Vitafoam’s revenue surges, but profits buckle under FX and finance cost pressures Nexovant

Vitafoam Nigeria Plc’s 2024 full-year results paint a picture of robust revenue growth juxtaposed with mounting profitability pressures.

Revenue grew by 56% year-on-year (YoY) to N82.640 billion, an achievement that eclipses the company’s 5-year compound annual growth rate (CAGR) of 40%.

This performance is further accentuated by an improved gross profit margin of 37%, up from 33% in 2023, signaling better cost management or enhanced pricing power.

However, the company’s profitability has been significantly undermined by escalating foreign exchange (FX) losses, which surged by 249% YoY to N12.723 billion.

These losses, attributed to dollar-denominated obligations, reduced the operating profit margin to 9.21% from 13% in 2023. Pre-tax profit plunged by 80% to N1.145 billion, compressing pre-tax and post-tax margins to 1.39% and 1.15%, respectively.

The drop in margins suggests that Vitafoam’s operational efficiency is under pressure, and rising costs are outpacing revenue growth. Such low margins raise red flags for investors, as they signal potential challenges in sustaining profitability and managing costs.

Management attributes the FX losses to currency exposure from assets and liabilities denominated in foreign currencies. To manage these risks, Vitafoam highlighted:

“Our approach to managing foreign exchange risk is to hold foreign currency bank accounts, which act as a natural hedge for these transactions. Currency exposure arising from assets and liabilities denominated in foreign currencies is also managed primarily by setting limits on the percentage of net assets that may be invested in such deposits.”

However, the sharp rise in FX losses suggests that these measures are proving insufficient in the face of Nigeria’s volatile currency market.

Strengthening these strategies such as adopting more robust hedging instruments or diversifying currency exposures will be critical for stabilizing margins.

Adding to the strain, finance costs surged by 231% YoY, with interest expenses climbing to N6.749 billion.

This sharp rise eroded earnings, leaving Vitafoam’s interest coverage ratio at a concerning 1.13x, an indicator of limited capacity to manage its debt obligations effectively.

Despite these financial pressures, the company’s share price achieved an 8.64% year-to-date (YtD) gain, ranking it 8th in the consumer goods sector and 91st on the NGX. This follows a modest 7.58% YtD gain recorded in 2023.

To further reward shareholders, Vitafoam declared a dividend of N1.05 per share for the 2024 full year, payable on March 6, 2025. However, this represents a reduction from the N1.56 per share paid in 2023. Notably, the declared dividend exceeds the post-tax profit of N952 million, signaling a reliance on reserves, a strategy that may raise concerns about long-term sustainability.

While Vitafoam’s revenue growth is commendable, the combination of heightened FX losses, increasing finance costs, and reduced profitability has raised red flags among investors.

The company must reassess its financial strategies to mitigate FX risks and improve its bottom line, ensuring that shareholders can rely on sustainable returns in the future.

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