VITAFOAM: HIGH COST OF FINANCING OPERATION AND LOST OF MARKET SHARE

The recent second quarter scorecard of Vitafoam Nigeria Plc revealed a decline in top and bottom line falling below market expectation as investing community were looking forward to see the gradual impact of the concluded merger arrangement and expansion drive of its management to reflect on its profitability ratio. The numbers reveal fall in sales revenue indicating that competition with increasing cottage companies in  that sector is having effect on its sales, also high cost of borrowing is another factor that had eaten into its profit to thrown the company into red position for the quarter under review.  This suggest that the company expansion drive to create value for shareholders are yet to start yielding result as expected meaning that investors should extend their waiting period as the bold step of the company to be the first Nigeria Company to go into motor spare part production through one of its subsidies, also with the enhance economics of scale as form vono products which now one of its subsidiary complement to create more value for stakeholders. This is fantastic a development for shareholders, especially when the effect is combined with strong efforts to manage cost and improve profitability on the long run. All these are likely to impact positively on the company's bottom line on the long run, if properly executed. 

The latest financials of Vita foam is that for its second quarter ended March 31, 2016, which revealed an unimpressive performance in all financial indices for the period under consideration.  Turnover dropped by 14 percent below that of the corresponding period of 2015, just as profit after tax turn to loss position of N49.61 million from N341.12 million in 2015.  Also, loss Per Share (LPS) of 0.05 from 35 kobo in the previous quarter of 2015. The Return on Equity (ROE) stood at a negative 1.49 percent, as against 10.25 percent in 2015. 

The company's profit margin is poor by all standard, as it deepen to negative tertiary of 0.62 percent from 3.66 percent in 2015. The company book value was down to N3.27 from N3.39, as a result of  increase in outstanding shares.

VITAFOAM NIGERIA PLC.
SIXMONTHS 2016
COY	2015	2016	% Chg
	(N)	(N)
Date Released	August 7 , 2015	May 4, 2016
Turnover	9,321,884,000	8,047,622,000	-13.67
Profit After Tax	341,121,000	-49,607,000	-114.5
Shareholders' Fund	3,328,,459,000	3,411,778,000	2.50
ESTIMATED RATIOS
Earnings Per Share	0.35	-0.05	-115
PE Ratio	4.14	-28.47
Earnings Yield	6.04	-0.88
Book Value	3.39	3.27	-3.54
Price to Book Value	0.59	0.60
ROE	10.25	-1.49
Profit Margin	3.66	-0.62

Source: Company Financial & Investdata Research

Technical View

The price action of Vitafoam shows that the stock has been trending downward since September 19, 2015, after the management delayed the submission of its 2015 financial year end results. There was however an attempt to reverse the trend in November 2015, but soon continued its southward journey, even when the full year report finally hit the market due to a drop in dividend offered.

The strong reversal finally came after it concluded acquisition of Vono products and announced plans to begin motor spare parts production soon.

On daily time frame the stock is weak as it fail to reverse after forming multiple bottom.  A breakdown below the yellow line will be a continuation of it lower lows.

Analysts Opinion/Recommendation

The equity is good for dividend investors as it guarantees annual returns, meanwhile, traders may not enjoy good margin in the equity probably in this financial year, especially now that the company is in red position.

On the other hand, the management of Vitafoam needs to execute its strategic business plans with all existing subsidiaries to boost its performance, while utilizing its modern research and development exposures.

Secondly, its should  curtailed its dependence on loan and rather opt for equity participation, strict strategies to cut running cost should be put in place so as to report improved financial in the current financial year. 

History

Vitafoam Nigeria is a leading manufacturer of flexible foam, reconstituted foam and other household products. It has the largest foam manufacturing and distribution network which facilitates just-in-time delivery of products throughout Nigeria, with off-shore operations in Ghana and Sierra Leone.

The company was established on August 4, 1962 by British vita and Unilever and listed on the floor of the NSE in 1978. Vitafoam is currently Nigeria’s most prominent and leading producer of Polyether, foam products, furniture, upholstery products and adhesives. In 2010, it became a major shareholder of Vono Products and established two sister companies; Vitapur Nigeria (an insulations products manufacturing company) in the Oil & Gas industry and Vitablom (fibre processing and soft furnishing company). Finally in 2012, it established its youngest inclusion- Vitavisco for production and sales of Visco elastic foam and latex products.

Vitafoam Nigeria PLC
Share Holding Structure
Chief S.O. Bolarinde	12.59%
Other Nigerians and Associates	87.41%
Other Statistics
Shares Outstanding (MN)	1,042,370,053
Opening Price (2015)	4.03
Close price ( 2015)	5.41
Opening Price ( 2016)	5.41
Current Price	4.27
Date Listed	1978
Year End	30th September

Source: Company Financial &Investdata Research

2015 Performances Analysis

In the period under consideration, the revenue witnesseda slight increase and the company's  operating and finance expenses continued to grow. This reduced profitability and bottom-line for the year, with cost of sales pointing in the northward direction.

With all of these, the company was forced into cutting its dividend, the first in five years. It paid a dividend of 25 kobo per share to reflect the seeming decline in its earnings power for the period, which also represented 100 percent payout ratio as all its earnings for that was paid as dividend. First quarter EPS of 17 kobo moved to 42 kobo in second quarter, representing more than 147 per cent increase, while third quarter was 41 kobo, before declining at year-end to 25 kobo.

The company's profit dropped at the end of 2015 despite the impressive scorecards in Q1 and Q2, but nose-dive in the other quarters, a situation that affected its payout. Turnover was up by 2.84 per cent to N17.19 billion while profit after tax declined by 42.83 per cent to N249.05 million.

The price performance for the year moved up and down to reflect the performance pattern of the earnings because EPS was up for Q1 and Q2 and subsequently dropped in Q3 and full year.   Price was down in the first quarter and rallied in the second and third quarter till September 2015 but trended down in Q1 and Q2 of 2016 financial year before the recent up trending.  On the long run, it is expected that earnings will drive price in the future when the company's expansion and invention start yielding positive results.

Five Years Financial Figures of Vitafoam Plc
Company Figures
	2011		2012		2013		2014		2015
Turnover	13,979,353,000		14,479,781,000		16,808,851,000		16,712,922,000		17,185,741,000
Profit After Tax	673,024,000		501,594,000		390,231,000		529,135,000		249,051,000
Net Assets	2,927,005,000		2,911,739,000		2,706,450,000		3,029,070,000		4,946,205,000
Dividend	0.30		0.30		0.30		0.30		0.25
Bonus							1;5
Estimated Ratios
EPS	0.82	0.61		0.50		0.53		0.25
Pay Out Ratio	36.51	48.98		59.88		46.15		100
PE/RATIO	6.43	6.24		7.62		8.23		21.35
E/YIELD	15.56	16.03		13.11		12.14		4.68
Price to Sales	0.31	0.22		0.19		0.26		0.93
BOOK VALUE	3.57	3.56		3.80		3.70		5.03
ROCE	22.99	17.23		13.19		17.00		5.04
PROFIT MARGIN	5.00	4.81		3.46		3.17		1.45
YEAR END	September	September		September		September		September

Source: Company Financial &Investdata Research

Five-Year Financial Analysis.

An analysis of Vitafoam's financials over the past five years revealed that management grew year-on-year revenue to 22.94 per cent CAGR from N13.98 billion in 2011 to N17.19 billion. Also, profitability level for the period was down by 63 per cent to N249.05 million from N673.01 million in 2011, with up and down movement for the period under review. The company's earnings power has been inconsistent to reflect the cost headwind in its operations.When the latest figure of 2015is compared to the reported profit, it resulted in a profit margin of 1.45 per cent. Meanwhile profit margins for the five years had nosedived on yearly basis which is an indication of increased costs cum tax during these periods.

In the same direction, shareholders' fund for the period grew from N2.93 billion in 2011 to N4.95 billion, representing a rise of 68.94 per cent.

The growth recorded in the total equity of Vitafoam was impressive and have supported the book value which equally rose from N3.57 in 2011 to N5.03 in 2015.

The reverse is the case when the said growth is compared to investors’ response in terms of market price valuation/judgment as Vitafoam unit price on the floor of the Nigerian Stock Exchange continued to maintain up and down trending. This was however before the current rally propelled by the infusion of Vono Product, to push price above estimated fair value of N4.00 for the period. Similarly, retained earnings grew over the period, a situation that has supported the 100 percent payout ratio in dividend this years.

Estimated Performance Ratios

Vitafoam's  earnings per share for the five-year period was on the decline to reflect the company's earnings power, even as the additional shares arising from the bonus have  weakened Earnings Per Share (EPS) for the period under review. The amount earned per share moved from 82 kobo in 2011 to 25 kobo in 2015. The dwindling earnings  and increase in share price within the period had elongate investors waiting period at 21.35x at the market value as at released date, after it had recorded a  P/E ratio of  6.45 times in 2011. Book value during the period grew from N3.57 to N5.03, indicating good margin of safety, considering the market price of the stock. 

Other performance ratios remained relative with the up and down movement,but profit margin is still pointing at high cost of operations.  On the strength of the figures posted and dividend declared over the years, the stock is fairly priced at N4.00. The recent down-grading of its rating was due to dwindling earnings.