Performance: Higher input costs increase losses
- FML reported a net loss of GHS 16.8m in 9M2022 as against a loss of GHS 13.6m in 9M2021
- Management attributed the higher loss to higher input costs caused by the rising commodity prices, soaring inflation and the depreciation of the Cedi
- Input costs increased by 19.7% y/y to GHS 279.2m, mainly driven by a rise in the price of FML’s key input materials such as skimmed milk powder (+35.1% y/y) and cocoa powder (+24.3% y/y) on the global market
- The rise in input costs was also supported by a 37.5% and 27.5% ytd depreciation of the Cedi against the US Dollar and Euro, respectively, in 9M2022. According to management, the company suffered a net exchange loss of GHS 19.0m due to the steep depreciation of the local currency against the USD and the EURO in 9M2022
- Inflation also soared from 10.6% in September 2021 to 37.2% in September 2022
- As a result of these macroeconomic pressures, cost of sales outpaced revenue by 8.1pps causing gross margin to fall by 4.9pps y/y to 26.9% in 9M2022
- Revenue increased by 11.6% y/y to GHS 382.2m, mainly driven by the upward price adjustments implemented in 9M2022 and improved trade networks
- FML controlled its OPEX in 9M2022 with a 7.4% y/y reduction to GHS 116.2m. This was influenced by a 31.6% y/y decrease in administrative expenses to GHS 24.5m
- On the back of OPEX containment, operating margin improved by 1.2pps, from -4.0% in 9M2021 to -2.7% in 9M2022
- FML’s EBITDA margins also improved from 3.0% in 9M2021 to 3.5% in 9M2022
- Finance cost, however, soared over sevenfold (+755.5% y/y) to GHS 14.7m in 9M2022
- Resultantly, net loss margin increased from -4.0% in 9M2021 to -4.4% in 9M2022
Outlook: Cost of sales to remain elevated
- We expect cost of sales to remain elevated in the short-to-medium term due to the rising commodity and fuel prices, as well as the Cedi’s continuous depreciation. As a result, we anticipate further margin compression in the coming quarters
- We also opine that, given the upside risks to consumer inflation, FML’s sales volume outturn will be impacted in the near term as consumers’ purse strings will remain tight, skewing a large portion of their purchases to necessities
- However, we anticipate that FML’s launch of the “FANICE Y33KOR DUBAI PROMO” sales promotion as well as its growing social media presence will help drive sales in the short-term
- Moreover, we expect the upcoming festive season to influence FML’s sales outturn positively in 4Q2022
- Furthermore, we are optimistic that FML will keep a tight lid on OPEX in the short-to-medium term, improving its operating margin. That notwithstanding, we do not foresee FML reporting profits for the FY2022 financial period
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 30.5x and EV/SALES of 1.0x