VFD Group’s high stakes play: Can a costly debt raise support its 2025 targets? 

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:

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:

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.

Despite the improvements in equity levels, VFD Group’s ability to service its debt remains a weak spot

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.

VFD Group’s financial projections for 2025 are aggressive but not unattainable:

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.

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.

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.

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.