Fan Milk Case Study PDF

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A case study on Fan Milk Limited...

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Introducing FanMaxx – Fan Milk's Expansion into the Drinking Yoghurt Market Esther Laryea Daniel Mensah Gilbert, approached expansion projects with a lot of caution as he clearly understood the repercussions of making a wrong investment call. As the Chief Financial Officer at Fan Milk Ghana, he appreciated the catastrophic effects that undertaking a poorly planned expansion project could have for the company. The investment opportunity that the introduction of FanMaxx represented seemed like a golden opportunity and a decision needed to be taken fast, but Gilbert was in no hurry. Company Background Fan Milk (Ghana) Limited is a manufacturer and distributor of milk-based and fruit-based products in Ghana. Its products include FanYogo, FanChoco, FanIce, FanDango and FanPop. The company was initially incorporated in Ghana as the Ghanaian Milk Company in 1960 to produce and distribute recombined milk. Due to unfavourable demand for fresh milk in Ghana at the time, the company recorded huge loses and went bankrupt in 1962 after losses eroded all its shareholders' equity. Later that year, following in-depth marketing research of the Ghanaian market, Fan Milk Ghana felt confident about restarting operations. This time round, operations were focused on the production and distribution of chocolate milk and ice cream. The company was successful after the revamp and became the first to be listed on the Ghana Stock Exchange in 1990. The company's strong growth has gained for it, the recognition as one of the strongest and oldest brands in Ghana. It has attained the highest market share for frozen products in Ghana. The company has continued to chalk good success and has received numerous awards including Best Food and Beverages, Large Scale Company awards at the Association of Ghana Industries awards in both 2012 and 2013.

Today, Fan Milk sells its products through key agents across the ten regions of Ghana. Its primary sales outlet include supermarkets, fuel marts, and vendors who ply the length and breadth of the country with bicycles, pushcarts, headboxes and other equipment. The company has strong brand recognition, an ungeared balance sheet, nationwide distribution network and high bargaining power over both buyers and suppliers. These characteristics have earned it an enviable and unbeatable position in the manufacturing and distribution of ice-cream and fruit-based products in Ghana. The expansion Fan Milk's leading shareholders included Danone, a global food and beverage company and Abraaj, a Dubai private equity group. Spurred on by the company's strong performance and the favourable market for its products in Ghana; shareholders were committed to the continued growth nd investment needed at Fan Milk. Additionally, Danone anticipated a steady growth in demand for dairy products in sub-Saharan Africa in the coming decades. In 2016, the board's strategic growth plan included a planned expansion of the production lines of the firm. This expansion would be achieved by opening three new factories in the country to help the company to sustain the demand for dairy products in West Africa. Pierre-André Térisse, Executive Vice President Access, Africa at Danone and Non-Executive Chairman of Fan Milk International opined that "…Fan Milk's growth has been strong for the past few years and we believe there is potential for dramatically expanding its footprint by exploring yet untapped sources of growth, including the drinkable yoghurt category". Wahid Hamid, the Managing Partner at The Abraaj Group, was also of the view that the investment will further propel Fan Milk's production capacity and ensure it can meet its ever-growing consumer demand for its high quality and nutritious products. The factory expansion was expected to happen in 2017 and would enable the

firm to produce a new product, the FanMaxx and create about 200 jobs in the country. According to Stéphane Couste, Managing Director of Fan Milk Ghana, "FanMaxx, is the first of its kind in West Africa, and provides a rich source of calcium and vitamins. FanMaxx can be consumed chilled or ambient and can be a light meal replacer due to its creamy texture.' The board's strategic plan had financial implications for Fanmilk's financing structure. Traditionally, Fanmilk operated as an all-equity financed firm. Even though over the years, boards had considered taking on some debt to support planned expansions; it had never materialized, and it remained an all-equity financed firm. At the most recent board meeting, the board had recommended that no dividends be paid for the 2016 financial year so as to conserve cash towards the funding of planned projects. One of Gilbert's concern was the sensitivity of shareholders to changes in the dividend policy. With other listed firms paying dividends, he was concerned about the signal that the cut in dividend sent to shareholders and whether it would negatively impact share value. He was hopeful that 2017 was going to be a successful year and looked forward to the possibility of Fan Milk announcing a dividend payout ratio as high as nine per cent. The marketing team had determined that by the end of 2017, the product would be available in more than 5,500 outlets in Accra, Tema and Kasoa in 300ml bottles. The company's sales had been growing at a rate of 34.7%, -5.6%, 27.7%, 78.0% and 22.5% between 2012 to 2016, respectively. Analysts at Databank had forecasted that the product innovation of the firm would widen its consumer base and boost sales growth, which would, in turn, result in higher earnings for 2017. Gilbert had a cause for concern, last year sales dropped significantly from 78% to 22.5%, and he did not feel too confident that the expansion was a step in the right direction. Additionally, although for the longest time Fanmilk had no real competitor, the market had a few new entrants,

and the competition in the market had grown much keener. In his opinion, the analysts were just spewing jargons. He was excited that if need be the shareholders were willing to invest some more in the business, a sign that they were confident about the future of Fan Milk. The question which remained, however, was - could he deliver that future on which they were banking their investment? The board had asked the following questions about the expansion at the last board meeting 1. How much would be needed in assets over the short to medium term to roll out FanMaxx? 2. How much additional financing would shareholders have to contribute towards the expansion each year, over the next three years? 3. If Fan Milk were to grow relying exclusively on internal financing, how much growth would it achieve? Gilbert's only preoccupation, for the time being, was to answer these questions as realistically as possible.

References Cornall, J. (2017). Danone and Abraaj Group expand Fan Milk capacity in Ghana to launch new

product. Retrieved September 7, 2020, from Diary Reporter.com: https://www.dairyreporter.com/Article/2017/05/24/Danone-and-Abraaj-Group-expandFan-Milk-capacity-in-Ghana Databank Research. (2017). Africa Quarterly Strategy Report. Retrieved 2020, from https://www.databankgroup.com/wp-content/uploads/2017/12/databank-africa-quarterlystrategy-report-half-year-report.pdf Doobia.com. (2017). The Danone and Abraaj Group partnership expands. Retrieved September 7, 2020, from https://doobia.com/userfiles/Fan%20Milk%20Ghana%20%20Factory%20expansion.pdf Fan Milk Ghana Ltd. (n.d.). History | Fan Milk Limited - Ghana. Retrieved September 7, 2020, from Fan Millk Ghana: http://www.fanmilk-gh.com/history.php

Exhibits Exhibit 1: Key Economic Indictors Economic Indicator

2013

2014

2015

2016

Inflation rate

11.67%

15.49%

17.15%

17.45%

2017 (forecast) 12.37%

Policy rate

15.8%

19.0%

23.6%

25.9%

22.3%

Year-end dollar rate (GHS/USD)

2.16

3.20

3.80

4.20

4.42

Real GDP (USD' billions)

43.07

44.31

45.28

46.84

50.66

Exhibit 1: Historical Financial Statements (GHS thousands)

Financial Year Ended December 31 2014 GHS'000

2014 % of sales

2015 GHS'000

2015

2016

2016

% of sales

GHS'000

% of sales

100.0%

Income Statement Revenue

177,492

100.0%

315,409

100.0%

386,402

Cost of sales

(95,131)

53.6%

(156,345)

49.6%

(189,345)

49.0%

82,361

46.4%

159,064

50.4%

197,057

51.0%

Distribution costs

(47,556)

26.8%

(73,555)

23.3%

(85,371)

22.1%

Administrative expenses

(19,384)

10.9%

(29,530)

9.4%

(32,162)

8.3%

4,348

2.4%

3,800

1.2%

2,731

0.7%

Gross profit

Other income

19,769

11.1%

59,779

19.0%

82,255

21.3%

Net finance income (cost)

1,959

1.1%

6,589

2.1%

5,302

1.4%

Profit before income tax Income tax expense

21,728 (6,679)

12.2%

66,368 (16,652)

21.0%

87,557 (21,429)

22.7%

3.8%

Profit for the year

15,049

8.5%

49,716

15.8%

66,128

17.1%

Dividends

10,459

5.9%

12,027

3.8%

4,590

2.6%

37,689

11.9%

Operating profit

Profit retained

5.3%

66,128

5.5%

0.0% 17.1%

Financial Year Ended December 31 2014

2014

2015

2015

2016

GHS'000

% of sales

GHS'000

% of sales

GHS'000

2016 % of sales

Balance Sheet ASSETS Non-current assets Property, plant and equipment Intangible assets Total Non-current assets

60,801

34.3%

61,865

19.6%

155,389

271

0.2%

120

0.0%

580

40.2% 0.2%

61,072

34.4%

61,985

19.7%

155,969

40.4%

19,788

11.1%

47,383

15.0%

51,769

13.4% 2.9%

Current assets Inventories Trade and other receivables

5,823

3.3%

7,175

2.3%

11,064

Cash and cash equivalents

37,230

21.0%

97,671

31.0%

26,262

6.8%

Total Current assets

62,841

35.4%

152,229

48.3%

89,095

23.1%

123,913

69.8%

214,214

67.9%

245,064

63.4%

Stated capital

10,000

5.6%

10,000

3.2%

10,000

2.6%

Income surplus account

71,021

40.0%

110,278

35.0%

164,379

42.5%

Shareholders' equity

81,021

45.6%

120,278

38.1%

174,379

45.1%

6,050

3.4%

6,907

2.2%

7,649

2.0%

34,390

19.4%

84,097

26.7%

59,168

15.3%

-

0.0%

207

0.1%

614

0.2%

TOTAL ASSETS EQUITY & LIABILITY Equity attributable to owners

Liabilities Non-current liabilities Deferred income tax Current liabilities Trade and other payables Current income tax Dividend payable Total Current liabilities Total liabilities TOTAL EQUITY & LIABILITIES

2,452

1.4%

2,725

0.9%

3,254

0.8%

36,842

20.8%

87,029

27.6%

63,036

16.3%

42,892

24.2%

93,936

29.8%

70,685

18.3%

69.8%

214,214

67.9%

245,064

63.4%

123,913...