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Nigerian companies are not spending money on the acquisition of assets to boost growth despite the gradual economic recovery.
The roughly 40 companies quoted on the floor of the bourse (excluding financial institutions) that have reported full year 2017 results saw their capital expenditure drop by 3.81 percent to N292.25 billion from N 303.83 billion the previous year.
It is generally expected that as the business cycle turns and growth resumes, firms will expend more money on capital assets.
However some analysts have a dissenting view.
Johnson Chukwu, managing director and CEO of Cowry Assets Management Limited says the decision to spend on assets depend on the strategies of firms.
The fact that the country exited recession doesn’t necessary mean firms will deploy money into capital expenditure, according to Chukwu.
Chukwu adds that it is firms in the growth stage that invest more on the acquisition of property plant and equipment.
“It depends on which sector and what they want to do. Dangote Cement has been expanding in other Africa countries. They may not put money into new projects as they previously did,” Chukwu said.
In the 2015 and 2016 periods when a sudden drop in oil price tipped the country into its first recession in 25 years, firms cash flow were hard hit and they were hindered from moving ahead with projects with a positive net present value.
An investment project has a positive net present value when the internal rate of return is greater than the cost of capital.
However, an increase in crude prices and the introduction of a new foreign-exchange system that ended a crippling shortage of dollars helped attract more investment flows into the country, while improving liquidity for the nation’s corporates.
The gross domestic product (GDP) of Africa’s largest oil producer expanded for three straight quarters last year after a 1.6 percent contraction in 2016, with year-on-year growth reaching 1.9 percent in the final three months of 2017.
Analysis by BusinessDay shows the industrial goods sector saw spending on the acquisition of property plants and equipment slide for the 2017 period.
Dangote Cement Plc, the largest producer of the building material saw spending on capital expenditure dip by 9.10 percent or N10.88 billion to N107.95 billion in December 2017 from N118.84 billion the previous year.
Lafarge Africa Plc’s capital expenditure declined by 63.06 percent to N15.27 billion in the period under review as the cement maker continues to grapple with rising gearing level and receding sales that resulted in losses.
There are indications firms in the sector could deploy more capital for the acquisition of property plants and equipment as the demand for cement products are expected to spike on the back of the huge infrastructure deficit bedevilling the country.
But firms in the fast moving consumer goods sector have resumed spending on property and equipment to bolster production as capital spending surged after the severe dollar scarcity of 2016 crimped their future expansion plans.
“These firms have continued to launch new production plants. For instance Nestle Nigeria and the millers have been expanding and their capacity utilization is getting to the maximum. They need to improve plant capacity,” said Ayodeji Ebo, managing director and CEO of Afrinvest Investment.
Nestle Nigeria Plc capital expenditure increased by 23.23 percent to N8.71 billion as at December 2017 as the company launched a N4.10 billion Milo plant in Ogun State.
NASCON Allied Industries, a subsidiary of Dangote Industries Limited and consumer good giant saw capital expenditure surge by 900 percent to N4.81 billion in the period under review.
Nigerian Breweries Plc’s capital expenditure increased by 67.19 percent to N32.12 billion in the period under review as the firm is poised for a beer war as rivals are launching market penetrating products with a view to increasing their market share.
Dangote Flour Mills Plc and Dangote Sugar Plc, controlled by Dangote Industry Limited, saw spending on capital expenditure surge by 206.55 percent and 146.82 percent to N4.026 billion and N9.74 billion respectively.
“Firms will increase spending on capital expenditure especially in the manufacturing sector as the demand for their product is price sensitive,” summed Ebo.
BALA AUGIE
