VFD Group Q3 2019 Results: Resisting Economic Headwinds

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 Friday, October 31, 2019 /6.00AM / Proshare Research/ Header Image Credit: Naija247 News

 

A daring pushback against current economic headwinds remains a major characteristic of the financial result of VFD Group, a local financial supermarket.  The group saw earnings grow by +144% between Q3 2018 and Q3 2019, the group's top line grew from N1.43bn in Q3 2018 to N3.48bn in Q3 2019. Its bottom line spiraled by +415% with profit before tax (PBT) moving up from N340m in Q3 2018 to N1.75bn in 2019 with an annualized PAT margin of 50% in Q3 2019 from 25% in Q3 in 2019.

 

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Highlights

Income Statement

  • Gross earnings went up by +144%, attributed by management to an increase in group’s loans and advances
  • Interest Income grew by +199% with Interest Expenses rising by only 6% resulting in a strong Net Interest spread; Net Interest Income climbed up by +1,245%
  • Non-Interest Income equally proved resilient rising +113% from N908m in Q3 2018 to N1.93bn in Q3 2019
  • Expense numbers rose by +95% from N648m in Q3 to N1.75bn in Q3, the relatively slower rise in expenses nudged earnings spread forward and pushed up tye groups return on average equity (ROaE).
  • Profit margin has improved steadily between FY 2017 and Q3 2019 with margin rising from -15% in FY 2017 to 50% in Q3 2019, although the Q3 margin represented a marginal fall from the 55% margin in Q2 2019 (see Table 1 below):

 

Table 1 VFD Group Profit Margin FY 2017 - Q3 2019

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Source: VFD Group Q3 2019 Financial Statement


  • Funding cost of the group showed a relatively large variability over the last three years as cost fell from 7% in FY 2017 to 6% in FY 2018 before rising to 11% in Q3 and falling again to 9% in Q3 2019, the variability of funding costs increases business risk  and remains an area the group will need to pay added attention (see Table 2 below):

 

Table 2 VFD Group Funding Cost FY 2017 - Q3 2019

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Source: VFD Group Q3 2019 Financial Statement

 

Statement of Financial Position

  • Total Assets of the company rose +83% from N19.05bn in Q3 2018 to N34.93bn in Q3 2019, about +47% (slightly over half of the increase) of the rise in total assets was attributed to the growth of financial assets. The reduction in investment property of -68% improved the operational breakeven margin which was reinforced by the relatively mild +19% growth in property and equipment. The low accretion to fixed assets has seen return on equity (ROaE) stay at 43%, which was lower than the 57% in Q2 2019 but was well above the recent inflation rate of 11.24% and Treasury rates of 13% (see chart 3 below). 


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Table 3 VFD Group ROaA and ROaE FY 2017 - Q3 2019

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Source: VFD Group Q3 2019 Financial Statement


  • Cash and cash equivalents went up sizably by +138% from N1.13bn in Q3 2018 to N2.70bn in Q3 2019, this helped liquidity but pushed down on inherent profitability as cash balances tend to have the lowest returns in the corporate asset portfolio.
  • The group's total equity went up +344% while total liabilities creeped forward by +61% from N17.51bn in Q3 2018 to N28.12bn in Q3 2019, the expansion in equity would likely reduce the group's ROaE going forward, especially as earnings growth slows on the back of economic headwinds that have persisted through 2019.


VFD Strikes Profit Gold in Q3 2019, But Concerns Remain

VFD Groups profit numbers in Q3 2019 were impressive but raise concerns about sustainability. Analysts at Proshare asked the company's executives to explain the key drivers of the stunning surge in Group's top and bottom line earnings. Interest income growth acceleration required clarification. According to the managements mailed response, "The 199% growth in Interest Income stemmed from the surge in revenue from loan & advances, interest on treasury bills and Placement. This is due to the deliberate strategy coupled with treasury management, the company deployed in growing its revenue base this year."

Notably, the Group's fee-based Income saw a -90% decline in Q3 2019 compared to fee Income in Q3 2018, the financial Group's management responded by noting that, "The decline in Fee Income by 91% was due to the significant growth witnessed in 2018 due to one-off fee from our business support services." But the Group's other Incomes equally seemed to have benefitted from one-off transactions.

Another issue around the Group's Income Statement was that its project expenses suddenly leaped from N1.98m in Q3 2018 to N69.98m in Q3 in 2019, representing a growth of +343.43%. According to the bosses at VFD, "The project expense of N69m is mainly due to the various ESG activities carried out to commemorate the VFD Group at 10 activities. Please note that the figure is N69m and not billion".

 

Mutuals; Rising Fund Cost 

An item that seemed to be a bit of a concern was the rise in VFD's Mutual Fund cost which rose from N13.26m in Q3 2018 to N72.4m in Q3 2019 representing a rise of +446% Y-o-Y. VFD management said that the rise in the mutual fund costs of one of its subsidiaries was the result of its initial public offer (IPO)  process, "The IPO process for our 3 SEC registered mutual fund commenced last year, however, the significant portion of these promotional costs were incurred during the year as the IPO gained momentum."

 

The Future Is Here 

With its healthy Q3 2019 performance it is likely that VFD will in the future evolve its business, given its recent focused approach to operational growth, the company may  add new value to the local banking ecosystem, nevertheless, a lot will depend on the quality of corporate governance, the discipline of leanness and the outcome of strong headwinds from an economy growing at a weak 1.94% as at Q2 2019 (see VFD Group actual Q3 2019 and guidance numbers for FYE 2019, Table 1 below).

 

Table 1 VFD Guidance FYE 2019 and Actual Q3 2019 Financials

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Source: VFD Group Q3 2019 Financial Statement


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Related News

1.      VFD Group Sells Stake in NEM Insurance - Jan 14, 2019

2.     VFD Group Achieves 175% Subscription on Debt Note Offer - Feb 28, 2018

 

 

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