E- COPY (8-14) January 2018 cover pgg-compressed | Page 9

CAPITAL MARKET
Monday, January 8 - 14, 2017
9
Banks may face profit challenge over T-bill decline
By NIYI JACOBS
F
itch Ratings recently said that
Nigerian banks may find it
more difficult to sustain prof-
itability given the decline in net
Treasury bill (T-bill) issuance of
country's Q1;18 issuance
programme.
The slowdown in T-bill issuance,
according to the rating agency,
marks a change of strategy as the
government looks to increase its
financing from external sources and
longer-dated domestic issuances.
Record T-bill issuance in 2017
helped support the Central Bank of
Nigeria's (CBN) strategy to main-
tain naira exchange-rate stability.
High yields on T-bills issued in 2017
(around 13%-14% on 90-day T-
bills) attracted investors and helped
to support the naira.
An increase in oil export earn-
ings and the introduction in April
2017 of the Nigerian Autonomous
Foreign Exchange Rate Fixing
(NAFEX) mechanism, commonly
referred to as the “Investors and
Exporters' FX Window”, also
helped naira stabilisation during
the second half of 2017, the agency
said in a statement.
Nigerian banks are highly reli-
ant on net interest income for prof-
itability and T-bills proved to be an
important source of profits in 2017.
Interest on securities represented
30% of total gross interest earned
last year, averaged across Nigerian
banks rated by Fitch (2016: 23%).
By end-September 2017, gov-
ernment securities including T-
bills represented more than 15% of
the banks' assets as new lending
fell, reflecting weak credit demand,
tighter underwriting standards and
banks' reluctance to extend new
loans as they focused on the exten-
sive restructuring of troubled oil-
related and other portfolios.
Even the country's largest
banks cut back on new lending,
with Guaranty Trust Bank's
stock of outstanding loans fall-
ing 10% during the period,
FBN Holdings' by 4.6%,
Zenith's by 3.7% and Access's
by 1.1%. United Bank for
Africa's loan book grew 5.6%,
but this is likely to have been
driven by non-Nigerian lend-
ing as the bank operates in 22
other African countries.
Fitch's 2018 rating outlook
for the Nigerian banking sector
is negative, reflecting contin-
ued fragility in the operating
environment and the Negative
Outlook on the sovereign's 'B+'
rating. It wants government to
fund infrastructure through
capital market.
Emefiele, CBN Governor
Vitafoam: Will rebounding earnings support...
Contd. from pg. 8
Turnover was down comparable to the N17.19 billion
recorded in 2015, while loss after tax stood at
N32.03million
The price performance for the year moved down to
reflect the performance pattern, but reversed up in 2017 on
the strength of it improving numbers for the period and
positive general market performance.
Five-Year Financial Analysis
Looking at Vitafoam's financials for the past five years
as shown in the table above, management grew revenue
year-on-year to a high of N17.19bnin 2015, from N14.48bn
in 2012, after which it fell in 2016 to coincide with the
acquisition of Vono Products when it stood at N13.57bn,
below the 2012 sales figure. Also, profitability level for the
period has been undulating but stood at N529.14m in 2014,
compared with the low of N249.05m recorded in 2015
before turning into a loss position of N32.03m in 2016 to
reflect the worse situation for the company in the last five
years. Earnings power has been inconsistent to reflect the
cost headwind in its operations. When the latest figures of
2015 and 2016 is compared to the reported profit, it
resulted in a negative profit margin of 0.24%. Meanwhile
profit margins for the five years had nosedived on yearly
basis which is an indication of increased costs cum tax
during these periods.
In the same direction, shareholders' fund which has
been unstable for the period grew from N2.91bn in 2012 to
N4.95bn in 2015,stood at N3.51bn in 2016. This also
reflected on the book value per share up and down
movement that affected the price movement for this same
period. The book value was up from N3.56 in 2012 to N5.03
in 2015, but came down in 2016 to N3.37.
The reverse is the case when the said growth is
compared to investors' response in terms of market price
valuation/judgment, as Vitafoam's unit price on the floor of
the Nigerian Stock Exchange continued to maintain up and
down trending. This was however before the current
market rally was propelled by the impressive Q2 outing and
general market uptrend.
Estimated Performance Ratios
Vitafoam's earnings per share for the five-year period
was on the decline to reflect the company's earnings power,
even as the additional shares arising from the bonus have
Source: Company Financial & Investdata Research
weakened Earnings Per Share (EPS) for the period under review. The amount earned per share moved
from 61 kobo in 2012 into red with LPS of 3 kobo in 2016. The dwindling earnings and increase in share
price within the period had elongated investors waiting period to -75.17x at the market value as at
released date, after it had recorded a P/E ratio of 6.24 times in 2012. Book value during the period
declined to N3.37 from N3.56 in 2012 which still indicated good margin of safety, considering the
market price of the stock as at released date.
Other performance ratios remained mixed with the up and down movement, but profit margin is
still pointing at high cost of operations. On the strength of the figures posted and dividend declared
over the years, the stock is fairly priced at N3.50.
Analysts Opinion/Recommendation
The equity is good for dividend investors as it guarantees annual returns. Also, traders may enjoy the
likely rally if full year financials beat expectations as money market interest rate continues to crash
ahead of the Federal Government's green bond and the first Monetary Policy Committee (MPC)
meeting of 2018, holding in January. Note also that monetary policy easing has technically commenced
in a bid by the authorities to bring down cost of funds and drive the expected growth in 2018 and
beyond.
But the management of Vitafoam should continue with its strategic business plans of repositioning
its subsidiaries to boost performance, while utilising modern research and development expo sures for
cutting costs and enhance profitability.