Fan Milk Ghana: Buy, Sell, or Hold?

It’s a pity Ghana isn’t home to more dairy cows. If it were, Fan Milk would likely be a substantially more profitable company.

It’s a pity Ghana isn’t home to more dairy cows.

If it was, Fan Milk would likely have made its investors even wealthier than it already has. Shares of the ice cream manufacturer have more than quadrupled in value over the past five years.

But the big gain doesn’t appear to be tied to any real improvement in the company’s operations. Fan Milk’s earnings dropped 29.8% in 2017 despite a 15.4% increase in revenue.

And the disappointing result doesn’t appear to be a solitary hiccup. The company’s earnings growth has averaged just 11.6% since 2012. That’s well below Ghana’s rate of inflation, which hovered above 16.0% for much of that time period and currently stands at 11.8%.

Fan Milk is simply far less profitable than it once was. Its net profit margin has narrowed from 18.5% in 2012 to 10.5% last year.

That’s a very tight squeeze.

Fan Milk
Photo by Babak Fakhamzadeh via Flickr

One big reason why a dwindling portion of revenue is trickling to the company’s bottom line is because it must import dry milk powder – its main input – from Europe. This milk powder is priced in euros. If Ghana’s cedi weakens against the euro, Fan Milk’s cost of production soars.

And weaken it does. The cedi has depreciated against the euro in each of the past five years. In February 2012, one cedi was worth EUR0.39. Today, it’s worth just EUR0.18 – a 54% drop.

That makes for a pretty stiff currency headwind for Fan Milk’s managers to muscle through.

Buy, Sell, or Hold?

Fan Milk shares have shed 17.5% of their value since September as investors begin to lock in their gains. If you own the stock, I suggest you join them.

Even after the recent sell-off, Fan Milk trades at a sky-high P/E ratio of 41.3. It pays no dividend. And it has had negative free cash flow for two consecutive years. What’s more, I don’t see much of a growth catalyst that can justify the stock’s frothy valuation.

Fan Milk’s a great company, but its substantially overpriced here. Time to sell.

What are your thoughts? Do you think Fan Milk’s a sell, too, or do I have a bad case of brain-freeze? Let’s hear your opinion in the comments.

Further Reading

How to Begin Investing on the Ghana Stock Exchange
Guinness Ghana: Glass Half Full or Half Empty?
Financial Statements for Listed Companies in Ghana

Disclosure: At time of publication I owned shares of Fan Milk.

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