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Tuesday, March 28, 2023

Nigerian Firms Take Tentative Steps to Ramp up Capital Expenditure

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Nigerian firms are gradually increasing capital expenditure, thanks to higher replacement cost of assets brought on by inflationary pressures, currency devaluation and a gradual economic recovery buoyed by the relaxation of lockdown measures.

With the majority of companies in the NGX ASI 30 index having reported first-quarter results, capital expenditure across its members rose 25.03 per cent year on year to N210.87 billion in the first quarter, according to MoneyCentral data.

Capital expenditures (CapEx) are funds used to improve and maintain the physical resources of a company. Common CapEx projects include the construction of new factories, upgrading manufacturing equipment, and payment for repairs.

“It could be that they are replacing the same items at a higher price due to inflation and foreign currency volatility. For instance, the cost of motor vehicles have gone up by 50 percent,” said Ayodele Akinwunmi, analyst at FSDH Securities Limited.

“Also, firms are motivated to acquire property plants and equipment as overcoming the Covid-19 has strengthened consumer spending,” said Akinwunmi.

The Q1-2022 GDP figures showed that the Nigerian economy expanded by 3.1 percent y/y in real terms in what was broadly a positive surprise as the growth print topped consensus expectation even amid unprecedented developments in the global economic environment including rising inflationary pressure, higher importation costs (due to disruption in the global supply chain), and geo-political uncertainties.

The headline inflation climbed 89bps to settle at 17.7 percent year on year (y/y) in May-2022, from April’s 16.8 percent, printing above consensus forecast of 17.5 percent and our in-house forecast of 17.4%.

According to data gathered by MoneyCentral, the sector with the largest growth in CapEx was the consumer goods sector. Sector players collectively saw capital spending surge by 94.15 percent to N85.14 billion in the first quarter.

While the war in East Europe has helped balloon crude oil price to an all-time high of $120 per barrel, Nigeria’s largest indigenous oil and gas firm Seplat Energy saw CapEx spending dip by 13.34 percent to N10.72 billion.

Dangote Cement, BUA Cement, and Lafarge Africa, collectively incurred N56.63 billion in capital expenditure spending as at March 2022, which is 23.68 percent lower than 2021’s N74.20 billion.

A breakdown of the figures shows Dangote Cement recorded CaPEX growth of (175.60 percent), but Lafarge Africa and BUA Cement saw CaPEX spend dip by 20.22 percent and 70.41 percent respectively, even as the benign weather conditions and reopening of the economy are expected to underpin construction activities.

Dangote Cement, the largest producer of the building material and most capitalized firm in the country, has invested in new capacities & equipment such as 3.0MMT Okpella plant and commissioning of a second gas-fired power plant in Tanzania)

BUA Cement commissioned the Sokoto line 4 cement plant earlier in 2022 which raised the company’s total installed capacity to 11.0MMTPA from 8.0MMTPA.

The majority of firms reported profit growth as they benefited from price hike in key products to compensate for rising input costs, but there are concerns that such strategy may have reached a crescendo as consumers are reeling from huge utility bills, spiraling transport fares and unemployment.

While firms are intensifying their capital investment plans, there are dark clouds on the horizon.

First, the bedlam in East Europe with the ensuing sanctions on Russia by the United States and the European Union for invading Ukraine has stoked raw material costs as both countries are the largest producers of the grain.

And that is double whammy for Nigerian companies who are already grappling with huge energy costs due to unreliably unstable power supply from a grid that has been collapsing. The price of diesel oil prices has been rising as it is susceptible to the vagaries of crude oil price since subsidy on the product had been removed.

Secondly, the decision of the central bank to hike monetary policy rate so as to tame red hot inflation could force companies to put a brake on capital spending and scale back on expansion plans because rising borrowing costs means they will be paying more interest on loans.

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