NEW PRODUCTS, EARNINGS FROM OFFSHORE OPERATIONS DRIVE VITAFOAM REBOUND

The management of Vitafoam Nigerian Plc recently presented its second quarter scorecard to investors. Besides coming earlier than the release date for the 2016 numbers,it revealed growth in top and bottom-lines that beat market expectation. The post-merger numbers also reflected impact of the company’s expansion drive outside the shores of Nigeria, just like introduction of new products that had boosted foreign exchange earnings and revenue from the domestic environment, as the company bounced back to profit.

The numbers equally revealed a rise in sales revenue, indicating the effects of market penetration and new segments through introduction of new products, following the merger that is ensuring that the company is able to effectively withstand competition from the growing number of cottage companies in it sector resulting in enhanced sales. This is despite the high cost of borrowing and income tax   that had eaten into its profit for the period under review.

Vitafoam has successfully repositioned its furniture business, while venturing into spare parts production and strategic repackaging of the insulation business to create value for shareholders, all of which have started yielding result as expected. This therefore means that investors should wait and expect better reward at the end of the financial year. The low profit margin however suggests the need for better and enhanced management of costs, while plugging loopholes if the shareholders must reap the benefit of the ongoing revenue growth trajectory, through improved profitability.

The company latest statistics forits second quarter ended March 31, 2017 revealed an impressive performance in all financial indices for the period under consideration, with turnover rising 31.30%above that of the corresponding period of 2016, with profit of N204.94m, as against a loss of N49.61min the corresponding period of 2016. The profit translated to Earnings Per Share (EPS) of 0.20 kobo,as against the 5 kobo loss per share in the 2016 Q2. The Return on Equity (ROE) stood at a 5.84%, as against a negative 1.49% in 2016.

As noted earlier, the company's profit margin is poor by all standards at 1.94%, even when compared to the negative 0.62% in the corresponding period of 2016. The company Book Value was up to N3.37 from N3.27, as a result of increase in profit and retained earnings.

VITAFOAM NIGERIA PLC.
SIXMONTHS 2016
COY	2016	2017	% Chg
	(N)	(N)
Date Released	May 4, 2016	May 2, 2017
Turnover	8,047,622,000	10,567,396,000	31.30
Profit After Tax	-49,607,000	204,939,000	313.13
Shareholders' Fund	3,411,778,000	3,508,924,000	2.93
ESTIMATED RATIOS
Earnings Per Share	-0.05	0.20	300.00
PE Ratio	-28.47	2.64
Earnings Yield	-0.88	9.83
Book Value	3.27	3.37	3.06
Price to Book Value	1.66	0.59	--64.46
ROE(%)	-1.49	5.84
Profit Margin	-0.62	1.94

Source: Company Financial & Investdata Research

Technical View

The price action of Vitafoam shows that the stock has been trending downward since May 22, 2015, with several attempts to reverse, but continued its southward movement due to negative sentiments occasioned by its weak financials.

The strong reversal finally came after it posted the positive Q1 financials, supported by another improved second quarter numbers with general market recovery.  The price action reveals a high possibility of the uptrend continuing to breakout the next resistant level of N3.03.

On daily time frame the stock is strong as it is trading above it year open and 100 DMA. Despite expected pullbacks as result of profit taking, the stock has the momentum to retrace up.

Analysts Opinion/Recommendation

The equity is good for dividend investors as it guarantees annual returns. Also, traders may enjoy good margins in the equity probably in this financial year, especially now that the company is bouncing back to profit in a recovering market and economy.

On the other hand, the management of Vitafoam should continue with its strategic business plans of repositioning its subsidiaries to boost its performance, while utilizing modern research and development exposures for cutting costs. 

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 (a fibre processing and soft furnishing company). Finally in 2012, it established its youngest subsidiary- 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 (2016)	5.41
Close price ( 2016)	2.51
Current Price	2.69
Date Listed	1978
Year End	30th September

Source: Company Financial & Investdata Research 2016 Performances Analysis

In the period under review, the sales revenue witnessed a dropand the company’s operating and finance expenses continued to grow. This forced the company into a loss position for the year, with cost of sales pointing in the northward direction at a time the business environment was very challenging and purchasing power of Nigerians was weak.

Despite all of these, and the company’s red account for the year it was forced to pay a dividend from its retained earnings just to keep shareholders smiling, for the first time in almost 10 years. It paid a dividend of 12 kobo per share to reflect the seeming loss position for the period,

Turnover was down comparable to the N16.85bnrecorded in 2015, while loss after tax stood at N32.03m.

The price performance for the yearmoved down to reflect the performance pattern of the company.

Five Years Financial Figures of Vitafoam Plc
Company Figures
	2012		2013		2014		2015		2016
Turnover	14,479,781,000		16,808,851,000		16,712,922,000		17,185,741,000		13,569,873,000
Profit After Tax	501,594,000		390,231,000		529,135,000		249,051,000		-32,032,000
Net Assets	2,911,739,000		2,706,450,000		3,029,070,000		4,946,205,000		3,508.458,000
Dividend	0.30		0.30		0.30		0.25		0.12
Bonus					1;5
Estimated Ratios
EPS	0.61	0.50		0.53		0.25		-0.03
Pay Out Ratio	48.98	59.88		46.15		100		nil
PE/RATIO	6.24	7.62		8.23		21.35		-75.17
E/YIELD	16.03	13.11		12.14		4.68		-1.33
Price to Sales	0.22	0.19		0.26		0.93		0.69
BOOK VALUE	3.56	3.80		3.70		5.03		3.37
ROCE	17.23	13.19		17.00		5.04		-0.91
PROFIT MARGIN	4.81	3.46		3.17		1.45		-0.24
YEAR END	September	September		September		September		September

Source: Company Financial & Investdata Research Five-Year Financial Analysis

Looking at Vitafoam’s financials for the past five years as shown in the table above, management grew revenue year-on-year to a high of N17.19bn in 2015, from N14.48bn in 2012, after whichit fell in 2016 to coincide with the acquisition of Vono Products when it stood at N13.57bn, below the 2012 sales figure.Also, profitability level for the period has been undulating but stood at N529.14m in 2014, compared with the low of N249.05m recorded in 2015 before turning into a loss position of N32.03m in 2016 to reflect the worse situation for the company in the last five years. Earnings power has been inconsistent to reflect the cost headwind in its operations.When the latest figures of 2015 and 2016 is compared to the reported profit, it resulted a negative profit margin of 0.24%. 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 which has been unstable for the period grew from N2.91bn in 2012 to N4.95bn in 2015,stood at N3.51bn in 2016. This also reflected on the book value per share up and down movement that affected the price movement for this same period. The book value was up from N3.56 in 2012 to N5.03 in 2015, but came down in 2016 to N3.37.

The reverse is the case when the said growth is compared to investors’ response in terms of market price valuation/judgment, as Vitafoam’s unit price on the floor of the Nigerian Stock Exchange continued to maintain up and down trending. This was however before the current market rally was propelled by the impressive Q2 outing and general market uptrend.

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 61 kobo in 2012 into red with LPS of 3 kobo in 2016. The dwindling earnings  and increase in share price within the period had elongate investors waiting period to -75.17x at the market value as at released date, after it had recorded a  P/E ratio of  6.24 times in 2012. Book value during the period decline to N3.37 from N3.56 in 2012 which still indicated good margin of safety, considering the market price of the stock as at released date. 

Other performance ratios remained mixed 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 N3.10.

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