Why Vitafoam’s Poor Third Quarter Is A Bad Sign For Investors

Vitafoam released its 2015 9 Months results showing Group pre-tax profits for the first 9 months of the year fell 31% to N522 million. Pre-tax profits for the company also fell 37% to N577 million, signifying a rather gloomy end of the year for shareholders of the foam making company.

Poor Third Quarter

• Third quarter results for Vitafoam over the last few years haven’t been particularly impressive. A look at past results shows that the company typically has a much weaker third and fourth quarter relying mostly on the first and second quarter to boost full year profits.
• This quarter however, was the first time the company will be reporting a loss since we began tracking in 2013. Vitafoam reported a loss of N26 million this quarter compared a pre-tax profit of N154 million same period in 2014 and N128m in 2013
• A look at the results suggest the reasons lie squarely in higher operating expenses. Opex rose 27% to N1.3billion this quarter compared to Q2 and was 9% higher than the N1.2billion posted a year earlier. Vitafoam did not provide a breakdown of its expense for the quarter and neither did it do so for the 9 months results it released.
• Historically, third quarters appear to be highest in terms of opex for the company and we don’t seem to understand why.

What does this signify?

• With the third quarter of the year churning out losses, it appears the company is setting up nicely for a very weak 2015.
• I do not expect any significant improvement from the company in the last quarter of the year as they typically report fourth quarter losses.
• The company reported  fourth quarter losses of N23m and N93m in 2014 and 2013 respectively.
• Currently the company’s 9 months pre-tax profits is 31% down year on year suggesting a gloomy full year results.
• It took Vitafoam almost 6 months to release its 2015 full year results. At this rate, one wonder if the company will delay results again.

Is current share price over valued?

• Vitafoam currently trades at N5.5 and has returned about 65% year to date.
• The stock has a year high of about N6.28 and a low of N2.69
• It also trades at a multiple to trailing earnings per share of 10x
• Whilst these all look like good numbers, the current set of results suggest the stock may just be over priced.
• For example, a 30% drop in profits this year alone will give the stock a forward price earnings ratio of between 15x to 17x
• Profits are already down 30% year on year and it is unlikely things will improve
• More importantly is the threat to the company’s dividend payout which could drop below 30 kobo per share for the first time in two years
• In fact, the impressive performance of the share price this year was mostly as a result of the 1 for 5 bonus issue and 30 kobo dividend it declared simultaneously.
• A repeat of that is highly unlikely in my opinion.