Fan Milk Ghana: Consumer goods

THE COMPANY: Fan Milk International A/S is a leading dairy and juice production and distribution company with operations across West Africa. Founded in Ghana in 1960, the group now boasts operating subsidiaries in six regional countries: Nigeria, Togo, Côte d’Ivoire, Burkina Faso, Liberia, and Benin.

Fan Milk Ghana (FML) has been operating in Ghana for over 50 years, producing and selling both dairy products and low-end fruit drinks. FML has maintained a near-monopoly market leadership position in Ghana’s ice cream and yoghurt segment. It has sustained growth and market share though its excellent distribution network and strong brand presence.

FML’s parent company, Fan Milk International, owns 57.6% of the company, with the remainder held by a wide mix of retail and institutional investors, as the company is listed on the Ghana Stock Exchange. In June 2013, Abraaj Capital, a large, Dubai-based, private equity firm, acquired 100% of Fan Milk International and also indirectly acquired control over FML.

Over the last five years, FML has been the largest contributor to Fan Milk International’s revenue as well as its earnings before interest, taxes, depreciation and amortisation (EBITDA). FML contributed an average of 45% and 58% of group’s revenue and EBITDA, respectively, from 2008 to 2012. FML’s revenue grew by compound annual growth rate (CAGR) of 15% over the fiveyear period, outpacing the group’s revenue CAGR of 8%. FML’s EBITDA grew by a CAGR of 20%.

In 2012, FML generated GHS147m ($75.6m) of revenue and recorded an EBITDA of GHS40m ($20.6m), with its net profit margin steadily improving from 14% in 2008 to 18% in 2012. FML witnessed an impressive 50% jump in its share price over 2012, closing the year at GHS3.55 ($1.83). The share price growth has continued into 2013, with the stock trading at its all-time high of GHS6 ($3.08) as at the end of July 2013. The share price was largely unaffected by the intermittent power shortages and lengthy raining season during the first half of 2013, which impaired revenue growth at GHS71m ($36.5m) in the first half of 2013 versus GHS73m ($37.5m) in the first half of 2012.

DEVELOPMENT STRATEGY: FML has over the years maintained its simple winning formula, with a strategy based on a strong brand image coupled with highdemand products and a wide distribution platform. The company’s model is to produce and sell affordable frozen dairy products to an expanding youthful population in a hot country. Despite increasing competition from imports and recent power challenges, FML has continued to record strong growth, driven largely by improvements to its distribution platform and the continued rise of the country’s middle class.

FML expects revenues to rebound, as additional power from new power plants in Ghana comes on-stream during the second half of 2013. Ongoing installations of new factory equipment, construction of new regional distribution centres and the acquisition of sales equipment are expected to enhance supply capabilities and nationwide presence, further improving sales.

FML expects to maintain healthy margins as it further exploits cost efficiencies via its extensive value chain from sourcing, procurement and production to distribution. Further cost efficiencies are also expected on the back of improved infrastructure. IC Securities expects FML’s gross margin ratio to remain in the mid-50s and a 2013 net profit margin of 20%, 200 bps above 2012.

IC Securities sees favourable socio-economic conditions positively affecting FML’s volume growth. Ghana has an expanding youthful population with increasing per capita income levels, as well as rising urbanisation levels coupled with a heightened desire for convenience foods. These favourable macro conditions should support future consumption and sustain growth levels.

Abraaj Capital is yet to fully unveil its strategy for FML.

Nonetheless, we remain optimistic about future performance due to Abraaj’s track record with similar African investments. Going forward, continuous brand loyalty and increased distribution supported by a stronger financial backbone should sustain FML’s growth. FML price & index relative performance FML market ratios