TheCable

Vitafoam Nigeria’s third quarter report shows a drop of 27% in after tax profit year-on-year to N335 million, as revenue failed to grow and costs grew ahead on incomes. The foam and furniture manufacturing company stepped up profit last year after two years of decline but looks likely to resume the downward steps this year. Sales revenue was flat at the end of the third quarter in June but is expected to accelerate in the final quarter to a new peak at the end of the financial year.

The company earned N13.84 billion in sales revenue at the end of the third quarter, which is an improvement of 3.7% year-on-year. The weak growth in revenue was further reinforced by a decline of about 21% in other income during the same period.

Based on the third quarter growth rate, full year sales revenue is estimated at N17.6 billion for Vitafoam Nigeria for the financial year ended September 2015. This will be an increase of 5.3% over the full year revenue figure in 2014 and a new peak in turnover after a slight decline last year. Revenue performance has followed an unstable path of rise and fall over the past three years.

A significant development in the 2015 financial year is a significant increase in export revenue though this represents an insignificant part of total sales. Export earnings rose from N51 million in the corresponding period last year to nearly N270 million at the end of the third quarter.

Against the moderate increase in sales revenue in the third quarter, after tax profit dropped by 26.8% to N335 million year-on-year. Full year estimates indicate an after tax profit in the region of N440 million for Vitafoam Nigeria in 2015. This will be a flat growth from the profit figure of N435 million the company posted in 2014. The company’s after tax profit improved by 11.8% last year though it remains below the 2012 high of about N540 million.

Inability to grow profit draws equally from the weakness in sales revenue growth as well as increasing operating costs. Expenses appear to be generally under control though some major expense lines grew ahead of sales revenue and therefore eroded profit margin. These include net interest expenses, which grew by 12%, administrative expenses, which increased by 6.8% and cost of sales, which went up by 5.1% on year-on-year basis.

Gross profit margin is slightly down at 32% at the end of the third quarter and operating profit dropped by 14% during the review period. The increase in interest expenses follows an increase in the company’s borrowings. Long-term borrowings rose by 53.8% to N1.41 billion and short-term debts also went up by 10.1% to N3.38 billion over the closing figures last financial year. Debt servicing payments constitute a drain on the company’s cash flow and accounts for a net decrease in cash resources at the end of the third quarter.

The summary of the cost-income relationship of the company shows a decline in the ability to convert revenue into profit. Net profit margin declined from 3.4% in the same period last year to 2.4% in the current financial year, a continuing decline from 4.8% in 2010. The decline in profit margin against inability to grow sales revenue has weakened the company’s profit capacity.

Incorporating the post bonus issue volume of shares, the company earned 34 kobo per share at the end of the third quarter, down from 56 kobo per share in the same period in 2014. Earnings per share of 41 kobo is expected from Vitafoam Nigeria at full year against 63 kobo in the preceding financial year.