Firms scale back expansion on cost management

Nigerian manufacturers are clawing back on their growth and expansion plans due to cash crunch.

This is based on capital expenditure margin data from the first half of 2024 (H1 2024), analysed by BusinessDay.

According to data tracked using the cash flow financial statements of manufacturers listed on the Nigerian Exchange (NGX), capital expenditure margins declined 2 percentage points year over year, from 10 percent as of H1 2023 to 8 percent as of H1 2024.

Capital expenditure margin (capex margin) is a metric which measures how much a company is spending on capital expenditure, essentially, the acquisition of new fixed assets, relative to its revenue. The metric provides insights into a company’s investment in its long-term assets in proportion to its generated revenue.

Capex margin is important because it provides a representation of how well a company is investing in its fixed assets in line with its growth and expansion plans. Essentially, when a company has a high capex margin, it depicts that the company is expanding its production capacity or upgrading its infrastructure.

It can also be used to assess the profitability potential of the company, as increased investment in long-term assets has the potential to boost revenue. When a company records low capex margins, it depicts that the company is more focused on cost management and optimisation, rather than expansion.

Since 2023, soaring inflation and foreign exchange instability have placed Nigerian manufacturers in precarious operational positions, with many facing significant losses that could take years to recover. Hence, since 2023, these manufacturers have been more focused on cost management than growth and upgrading their infrastructure.

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In H1 2023, the 28 companies tracked during this analysis posted gross revenue of N3.17 trillion in H1 2023. However, they spent N311.5 billion on the fixed assets addition during the period, marking a capex margin of 10 percent. As of H1 2024, these same companies posted gross revenue of N5.38 trillion, with a capital expenditure of N430.6 billion, marking a capex margin of 8 percent.

Although there was a 38 percent year-on-year growth in the capital expenditure, it was not commensurate with the 70 percent year-on-year growth in revenue during the period.

The companies used in this analysis were drawn from across different sectors in the NGX, including industrial goods, consumer goods, agriculture, and breweries. During the half-year, BUA Cement, just like last year, posted the highest capex margin, with 23 percent. In H1 2023, BUA spent about 50 percent of its generated revenue on fixed asset additions, as the group had a capex of N110.9 billion, with a revenue of N221 billion.

BUA Cement’s capex margin is down to its expansionary move, with the group currently expanding its Sokoto and Edo plants, with the aim of boosting its total capacity to 20 million tonnes per annum.

Palm oil company, Presco Plc, is also on a growth move with a capex margin of 20 percent during the half-year. The company recorded a capex of N17.4 billion during the half-year, marking a 202 percent year-on-year growth from N5.8 billion capital expenditure spent in H1 2023. Since undergoing management changes, Presco has seen a significant expansion drive, evidenced with its acquisition of Ghana Oil Palm Development Company (GOPDC).

Cement makers, Dangote Cement and Lafarge Africa, are also spending more money on expansion. The cement industry in Nigeria has become quite competitive in recent years, with the major players, Dangote, BUA, and Lafarge expanding their production capacity at the same time. For Lafarge, the company’s fixed assets addition during the half-year was N27.8 billion, marking a 99 percent year-on-year growth from the N13.9 billion recorded in H1 2023.

Dangote Cement also spent N161.8 billion on fixed assets addition during the half-year, marking a capex margin of 9 percent. In H1 2023, the company posted a capex of N66.4 billion as well as a capex margin of 7 percent.

In terms of fixed assets addition during the half-year, Dangote Cement, BUA Cement, International Breweries, Lafarge Africa, and Nigerian Breweries posted the highest capex in H1 2024. Nestle Nigeria, Dangote Sugar Refinery, Presco, and BUA Foods completed the list of the top ten in terms of capex.