VFD Group Plc has set its sights on an ambitious expansion, but its latest N6 billion commercial paper issuances under a N20 billion program raises fundamental questions about its financial strategy.
The 270-day Series 5 commercial paper, issued at a discount rate of 24.55% (effective yield of 30%), which opened on February 10 and closes on February 14, 2025, comes at a time when the company is aggressively reshaping its balance sheet through equity raises and asset sales.
The move follows a rights issue that raised N12.5 billion, alongside strategic divestments such as:
- A 30% stake in Abbey Mortgage Bank for N3.1 billion.
- An approved divestment of 343.5 million shares in Atiat Limited, valued at N7 billion.
These transactions helped propel the company’s earnings and profitability in 2024. Shareholders’ funds surged 90% to N61.98 billion, a marked improvement from the previous year.
However, with a 30% yield on new debt, the question arises: is VFD Group strengthening its balance sheet or digging itself deeper into a costly financial trap?
A balancing act: Debt reduction vs. expensive borrowing
On paper, VFD Group has made meaningful strides in deleveraging:
- The debt-to-equity ratio fell to 1.78x (FY 2023: 2.51x).
- The debt-to-assets ratio improved slightly to 0.34x (FY 2023: 0.37x).
- The assets-to-equity ratio settled at 5.30x, down from 6.74x.
These numbers suggest a concerted effort to reduce reliance on debt. However, issuing high-yield commercial paper at 30% raises doubts about the sustainability of this strategy.
The cost of borrowing at such elevated rates could erode future earnings, placing renewed pressure on interest coverage and profitability.
Interest coverage: A weak spot
Despite the improvements in equity levels, VFD Group’s ability to service its debt remains a weak spot
- Interest coverage ratio improved to 1.36x (FY 2023: 1.02x) but remains well below the 3x threshold that typically signals financial resilience.
- Interest expenses jumped from N25.3 billion in 2023 to N41.6 billion in 2024, eating into earnings.
- Operating cash flow collapsed from N17.42 billion in 2023 to just N4.52 billion in 2024.
This signals a troubling dependency on external financing to stay afloat. If revenue growth falters or macroeconomic conditions tighten, VFD Group could face a liquidity crunch, forcing it to roll over debt at even higher rates or make further asset sales.
Can VFD Group achieve its 2025 ambitions?
VFD Group’s financial projections for 2025 are aggressive but not unattainable:
- Q1 2025 gross earnings forecast: N36.83 billion (44% of full-year 2024 gross earnings).
- Pre-tax profit forecast: N2.8 billion for Q1 2025, rising to N16.44 billion for the full year.
However, the proposed reliance on short-term debt instruments poses a risk. If borrowing costs continue to rise, the group’s interest burden could overshadow profitability gains.
Worse, if operating cash flow does not recover, the company may be forced into a vicious cycle of refinancing expensive debt.
Investor Takeaway: A high-risk, high reward bet
For investors, VFD Group presents a compelling but risky opportunity. Its 1,487% increase in profit after tax and a 308% jump in earnings per share in 2024 makes for an attractive growth story. Yet, its balance sheet tells a more cautionary tale.
- While the 30% yield on its commercial paper may entice institutional investors seeking high returns, it also reflects the underlying risks of financing operations through expensive short-term debt.
- The company’s ability to boost its interest coverage ratio, generate sustainable cash flow, and manage leverage will be key indicators of future stability.
- VFD Group’s recent strides in reducing leverage are commendable, but its reliance on high-cost debt remains a glaring vulnerability.
- The coming year will serve as a litmus test: if the company can balance its debt obligations with strong cash flow generation, it could cement its position as a formidable player in Nigeria’s financial landscape.
- If not, the weight of its borrowing costs may overshadow profitability gains, leading to yet another round of financial restructuring.
- Ultimately, what matters most to investors and shareholders is returns; both in terms of capital appreciation and dividends.
VFD Group’s stock has been on an upward trajectory this year, closing at N52.80 per share on February 12, 2025, marking a 10% gain from its previous close of N48.00.
Year-to-date, the stock has gained 18.9%, ranking 39th on the NGX.
In 2024, return on average equity (ROAE) surged to 22%, a remarkable turnaround from -2.24% in 2023.
Given the unprofitability in 2023, the company opted for a 4-for-1 bonus issue for that financial year. With earnings surging in 2024, expectations for a cash dividend are understandable.
The key question still is whether VFD’s leverage-heavy strategy will continue to drive shareholder value or become a burden.
Strong earnings growth is encouraging, but can the company balance expansion with financial sustainability? Investors will be watching closely.
