outlook remains unchanged for FY2023
• This is because we believe that the factors that drove FML into the red are still lingering and will not alter much in FY2023
• For instance, we continue to expect cost of sales to remain high in the short-to-medium term due to rising input material costs, surging inflation, higher utility costs and local currency weakness
• With the Cedi already depreciating by 20.6% and 20.1% in January 2023 against the US Dollar and Euro respectively, and with increases in electricity and water tariffs of 30.0% and 8.3%, respectively, in February 2023, we anticipate a significant increase in FML’s costs and further margin compression in the coming quarters
• On the OPEX front, however, we are optimistic that FML will keep a tight lid on operating expenses
• Our outlook on FML’s sales outturn also remains gloomy. We are of the opinion that, given the elevated consumer inflation coupled with the 15.0% to 20.0% price hikes across pouches in 1Q2023, FML’s sales volume outturn will be impacted in the near term as consumers’ purse strings tighten
• The above notwithstanding, we expect FML to aggressively pursue the necessary marketing initiatives to help drive sales volumes

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 a P/B of 1.5x and EV/SALES of 0.6x