THE COMPANY: Fan Milk International was founded in 1960 in Ghana by Danish entrepreneur Erik Emborg. In addition to Ghana, Fan Milk International operates in six other West African countries, producing dairy products, juice and juice drinks. Fan Milk has successfully distributed its products to the final consumer through its unique street vending system. The group has operating plants in Ghana, Côte d’Ivoire, Togo and Nigeria, and has sales and distribution companies in Liberia, Burkina Faso and Benin.
Incorporated in 1962, Fan Milk Ghana is the leading manufacturer of both ice cream and yoghurt in Ghana with a product range that also includes lowend fruit drinks. Fan Milk Ghana is 56% owned by Fan Milk International, and is the largest contributor to group revenue (48% of group revenue in 2010) and profitability (64% of group earnings before interest and taxes, EBIT, in 2010). Fan Milk Ghana’s turnover outpaced group turnover between 2007 and 2010, growing at a compound annual growth rate (CAGR) of 36% (versus 10% at the group level). Similarly, Fan Milk Ghana grew EBIT at a CAGR of 63% over the same period (versus 52% at the group level).
On a standalone basis, Fan Milk Ghana has recorded decent results, improving operating margin from 15% in 2007 to 21% in 2011. Also, gross margins have averaged 51% over the past five years.
DEVELOPMENT STRATEGY: Fan Milk Ghana uses a combination of strong branding, an appropriate product mix and a unique vendor distribution system to drive revenues and reduce costs, as well as improve margins. The price-sensitive business has routinely invested in depot upgrades, logistics, research and development, and branding to drive volumes while containing prices.
As far as cost reduction goes, Fan Milk Ghana’s transition from a depot-based distribution model to the use of independent agents and distributors since 2009 has aided cost reduction. Also, commodity hedging at the group level, the sourcing of cheaper raw materials, and the introduction of lean production processes has further streamlined its operations and improved efficiency.
The aggregate result of the forgoing strategies are healthy margins and decent bottom line growth of 44% CAGR over the past five years. Annual growth in operating expenses shrunk from 31% in 2008 to 9% in the full year ending 2011.
The Fan Milk model is relatively simple in that the company manufactures and distributes cheap ice cream in a hot country with a young population. The company currently operates through an extensive network of agents and vendors, employing stringent procedures to maintain the quality of its products across the value chain.
Fan Milk Ghana recently introduced regional distribution centres and continues to inject capital into building a solid distribution platform. Also, Fan Milk Ghana has recently invested in repackaging its juice drinks in a bid to address increased competition from cheaper imported alternatives.
Going forward, IC Securities expects Fan Milk Ghana to maintain healthy margins as it continually improves operations and invests in distribution. Based on these expectations, we anticipate turnover to increase by 22% to GHS133.02m ($78.9m) in 2012. We expect gross margins to continue in the lower-50s and a 2012 net margin of 16%, 30 percentage points above the current five-year average.
IC Securities believes that Fan Milk Ghana has passed its capital expenditure (CAPEX) peak ( financial year 2011) and the company should register stronger cash flows between 2012 and 2015 as the company eases off placements in distribution centres and storage facilities. However, the company has historically had a low payout ratio of around 12% and the forward dividend yield is pegged at approximately 1.1%. Notwithstanding this point, we expect the positive operational performance to impact its bottom line and pricing positively going forward.
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