The Fan Milk (FML) Debate: Is FML over-valued on GSE? #FMLdebate

The Fan Milk debate continues, Is Fan Milk Ltd over-priced or valued? What’s your take on this subject? Below is the Facebook debate we had on Fan Milk. Me and my colleagues of Fortune Haven Group started this debate days ago and then I chanced upon Boakye Ogyem’s  Facebook Post. Share you views on this subject below. On Twitter, and Google+  the debate continues with the hash tag #FMLdebate. Join.

Post by Boakye Ogyem
All investors both professionals and amateurs do know that the basic principle of making money is to buy low and sell high , any other strategy that flouts this basic rule is bound to failure. In making money one should be able to buy terrific companies at a discount or at a fair price to its intrinsic value. Buying great companies such as (fan milk , Guinness Ghana and Unilever ) at astronomical prices won’t translate into a good investment for the long run due to several reasons, firstly high valuations for stock prices don’t give in much room for potential upside movement of the stock price since its overvalued (that’s why IPO’S normally trades at a discount), secondly most overvalued stocks (growth stocks) are hardly hit during markets declines and therefore possess unjustifiable risk components and lastly there isn’t a proper tradeoff between risk and return.
The table below shows the market capitalization or market value of fan milk company , its sales for 2013 and earnings for the year 2013. However the market value is for 6th may 2014.

SALES (2013)

Finally , I know owners of fan milk’s stock will argue from the fact that the company has tremendous potential for growth , as Africa’s economy boom and the middle class burgeons. These assertions though true wont only benefit Fan milk alone but rather all companies within the FMCG, FINANCIALS, COMMODITY and TOURISM industry which the portfolio listed above clearly incorporates. Secondly ,projecting too much into the future prospects of a company does not only leads to risky speculation but rather irrational analysis which undoubtedly leads to lackluster stock selection , therefore investors who vaguely uses a companies projected long term growth potentials to justify its stocks astronomical P/E ratios are bound to achieve mediocre performance in the long run, mainly due to the unpredictability of the future. Therefore buy stocks when the prices are reasonable and its valuations are justifiable by all valuation parameters. Though I know Fanmilk is an industrial juggernaut and a formidable player in its industries I just don’t think is worth buying at that price.

Fan Milk limited , the Ghanaian based company which prides itself as a market leader in the manufacturing and distribution of dairy products and fruit drinks seems to be overpriced from the tabular figures. This is because the value or price of Fanmilk seems to be astronomically high relative to other listed companies on the exchange, the value for owing the Fanmilk company is 868.67million Ghana cedis with sales around 139million and earnings within the range of 21.72 million. However, an investor could have bought a slice of all the company listed in the table (GOIL , BOPP, MAC, PZC, SPL, EGL, PBC) for just 807.67M , but will undoubtedly gain a superior sales value of 2.5billion and a spectacular net earnings of 75.4 million which is roughly 3.5x Fanmilk Ghana’s earnings of 21.72M. Secondly, the companies listed in the table commands a P/E ratio of 10.7, whiles fanmilk commands a P/E ratio of 40 making it too expensive to own for your portfolio, also the other company provides a better platform for risk diversification than single handedly holding fanmilk.

Comments and Arguements:
Patrick Edem Agama Good points there. However, Have you considered dividend investors?

Boakye Ogyem naa i didn’t , i think am biased toward capital appreciation , but since u’ve mention it i will take a second look at that. Thanks Boss!!

Avor David Mawutor Permit me to jump into the argument. First of all i must commend you for the bold move to analyse FML from “your lenses”; the market needs more informed investors like yourself. I however have some points to raise: 1. Your argument vacillates between two issues: The heading is encouraging those who already own the shares to sell them now however, most of your points (and your conclusion) rather support why someone who wants to buy should not buy. My opinion: As a rational investor, i agree that it doesn’t make financial sense to buy FML shares now, particularly if your interest is in capital gains but, that doesn’t mean those who already own the shares must sell them. If i have already made over 200% holding this shares, i would rather ride with the “bull” until i am convinced it has peaked. Even if the share price starts falling before i realise it, it wouldn’t come done so fast to erode all my gains. It is therefore worth the ride

Avor David Mawutor 2. Declaring a stock over-priced, must be in relation to the stocks own fundamentals, and not in relation to other stocks. I therefore find your sentence “…Fanmilk seems to be astronomically high relative to other listed companies on the exchange…” out of place.

Avor David Mawutor 3. You were basing part of your argument on the sales figures of the companies but as an investor, i think you should be more concerned about profits, dividends and the prospects of the business than its sales figures. A company with relatively low sales figure can be very profitable whiles one with very high sales figures can be almost worthless in profitability terms.

Patrick Edem Agama Very interesting points David. With respect to your 1st point, if a stock is not ‘worth buying’ due to projections that there wont be significant capital gain, then it’s a good indication that it’s has reach it’s peak. Secondly, knowing FML, the price can plummet before you get the chance to sell it. Your 200% can become 45%.

Avor David Mawutor On your first point: It doesn’t necessarily mean it has reached its peak. The ignorance of other “investors” can drive it further higher. And as you and i know, the ignorance is massive in the Ghanaian market. On your second point, that would only happen if you are an investor who is “sleeping” instead of monitoring. Realistically, your 200% can become 150% before you sell. I would rather be fascinated at the prospect of getting 100% than losing 50%.

Patrick Edem Agama Interesting. One thing is that, selling a “high priced stock’ like fan milk could be hard even if the investor is not sleeping. It’s demand and supply. there can’t be a sales when no one is willing to buy. Leaving this argument here. Let me move to your 2nd point. Pls be reminded that You can determine whether a stock is over priced / valued NOT only by looking at the stocks own fundamentals but also looking at other peer companies. It’s about what you are looking at. One can look at the price to earnings (P/E) ratio in comparison to the company’s peers, and the price to earnings growth (PEG) ratio to determine if a stock is overvalued.

Avor David Mawutor Unless the fundamentals of a company are severely weakened and it’s future prospects very bleak, there would always be demand so long as GSE exists. The only problem is that people would be willing to pay less than the market value. Okay, may be to aid our argument, what do you think FML’s realistic price should be?

Avor David Mawutor Excellent second point! So as you said, you can use P/E ratio IF you are interested in earnings (dividend). But Boakye‘s answer to your first question was that, he was not considering “dividend investors”.

Avor David Mawutor But all in all, i think this is a very good discussion topic. Opinions may vary depending on your risk appetite and objectives. Patrick, i think you should blog the discussions and allow others to join the debate.

Patrick Edem Agama We are back to the debate, Is Fan Milk overvalued? What is the real price of Fan Milk Limited. if you are reading this, Join us. What’s your take on Fan Milk?

Joshua Naayo Thanks for inviting me to join in this discussion Patrick Edem Agama.
I think the title of this article should be Fanmilk is overvalued, Don’t Buy it!

I agree with you on the fact that the company is overvalued however, your analysis falls short of convincing. First and foremost, High values do give in for potential upside movements. This is called market sentiments. Most investors don’t value investments before making a trade, they trade on the fact that people are gaining on FML stocks hence will decide to go in, driving the price further up. I am not here to preach about behavioural investments but rather talk about Value. Secondly, comparing Fanmilk to stocks like GOIL, MAC, EGL etc is like comparing apples to oranges. These are completely different industries affected by different market factors. 

Now why I think Fanmilk is overvalued and Investors should not buy (for now). Fanmilk’s sales revnue report shows a 5.06% decline, this primarily can be attributed to the increasing cost of its products which has reduced demand. Now, how did this small decline in sales affect Fanmilk? A look at their financial reports shows its operating expenses increasing by about 11%. This increase in operating expenses which has led them to increase their prices can partially be attributed to inflation and exchange rate depreciation – Something we don’t expect to get better anytime soon.

My good friend Avor, you talk about dividends, dividends come from earnings and the companies ability to generate good earnings depends on its ability to reduce expense and increase sales. With the increase in operating expenses and a fall in sales revenue, Fanmilk’s Net Income fell by a whooping 20.13%. Now considering the market conditions do you expect this figure to increase or decline? How do you think they will consistently pay dividends when their earnings fall?

Now, why an investor should not buy fanmilk at 7.47. I used two approaches in valuing FML stocks.- an Earnings Model and DCF model. 

FML’s EPS has over the past 6 years dropped from 0.36 to 0.19. With current market conditions, I expect this EPS to fall by about 7% over the next year, which puts the Expected EPS at about 0.18. Now comparing this EPS to our current P/E, I expect the price of FML to be at 7.06 at year end. 

So then, how much should you buy it now? 
GoG 1yr TNote is currently returning 22.50% and a fixed deposit from Dalex for 182 days is returning 27%. As an investor, you expect returns on your investment. The stock Market we know is risky, therefore we wouldn’t expect anything below 30%. Personally, I will expect a required rate of return on FML at 35%. Using this ROR to discount our terminal value of 7.06 gives us an Intrinsic value of about 5.23. Now, using a DCF, i got a terminal value of 6.94 which when discounted by same ROR gives us 5.15 intrinsic value (i have mentioned too many numbers, no need to go into details here, unless you need it). So here you go, don’t buy FML because it is overvalued. 

Now to those who already hold FML, if you have returned over 200% as Avor has stated, you can continue to hold it and enjoy the ride.. 

Boakye Ogyem Joshua Naayo , am very much appreciative of your insightful dimension from which you approach the analysis , but first of all i based the entire analysis from the perspective of a value investor , not from a speculative perspective. so behavioral components for stock selections were completely eliminated. moreover irrational investors form a smaller percentage of the investment population especially here in Ghana where most stocks are confined in the portfolio of large institutional investors and pension funds , therefore it’s all together meek to value stocks from a value investor’s point of view since they are the market movers not irrational investors fueled by behavioral sentiments. secondly you know that our market is relatively small so getting pure plays or veritable companies for relative valuations are very difficult, however the comparison from other industries is to give a fair idea of how it’s pricing has gone way words. i will comment on your models very soon.

Joshua Naayo BSH is a holding company, holding diversified investments in several companies.Investment holding companies are classified under financial services. It will not be prudent to place them under any of the industries of which companies they hold. 

Perpetuity? Uhm? Not really.. If growth rate, then I mentioned in my earlier submission that “I expect this EPS to fall by about 7% over the next year, which puts the Expected EPS at about 0.18.” It’s okay to use the GOG bond rate for your valuations, but in being conservative i decided to use a 1yr TNote as the base risk free rate. Using the rate on a 5 year bond which is higher will only reduce your intrinsic value further. And considering the uncertainty of cash flows as far of as 5 years, I deem it not prudent to forecast beyond three years. 

Again, you will realise that we are not saying anything different. The end result is the same: FML is overvalued but the base approach is what we have differing views on.

Patrick Edem Agama Interesting views, Great debate, Good conclusion. The beauty about the market is that despite all these analyses people will still buy and probably make money out of FML. The Ghanaian market is an interesting market. I’ll raise another discussion on what moves the Ghanaian market. I’ll be glad to hear your views on each stock. I believe there’s nothing like the “right view”. All views are very valuable. We’ll then take this debate to YouTube. Avor Mawutor and I will be holding series of YouTube discussions on the market. And Boakye Ogyem and Joshua Naayo have won a seat on the panel. Let’s all learn and grow stronger in this field. Have a great day guys.

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