An expected pick-up in capital investment by companies has failed to occur so far this year as they are looking out for more investment opportunities amid economic uncertainties.
There was optimism that an improvement in the economic cycle buoyed by the relaxation of lockdown policy would make companies feel more comfortable to start sending cash, which casts a pall about the robustness of economic recovery this year.
Capex by Nigerian corporates dipped by 34.02 percent to N319.93 billion as at September 2021 from N484.90 billion as at September 2020, according to data gathered by MoneyCentral.
This shows that companies are not investing in new manufacturing capacity, as many of them still have spare capacity,” said an anonymous source.
“Notably, the growth in revenue of most FMCGs has been purely driven by price increases over the past 3 years, whilst volume of goods sold has been on the downtrend, indicating lower capacity utilization,” said the source.
Operators in the industrial goods sector who used to be the biggest spenders have tightened purse strings as managers have become circumspect.
Aggressive cuts to capital expenditure were being implemented by BUA Cement as the cement maker’s acquisition of property plant and equipment reduced by 72.75 percent to N34.63 billion as at September 2021 from N127.11 billion the previous year.
While Dangote Cement has taken advantage of a gradual uptick in construction activities as capex spend increased by 13.92 percent in the period under review, the growth is far behind the 45.58 percent increase in 2019.
Oil majors have put a break on aggressive capital expenditure spending such as accelerating drilling of wells as they are seeing continuing uncertainty over the outlook for global demand.
Seplat Energy, the largest upstream oil and gas firm by market capitalization, saw the acquisition of property plant and equipment reduce by 19.13 percent to N33.32 billion as at September 2021.
Analysts are of the view that a lot of firms have not recovered from the shock caused by the coronavirus pandemic that paralyzed business across the globe, and they added that incongruousness between GDP growth and receding capex spend is not strange.
The economy sustained its expansionary trend in the third quarter of 2021, as the country’s gross product grew by 4.03 percent in real terms compared to 5.01 percent in the second quarter of Q2 of 2021, according to latest data from National Bureau of Statistics (NBS).
There is light at the end of the tunnel because firms have enough cash to fund expansion plans in case the investment climate becomes benign.
The largest companies generated N1.69 trillion from cash flow from operating activities, and that is 23.63 percent higher than 2020’s N1.37 trillion, according to data gathered by MoneyCentral.
Of course, the bellwether ones took advantage of the low yield environment to tap the debt market for capital that they intended to use to refinance existing debt, strengthen their balance sheet and finance the acquisition of assets.
Total borrowings (long and short term) of the non-financial firms fell by 4.62 percent to N2.87 trillion in September 2021 from N3.01 trillion the previous year.
Once demand growth picks up however industrial firms like Dangote Cement, BUA Cement, and Lafarge Africa may need to boost capacity to meet the growing market.
Analysts at Chapel Hills have said that Lafarge Africa will need to raise its installed capacity by, at least, 3mmt to remain competitive with peer rivals.
“Management said it has earmarked US$100mn to CAPEX in FY-21E, with 60% of that going strictly to funding its debottlenecking exercise in Ashaka and Ewekoro II. We estimate that c.US$20mn has already been spent as at H1-21,” said analysts at Chapel Hill Denham Limited.
“Hopefully, as the economy grows, disposable income would begin to improve, especially as inflationary pressures begin to ease. This evolving dynamics may improve capacity utilisation in many of the factories and at some point reinforce the need and appetite of FMCGs to invest in additional capacity to meet expected growth in demand,” summed the source.