Vitafoam Plc 2021H1: Time To Sweat The Assets, Cut Direct Operating Costs

Rating: 

Short Term: Buy

Long Term: Buy

Current Market Price: N9.00
Latest Cash Dividend: N0.70

Year High: N10.05
Year Low: N7.05
Fair Value: N17.98
Equity Analyst: Tunde Segun Jeariogbe

Introduction

• In this report, is based on half-year financial performance indices of Vitafoam Plc for the period ended 31^st March, 2021, compared same to figures released for the corresponding period of 2020 to establish a direction, make projections and valuations.
• The improved performance of Vitafoam within the past full-years impacted its valuation metrics positively.
• Before delving into the numbers, there is need for the management of Vitafoam to pay more attention to its valuation indices, especially as most of them dropped in the year when compared to the 2020 numbers.
• The impact of the increased debt engaged in servicing the company’s assets from last year is coming up positive, as numbers improved appreciably QoQ. See below for detailed financial comparison.

Statement of Comprehensive Income

• The reported Turnover figure for the period improved by 55.79% to N18.63 billion, as against the N11.96 billion in the comparable period of last year.
• Cost of Sales grew by 76.35% to N11.92 billion, from N6.76 billion in the similar period of 2020.
• Operating Profit grew to N3.78 billion, 36.34% better than N2.77 billion in the comparable period.
• Nevertheless, Operating Expenses increased by 17.76% over the comparable period, as it is currently valued at N3.07 billion, versus N2.60 billion used in 2020 half year business session.
• Finance Cost used through the two periods compared dropped by 14.02% to N353.61 million, compared to N411.27 million in the corresponding quarter.
• Thus, Profit before Tax was estimated at N3.49 billion, same as 47.60% up from the N2.36 billion reported in its 2020 half year report.
• After taking care of the Tax Expenses as shown in the table below, the management of Vitafoam reported half-year profit of N2.48 billion, same as 47.00% improvement over the N1.69 billion achieved at the end of 2020 half-year.
• Enhanced by Exchange difference on translating foreign operations, Total Comprehensive income for the quarter stood over comparable period by 51.93%, as it is currently valued at N2.59 billion against N1.70 billion.

Statement of Financial Position

• At the end of the period, Total Current Assets of Vitafoam was valued at N19.27 billion, same as 68.42% above the N11.44 billion stated in its 2020 half year numbers
• Meanwhile, Non-Current Assets grew by 99.93% to stand at N6.29 billion against N3.15 billion in the corresponding quarter
• At the end of the quarter, Vitafoam had a long term borrowings of N1.81 billion versus N2.45 billion in the full year 2020 result.
• It also had a short term borrowings of N5.60 billion, as against N4.18 billion at the end of 2020 financial year business activities.
• Nevertheless, total current liabilities amounted to N11.42 billion, versus N5.64 billion in the corresponding quarter.
• On the other hand, total non-current liabilities rose from N3.40 billion, as against N4.15 billion in the similar quarter of 2020.
• Nets Assets therefore was valued at N10.69 billion, same as 50.62% growth over the N7.10 billion stated in 2020.
• Also, Retained Earnings remained positive at N9.15 billion, versus N567.38 million in the comparable quarter.

Financial Strength

• The amount reported as Total Liabilities is same as 58.19% of the Total Assets figure for the year. In other words, the Debt Ratio is 0.58x, which is 13.16% below the 0.67x in the corresponding period of last year. This is a positive trend, since it confirmed Assets improvement over liabilities
• Total Debt to Equity Ratio is currently estimated at 1.39x against 1.37x in the corresponding quarter, which implies that the Total Debt Value for the year can replicate Equity 1.39 times, almost same position as the 1.37 times replicate of the previous quarter.
• Reegarding investors’ stand, we checked the Equity Ratio and established that equity is same as 41.81% of Vitafoam Total Assets’ Valuation, this is a lower position when compared to 48.64% estimated in 2020.
• Going by the current estimated Beta value, shares of Vitafoam can be said to be more liquid as its beta value currently stands above the market beta, and above its industrial average.

Profitability Ratio

• EBITDA Margin is currently estimated at 20.32%, which is 12.48% below the 23.21% estimate at the end of the 2020 half-year.
• Pre-Tax Margin stood at 18.74% as against 19.78% in 2020; difference between the two ratios is same as 5.25% in negative territory.
• Cost of Sales is estimated to be 64.00% of the Turnover Figure, which is 13.20% above the 56.53% in the corresponding quarter. Do note that this signifies a failure by the management to reduce the company’s direct cost of running the business.
• The Company achieved a high return on Equity to the tune of 23.26%, which is a marginal drop of 2.40% from the 23.83% returns achieved in the comparable quarter.
• See below for detailed profitability ratios and comparisons.

Efficiency Ratio

• Operating Expenses is estimate as 16.48% of the Turnover Value, same as 24.41% improvement in the management efficiency when compared to the 21.80% estimated in 2020. In other words, as against the drop in its profitability numbers on direct cost, it reduced its operating expenses appreciably within the compared periods
• Turnover Value is 72.84% of the Total Assets Value, the ratio is 11.09% drop from the 81.93% estimated from 2020 figures. This can be seen as another drop in the management efficiency, as it implies that Vitafoam Assets is not fully utilized through the period, nevertheless, it is still a good ratio
• Working Capital Turnover grew to 2.39% from the previously estimated 2.05%
• Working Capital Ratio, within the two compared year, stood above unity and confirmed the firm’s strength to settle its current liabilities with current assets as at when due through the season.

Investment Ratios

• Judging by the price of Vitafoam unit shares on the floor of the exchange as at the time the two results compared were released to the investing public, one can conclude that investors jointly agreed on upward revaluation of Vitafoam share price.
• The amount earned per unit of Vitafoam is currently estimated as N1.99 as against the N1.35 earned in the corresponding quarter.
• P/E-Ratio grew within the period (due to investor sentiments) to 4.38x versus 3.67x. This is a reflection of the improvements seen in the company’s earnings over the periods compared and signifies a positive investment point for investors.
• The above-mentioned earnings per share is a 22.86% yield on the price of Vitafoam shares on the exchange as of the time the result was made available to investors. Please understand that this is outstanding, especially when compared to the current rate in the fixed income market at the moment.
• We have established that each unit of Vitafoam is worth N8.55 in its book, almost the same as the market price of Vitafoam when this report was released.
• Confirming a seemingly overvalued position for Vitafoam is the Price to Book Value Ratio, which stood above unity.
• See the table below for detailed investment analysis.

Valuation

• We have carefully explored two valuation models- FCFE Growth Model and 2-Stage H-Model, and our conclusion on the intrinsic value of Vitafoam was arrived by averaging the outcome of the two valuation models. Thus we have valued units of Vitafoam shares for N17.98 each. Meanwhile, considering the gap between our valuation and the current market price of Vitafoam shares, along the estimated Book Value, we Rated Vitafoam a Buyfor long term; and a Buyfor short term investment options.