Vitafoam: Cost of Sales Reduces Profit

Kayode Tokede
Vitafoam Nigeria in its unaudited result and accounts for full year ended September 30, 2021 recorded significant increase in revenue but a double-digit growth in cost of sales reduced profits.

The foam-manufacturing company also recorded growth in its total operating expenses, another financial parameter that further highlights severe business operating environment faced by companies operating in the country.
Vitafoam Nigeria reported 50.9 per cent increase in revenue to N35.4billion in 2021 unaudited result and accounts as against N23.44billion reported in 2020.

The breakdown revealed that locally generated revenue was up by 51.23 per cent to N34.5billion in 2021 from N22.83billion in 2020, while revenue generated outside Nigeria rose by 38.6 per cent to N853.87million in 2021 from N615.93million in2020.
The company’s primary geographical segment is Nigeria and over 99.9per cent of the sales of the company are made in Nigeria.

The company has continued to grow its revenue with improved sells in polyurethane/reconstituted foam (mattress, cushions, pillows, sheetings) and allied products that conforms with international standards, and applicable statutory.
The company had attributed its steadily impressive performance to continuous investment in innovative products and services across its businesses.

Despite the inclement operating environment, Vitafoam has remained resilient with an average gross margin of 37.90 per cent in the last five years and the company’s shares is one of the most sought after on the Nigerian Exchange Limited (NGX) due to track record of consistent profitability.
It stocks price Year-Till-Date gained 181 per cent to close at N21.9 as at December 3, 2021 from N7.80 it opened for trading in 2021.

innovative products
The Group Managing Director, Vitafoam Nigeria, Mr. Taiwo Adeniyi had explained that company was no longer just about manufacturing of rigid foams but had developed other innovative products through its subsidiaries in Nigeria and overseas.
From the profit & loss figures, Vitafoam cost of sales rose by 69 per cent to N21.01billion in 2021 from N12.43billion reported in 2020.

Cost of goods sold was driving force behind Vitafoam Nigeria growth in cost of sales as it gained 69 per cent to N20.9billion in 2021 from N12.36billion in 2020, while Labour Cost rose by nearly 13 per cent to N80.8billion in 2021 from N71.77billion in 2020.

The interplay between revenue and cost of sales dragged gross profit in 2021 to N14.37billion, an increase of 30.4 per cent from N11.01billion reported in 2020.

Vitafoam Nigeria’s non-core business transactions closed unaudited 2021 at N415.34million in 2021 rom N648.98million in 2020.
As regards operating expenses, the company reported 22 per cent increase in administrative expenses to N5.02billion in 2021 from N4.13billion in 2020 as Distribution expenses rose by 24 per cent to N6.4billion in 2021 from N5.18billion in 2020.
Administrative and distribution expenses plunged the company’s total operating expenses in 2021 to N6.43billion from N5.18billion in 2020.

On finances, Vitafoam Nigeria finance income moved from N106.51million to N251.48million in 2021, while finance charges increased by 136 per cent to N717.23million in 2021 from N930.17million recorded in 2020.
For the unaudited results under review, the group profit before tax rose by 35 per cent to N7.89billion in 2021 from N5.84billion reported in 2020.
The group paid a tax worth N2.56billion in 2021 from N1.73billion in 2020 to position profit for the period to N5.33billion as against N4.11 billion reported in 2020.

cost efficiency
Meanwhile, the company in 2020 financial year drew on increasing cost efficiency to optimise modest revenue growth into significant improvement in profitability.
The growth enabled the company to increase dividend payouts by about 67 per cent while providing four-fold assurance on dividend sustainability.

With the exception of a tint of increased gearing, the foam-manufacturing group recorded a well-rounded performance with considerable improvements in revenue, profitability, returns and balance sheet strength.
Audited report and accounts of Vitafoam Nigeria for the year ended September 30, 2020 showed that revenue growth of 5.2 per cent while 8.1 per cent drop in cost of sales and 11.4 per cent reduction in finance cost boosted the overall bottom-line performance.

With 8.4 percentage points added to underlying profit margin, the board of directors increased dividend payout by 67 per cent, putting the company’s yield considerably above current rates in the fixed-income markets.
At N7.25, the net assets per share provided a base for possible further re-pricing of the company’s shares at the stock market. Vitafoam recorded well-rounded profitability with modest sales growth, despite the adverse impact of COVID-19 pandemic.

Revenue rose by 5.2 per cent from N22.28 billion to N23.44 billion. Cost of sales dropped by 8.1 per cent from N13.52 billion to N12.43 billion. Gross profit thus rose by 25.7 per cent from N8.76 billion to N11.01 billion.
Administrative and marketing expenses increased by 10 per cent to N5.18 billion in 2020 as against N4.71 billion in 2019. Non-core business income rose by 52 per cent from N491 million to N745 million. Interest expenses reduced by 11.4 per cent from N1.05 billion to N930 million.

With these, profit before tax rose by 61.5 per cent from N3.5 billion to N5.6 billion. After taxes, net profit also jumped by 72 per cent from N2.39 billion to N4.11 billion.
Basic earnings per share thus increased from N1.82 to N3.05. Net assets per share rode on the back of high retained earnings to N7.25 in 2020, 54.3 per cent above N4.70 recorded in 2019.

With the expansive growth in the bottom-line, the board of the company has recommended distribution of N979.4 million as cash dividends for 2020, 64.5 per cent above N595.4 million paid for the 2019 business year. This implied a dividend per share of 70 kobo for 2020 as against 42 kobo paid in 2019.

Underlying ratios showed similar positive outlook. Gross profit margin increased from 39.3 per cent to 47 per cent.
Pre-tax profit margin- which measures average profit per unit of sales and serves as a major indicator of profitability, leapt to 24.1 per cent in 2020 as against 15.7 per cent in 2019. Return on total assets improved from 25.3 per cent to 26.1 per cent.

Return on equity also increased from 40 per cent to 45.4 per cent. Even with the increase in dividend payout, the sustainability improved with a dividend cover of 4.36 times in 2020 as against 4.33 times in 2019.

Stronger balance sheet
Group total balance sheet size grew by 56.5 per cent from N13.82 billion in 2019 to N21.64 billion in 2020. Total assets growth was driven by significant increases in current and non-current assets.

Total liabilities also rose by 60.4 per cent from N7.85 billion in 2019 to N12.6 billion in 2020. While the paid up share capital remained unchanged, total equity funds rose by 51.4 per cent from N5.97 billion to N9.04 billion.
With 35 per cent increase in bank loans, the group’s financing structure showed slight increase in leverage, though the internal financing structure remained considerably high.

The proportion of equity funds to total assets dropped from 43.2 per cent in 2019 to 41.8 per cent in 2020. Long-term liabilities/total assets ratio declined from 56.8 per cent in 2019 to 58.2 per cent in 2020.

Current liabilities also increased to 39.8 per cent of total assets in 2020 as against 37.3 per cent in 2019. Debt-to-equity ratio declined to 46.3 per cent in 2020, as against 35.9 per cent recorded in 2019.
Staff productivity and cost efficiency improved considerably during the year, providing the headroom for increased profitability and returns to shareholders.

Total number of employees increased from 607 persons in 2019 to 652 persons in 2020. Total staff costs also improved from N1.92 billion to N2.05 billion.
Average contribution of each employee to pre-tax profit rose from N5.76 million in 2019 to N8.66 million in 2020. Average staff cost per head however slipped marginally from N3.16 million in 2019 to N3.14 million in 2020. Total cost of business, excluding finance charges, in relations to sales improved from 81.8 per cent in 2019 to 75.1 per cent in 2020.

Modest liquidity
The liquidity position of the company improved considerably during the period with better financial coverage and working capital. Current ratio, which relates easily available finances to similar liabilities, increased from 1.6 times in 2019 to 1.8 times in 2020. The proportion of working capital to total sales improved from 12.8 per cent to 30.8 per cent. Debtors/creditors ratio stood at 111.1 per cent in 2020 compared with 245.5 per cent in 2019.

The latest audited report showed resilience and underscored the focused investments and expansions in value-adding businesses. In the increasingly competitive and constraining business landscape, companies with diversified products and long-established cost management structure stand greater chance of winning the headwinds.

There is considerable untapped potential in the group’s emerging protective and insulation businesses while the foam, bedding and furniture businesses are in strong market-leading positions. Expected boost in intra-Africa trade should further open up opportunities to scale up market share.

Vitafoam Nigeria is Nigeria’s leading foam-manufacturing group. Incorporated on August 4, 1962 and listed on the Nigerian Stock Exchange (NSE) in November 1978, Vitafoam is a wholly Nigerian-owned company with highly diversified shareholding structure. Vitafoam engages in manufacturing and distribution of flexible, reconstituted and rigid foams, all in various forms and designs that make the group a one-stop cushion supermarket. It had recently integrated a wide range of furniture designs and related products, providing the group a lifelong value chain of birth, education, work and leisure. With subsidiaries in Ghana and Sierra Leone, other subsidiaries in Nigeria include Vita Blom, Vita Visco and Vitapur.