New Zealand firms to boost capex budgets this financial year

27 April, 2016

New Zealand firms to boost capex budgets this financial year

Smaller businesses showing the most positive investment intentions

One in two New Zealand businesses plan to boost their capital expenditure (capex) budget this financial year, a move that is intended to drive down margins, accelerate growth and improve competitive positioning. These findings come from new research, which also reveals that the number of businesses New Zealand businesses planning to increase their asset baseintending to increase their asset base has risen by 6.7% in the past eight months, with the smaller end of town displaying the most positive intentions regarding equipment investment.

The latest round of the Alleasing Equipment Demand Index (the Index) found that 56.6% of SMEs plan to boost their capex budget this financial year, by an average of 7.4%. This compares to 45.2% of micro businesses and just 31.5% of corporates, and it provides further evidence that the country’s small businesses are underpinning overall asset acquisition demand growth.

At a geographic level, the data reveals Auckland-based businesses are considerably more optimistic than their Wellington-based counterparts. Almost half of Auckland-based businesses (48.3%) intend to increase their asset base, up from 43.9% in September 2015, with an average forecast increase of 7.4%. In contrast, 41.9% of businesses located in Wellington expect to increase their asset base, with a lower average forecast increase of 6.0%.

According to Alleasing’s Chief Executive Officer, Daniel Blizzard, investment conditions for the new financial year are relatively buoyant, despite some uncertainty in domestic and international trading conditions.

“Businesses with asset acquisition on their agenda in the 2016-17 financial year are confident in their own operations – they are not focussed on reacting to external economic conditions, such as the rapidly falling New Zealand dollar or negative agriculture expectations,” Mr Blizzard said.

“While it is clear there is a difference in investment intent for businesses of varying sizes and locations, the overall number of firms intending to decrease their asset base remains stable. What’s more, the average asset reduction forecast has dropped by 16.6% since the inaugural Index in September 2015, a further positive sign that overall sentiment is improving,” Mr Blizzard added.

Finance sources split

In terms of businesses that reported unchanged capex intentions for the new financial year, 89.0% said their decision to not invest is predominantly externally motivated, with over half of this group (55.0%) indicating a lack of confidence in domestic and international trading conditions is driving their decision. The firms who are intending to reduce their capex budget say they will be forced to defer new projects (29.1%), suffer slower business growth (25.5%) and their competitive positioning will deteriorate (23.6%).

The Index also examined sources of finance for New Zealand businesses. The results reveal that while bank loans are king, some micro firms have a heavy reliance on equity as a primary source of finance.

“For four in 10 micro firms, equity is the primary source of finance,” said Mr Blizzard.

“This trend stems in part from a continued struggle for this group to access secured finance. Equity as both a primary finance source, and to use to remain productive and continue investing in new equipment or technology, is unsustainable and will ultimately inhibit the long-term growth prospects of the segment. It is critical that New Zealand businesses reassess their approach to funding because unlike borrowing money which can be repaid with interest then wiped, equity is not temporary or capped; it costs a portion of a business, forever.”

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