VITAFOAM: Financial mismatch and high cost of operation put Pressure


Monday, May 11, 2015 1:42 PM /Invest Data Consulting

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 its 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 Nigeria stock exchange in 1978. Vitafoam is currently Nigeria’s most prominent and leading producer of Polyether, foam products, furniture, upholstery products and adhesives.

In 2010, Vitafoam 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.

In celebrating its 50th anniversary and sojourn of resilience, integrity and value adding from inception till date. It is no doubt an icon of excellent performance that has permanently made its mark in history. With vibrant broad and dynamic management team of young, seasoned and energetic workforce, coupled with multi-product lines of mattresses, pillows, sponges, carpet underlay, mats, foam blocks, and other foam products.  Vitafoam can only tread on to further greater heights, giving comfort, quality, and uniqueness to life, all the way. As its historic performance and steady fundamental have supported its price as investors smile to bank on yearly basis with regular dividend.

2014 Performances Analysis

The company's management team and board have strong business strategies and influence to post an impressive performance as revealed by numbers posted for 2014.

In the period under consideration, the revenue witnessed a slight decline and the company held tightly to operating expenses, finance expenses continued, just as the modest growth in bottom-line, as cost of sales was marginally down. For the fifth  consecutive period, the company held on to its dividend payout rate of 30 kobo and bonus share of one ordinary share for every five which reflected the seeming improved earnings power. 

As its first quarter EPS of 22 kobo moved to 48 kobo in second quarter, representing  more than 100 per cent increase, while third  quarter was  56 kobo and full-year EPS of 65 kobo. it still has substantial headroom to pay as much in the years ahead, but the future probability of similar dividend will be a function of stronger numbers. Turnover was down by 0.57per cent to N16.71 billion but profit after tax rose by 35.6 per cent to N529.14 million.

The price performance for the year was in the same direction with earnings performance because EPS was up on quarter by quarter basis.  Price rallied in the first quarter and declined in the second quarter due to profit taking, while price was side trending in other quarters of the year as a result of market sentiments. On the long run, it is expected that earnings will drive price in the future if the company maintains impressive results.

Five-Year Financial Analysis
Looking at the financials of Vitafoam over the years it revealed that management grew year-on-year revenue to 11.72 per cent CAGR from N10.54 billion in 2010 to N16.71 billion. Also, profitability level for the period was marginally   up by 0.47 per cent to N529.14 million from N526.66 million in 2010, after posting a profit of N673.02 million in 2011 and N390.23 million in 2013. The company's earnings power has been inconsistent to reflect the cost headwind in its operations.  When the latest figure of 2014 was compare to the reported profit, it resulted in a profit margin of 3.17 per cent. Meanwhile profit margins nosedive south YoY which is an indication of increased costs cum tax during these periods.

In the same direction, shareholder’s funds for the period grew from N2.50 billion in 2010 to N3.03 billion, representing a growth of 21.18 per cent.

The growth recorded in the total equity of Vitafoam was impressive and have encouraged the book value which equally rose from N3.05 in 2010 to N3.70 in 2014.

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 maintained a downtrend before the current rally that was propelled by corporate action of 30 kobo dividend and bonus share of one for five, to push price above estimated fair value of N4.35 for the period.

Similarly, retained earnings equally grew over the years and have supported dividend payout for this years.

Estimated Performance Ratios
Vitafoam's  earnings per share for the five-year period was flat, reflecting the earnings power of the company since there was no additional shares to weaken the EPS for the period under review. The amount earned per share moved from 64 kobo in 2010 to 65 kobo in 2015. 

The relative flat  earnings within the period had kept  investors waiting period at 8.23x at the market value as released date, after it had recorded a  P/E ratio of  8.21 times in 2010. Book value during the period grew from N3.05 to N3.70, indicating zero margin of safety considering the market price of the stock.

Other performance ratios remained relatively flat 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 N4.35.

Technical View

Price action of Vitafoam shows that the stock has been trending down since 2014 but reverse in 2015 to form a cup pattern on a weekly time frame with most reliable reversal. But on daily time frame the stock weak to breakout at N6.50 resistance line as profit taking is imminent.   Any breakout of the orange line is a continuation pattern.

Meanwhile, traders are likely to start cashing out while investors are waiting for dividend and bonus. RSI is currently at 91.51, and other indicators like stochastic oscillator and  CCI  are in the overbought region while Money flow are signaling sell as funds is leaving the stock.

If the equity is considered on a book value basis one will rather conclude that the stock is currently overpriced and attractiveness to the equity as seen in its waiting period remain relatively low at price earnings ratio of 8.23x.
In conclusion, each unit of Vitafoam is fairly priced at N4.35.

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 through the coming year, especially when its loan exposure is put into consideration. On the other hand, the management of Vitafoam needs to scout for viable partners who could boost its performances and increase its modern research and development exposures. Secondly, exposure to loan should be curtailed; strict strategies to cut running cost should be put in place so as to report improved financial figures in the ongoing financial year. To solidify its capital base to drive the ongoing capital injection for expansion  can be  achieved through equity and not from bank borrowing again

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