Vitafoam Nigeria Plc hit a 5-year high on the Nigerian Stock Exchange, this week. The stock closed at N5 in Tuesday’s trading session. The last time the stock traded at that level was on the 4th of September, 2015.
The key driver behind the stock’s rally is a sharp rise in its full-year results. Vitafoam’s financial year ends in September. For the financial year ended September 2019, revenue was up by 13.8%, from N19.5 billion in 2018 to N22.8 billion in 2019. Profit before tax jumped from N793 million in 2018 to N3.4 billion in 2019. Profit after tax also rose from N601 million in 2018 to N2.3 billion in 2019.
The company declared a N0.42 kobo dividend from an earnings per share of N1.82, amounting to a payout ratio of 23%.
Key drivers behind the results were higher revenue and lower finance costs. Finance costs dipped from N1.3 billion in 2018 to N1 billion in 2019, down 23% year on year. The increased revenue came from freight income which amounted to N779 million in 2019.
The company also earned N779 million as freight income within the year.
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Where will the price move from here?
The interplay of three factors will determine the stock’s price direction: Performance of the market as a whole, the stock’s valuation compared to the larger market, and its Q1 2019/2020 results.
Year to date, the NSE All-Share Index is up by over 9%. Single-digit rates on treasury bills have led to a movement of funds from the fixed income market to the equities space. Savvy investors are positioning in stocks for short term play during the earning season.
The expectation of most analysts is that rates may remain at the current level for the first half of the year. Thus, there may be room for further upside for the market as a whole. When the tide rises, all boats are lifted. Year to date, Vitafoam is up by 13.6%, outperforming the NSE All-Share Index. A pullback at this point would not be far-fetched.
While it has hit a 5-year high, there may be room for further upside, as the stock is trading at a price-earnings ratio far lower than the average on the Nigerian Stock Exchange (NSE). Vitafoam is trading at a PE ratio of 2.7 times earnings. The average PE on the NSE is 7.8 times earnings.
Holding the earnings constant, the PE ratio can be used to estimate the number of years it will take for the company to pay back the amount paid for each share. That would translate to 2 years and 7 months.
Vitafoam’s Q1 2019/2020 results should be out in a few weeks from now and will be a pointer as to the company’s ability to sustain last year’s performance. The results are for the three months ended December 2019, which witnessed increased consumer spending.