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Vitafoam: Need to sustain growth earnings in 2013- THE CITIZEN

By The Citizen
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Vitafoam is one of the companies to watch for strong growth in earnings in 2013. The foam makers seem to have been sleeping since 2009 when its profits began a downward creep. Fiscal 2013 seems to be a year of waking up and stretching out for the company.

The company's first quarter operations ended well with sales revenue at N4.05 billion and net profit of N174 million. That yielded a net profit margin of 4.3%, which was much better than the net profit margin of 3.5% recorded at the end of its 2012 operations in September.

Vitafoam's second quarter operations for the period ended March 2013 shows an all-round improvement in key earnings indicators. Both revenue and profit growth accelerated during the period. Sales revenue came to N8.79 billion at the end of the second quarter, up by 15.4% from the corresponding quarter in 2012. Based on the second quarter growth rate, sales revenue is projected to stand at N18.3 billion for Vitafoam in 2013.

The projected revenue will be an increase of 26.4% over the full year revenue figure in 2012. This will be a major growth in sales revenue compared to a marginal decline of 0.3% in 2013. Except in 2011 when turnover grew by 36.7%, sales revenue growth has been generally slow for the company in recent years. On the average however the company has maintained a good level of stability in earnings performance. In the past five years, it grew sales revenue by an average of 16.2%.

A new strength in profit performance has accompanied the company's improved sales revenue outlook for 2013. At the end of the second quarter, the company posted a net profit of N408 million, a rise of 16.9% over the figure in the corresponding period last year.

If the current growth rate is maintained to full year, the company is expected to post a net profit of N861 million. This will be a new peak in the company's profit records and a big leap of 72.2% over the full year profit figure in 2012.

Against the fairly stable growth in sales revenue, the company's profit performance has been creeping down since 2009. Its profit figures have been generally declined from about N0.7 billion in 2008 to N0.50 billion at the end of 2012. This is a reflection of a sustained decline in profit margin over the period. Net profit margin has consistently declined from 8.5% in 2008 to 5.2% in 2009 and from 4.8% in 2010 to 3.6% in 2011. It slipped further to 3.5% in 2012.

The new strength in profit performance in the current year reflects a gain in profit margin from 4.3% in the first quarter to 4.6% in the second. This shows some progress though still well below the previous highs. Net profit margin is unchanged at 4.6% between the corresponding quarter of last year and the current period. The gain in profit margin in the second quarter and the accelerating growth in sales revenue underlie the strong growth in profit so far in the current financial year.

There isn't any reasonable cost saving between the current quarter and the corresponding quarter of last year. Changes in the cost and revenue relationship of the company over the period appear to cancel out, leaving net profit margin unchanged at 4.6%. This means that generally cost grew at part with revenue over the review period.

Cost of sales rose by 15.2% in the second quarter, almost at par with the 15.4% growth in sales revenue. Gross profit margin therefore improved by 15.6%. The only cost moderation happened in respect of administrative expenses and distribution cost, which grew at 12% and 14.7% respectively. The increases are slightly below the growth in sales revenue during the period. The moderate cost saving on the two expense lines were reinforced by an increase of 19.5% in other income.

The three favourable developments accounted for a 23.9% improvement in operating profit. The gains were however neutralised by a rise of 19.5% in interest charges. There is a drop of 73.6% in bank overdraft at the end of the second quarter as well as a new borrowing of N2.2 billion during the same period. Term loans have declined from both the corresponding quarter in 2012 and from the 2012 full year figures. It is however likely that interest expenses will continue to claim an increased share of sales revenue for the rest of the financial year.

The company earned 50 kobo per share at the end of the second quarter compared with 43 kobo in the corresponding quarter last year and 61 kobo recoded in the 2012 full year. Based on the projected full year profit figure, earnings per share is projected t N1.04 for Vitafoam in 2013. This will be a new earnings peak and a rise of about 72% above the 61 kobo it earned last year.

The company has maintained a track record of stable dividend payment in recent years. This has shielded it shareholders by way of regular income in a period when wide earnings fluctuations have prevented many companies from paying dividends to shareholders.

While cash dividend has been regular, it has not improved from 30 kobo per share it has been paying in the past years. With the strong growth in profit and earnings per share expected for the current year however, prospects for raising dividend per share are looking good for Vitafoam in 2013.

Other major changes in the company's balance sheet in the second quarter include an increase of 18% in inventories and an increase of 15.4% in trade and other receivables. There was a drop of 30.5% in cash balances and an increase of 24.7% in trade and other payables. The overall impact of these changes was negative on the cash flow position. Cash flow deficiency was met by a new borrowing of N2.2 billion during the period while a major drop in interest payment from N542 million in 2012 to N249 million in 2013 helped to moderate cash out flow.

Vitafoam is a company to watch to see whether the accelerating growth in sales revenue and profit would be maintained to full year. Further gain in profit margin is needed to defend profit growth if sales revenue growth should slow down in the remaining two quarters.

Further moderation of administrative and distribution expenses is required to stretch out profit margin, while further incursion in interest cost into revenue will need to be checked.  The company's third quarter performance at the end of June will be critical in terms of the defining the path of earnings performance for 2013 that isn't likely to change much at full year.