Is Fan Milk Limited (Ghana) fairly priced?

Company Overview

Ghana Milk Company Limited was established in January 1960 to produce and market milk products in Ghana. It went bankrupt in 1962. FML emerged from the defunct Ghana Milk Company Limited in 1962 in a bid to resuscitate the company. The company was changed to a public limited company seven years after and was listed on the Ghana Stock Exchange on October 18, 1991.

FML prides itself on the production and distribution of dairy products and food drinks such as FanIce, FanYogo and FanChoco. The management grows the business internally by continuously investing in production and distribution facilities. The company expended GH¢49.1 million in 2017 on property, plant and equipment ( 2016: GH¢107.8 million). Also, distribution expenses increased by 26.7% from GH¢85.4 million to GH¢108.1 million between 2016 and 2017. The company sells its products through distributors and agents who are trained from time to time in order to improve customer  service and create brand preference. Fan Milk International A/S (Denmark), its parent company, controls 56.6% of the equity stake of the company. Dr. Charles Mensa (Ghanaian) occupies the position of the chairman of the board while Stephane Couste (French), the managing director, leads the management board of FML.

Investment Thesis

The decision not to pay dividends in 2017 and 2018 is a plus for the management. It would reduce company's dependence on loans to finance its expansion activities. We are of the opinion that management's capital investment would strengthen FML's productive capacity and distribution network. And shareholders would benefit from appreciation of their investments going forward. In addition, debt obligations will not erode profits and assure of future dividends. Revenue and Earnings Per Share (EPS) have been grown by 23.2% and 14% respectively in the last seven years on a Compound Annual Growth Rate (CAGR) basis.

We arrived at an estimate ranging from GH¢5.2 to GH¢7.4 per share. 

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