These days everything can be bought online and delivered to your house. It is the new trend and some manufacturers don’t think they should be waiting on the sidelines. You could consider Vitafoam a pacesetter of some sort. These days you can order a foam online and have it delivered to you within 24hours. In fact, you can even pick up the phone, call one of their “comfort centres” and a delivery will be made to you in 24hours.
Whilst all this seem impressive, the underlying reason for this is far from herd mentality. Rather, this is an arduous attempt to increase top line growth amidst rising operating cost and stiff competition. Revenue growth has been stunted in the last couple of years after growing 37% to N14billion in 2010. In spite of this, operating cost has continued to be a drag on profitability as is evident in the spiralling cost of distributing their products as well as raw material cost. The company acknowledged this much maintaining that these cost could not have been passed on to consumers necessitating the branch expansion that we see.
But branch expansion does cost money and takes time to materialise. This current adventure cost the company some N1.7billion with about N684million spent at the financial year ended September 2012. The asset purchase spree was partly financed with a bank loan of about N450million. But that is not all the loans they have. Total loans at the end of 6months to March 2013 stood at about N3.1billion or 97% of Equity. Out of this total, N2.7billion was used to finance stock replacement and another N1billion in augmenting other working capital requirements. Bad as this may seem, it is some what mitigated by an estimated N1.5billion in Ebitda they generated last year.
According to Vitafoam, if you had bought 10,000 ordinary shares of the company in 1978 and never sold, that quantum of shares would be about 299,993 ordinary shares. Put a value to the latter and you’d get about N1million. Intending investors may not find this gloat impressive considering the effect of inflation over the years. Impressive though is the fact that Vitafoam has consistently paid dividends over the years and in the last five years post ROE of not less than 20% having peaked to 37% in 2008. Only last financial year did they post a lower ROE (17%). The company’s expansion plans and foray into other West African countries such as Ghana and Serra Leone, I believe will yield fruit. Product diversification which they have also embarked upon in recent times should push top line growth northwards.
At the end of first half of this year (March 2013) revenue has jumped 15% and profit after tax 30%.Even though the pressures of operating cost remain the turning point in the short term will be their ability to keep interest cost at under 40% of Operating Profit as well as reduce effective tax rate to 25%. Achieve that and I can bet ROE will hit 24-27% come September. It is important to note that Vitafoam has always paid an effective tax rate of over 30% in the last five years and so dropping it to below that will be a monumental task.
Bearing all of the above in mind, one would have to feel the current share price of N3.48 (and rising) is somewhat affordable especially if you consider its one year peak was N4.04kobo back in January. The current share price (which has now been rising) is about 5x TTM earnings per share of 67kobo. In fact, the current share price is less than its TTM book value per share of N3.94kobo. Remember, this company pays dividends regularly and currently they have a gross dividend yield of 8.5%.
Vitafoam does have some indices I hate to see in companies. High S,G&A as a percentage of Gross Profit and higher than preferred debt to equity ratio comes to mind too. However, they sell a product that Nigerians always need and have a strong brand name to compliment that. A strong dividend policy over the years is also key positive in addition to a respectable board and management. What ticks the last box finally is low premium currently attached to its share price.