Outright asset purchases may reduce opportunity to grow
More than half of New Zealand businesses are planning to increase their asset base in the first quarter of 2017, with the vast majority purchasing equipment to increase their asset base rather than replacing existing equipment. The bullish intentions resonate with other indices for business and consumer sentiment in New Zealand, reflecting strong economic growth as the economy tracks at 3.6 per cent, one of the highest rates in the developed world.
However, the latest round of the Alleasing Equipment Demand Index (the Index) has revealed that the way businesses are choosing to fund their assets, could hinder their growth prospects, with almost one in two intending to use equity or internal cash flow to fund their acquisitions.
The Index found that 51.2 per cent of businesses intend increase their asset base this quarter. This is the first time since the Index began in August 2015 that the quarterly increase has moved above 50.0 per cent. In comparison, only 3.0 per cent of businesses reported their intent to decrease their asset base.
Of those businesses looking to increase their asset base, the average increase is 8.9 per cent, another new high. In addition, more than 70.0 per cent of the assets earmarked for acquisition this quarter are part of new investment capital expenditure.
The sample group was divided into three segments, based on annual turnover, and for the first time included ‘upper corporate’ businesses with turnover in the $100 million to $250 million band.
This segment proved to be the most bullish, with 56.9 per cent planning an asset base increase, closely followed by 55.2 per cent of SME’s ($5-20m annual turnover). This leaves lower corporates ($20-100 million) at a significantly lower 41.5 per cent planning an increase.
While businesses are planning acquisitions, the biggest source of funds is internal, with 46.8 per cent saying they will use equity or internal cash flow to fund the purchases.
Commenting on these results, Alleasing Chief Executive Officer, Daniel Blizzard, said: “While this shows that New Zealand businesses are self-reliant, it also reveals significant potential for further growth if these businesses opt to fund their assets another way.
“Our research has found that one in five businesses are suffering from capital constraints, which are inhibiting their ability to expand. Nearly half of these businesses would like to achieve growth through M&A, but a lack of access to capital is frustrating their plans.
“The Index shows that while confidence is strong, major opportunities are being missed because businesses aren’t able to access sufficient capital. This could be a result of banks becoming cautious of how many loans they grant prior to the upcoming implementation of Basel III. If businesses want to grow and remain profitable, they will need to find alternative capital sources instead of relying on outright purchases.”
Leveraging an alternative capital source has the potential to release significant funds for cash flow or business investment. Index data reveals that 16.0 per cent of the asset base of New Zealand businesses is leased or financed. Based on recent data from Statistics New Zealand, this equates to businesses owning assets worth more than two times the value of the nation’s GDP. That is nearly $1.8 trillion of assets, of which, $992 billion are financial assets owned by the finance and insurance sector (i.e. rented or leased). This suggests that businesses across the country hold just over $800 billion in non-financial assets*.
Applying the result from the Alleasing Index, 16.0 per cent of this is leased or financed, leaving a balance of $672 billion in owned assets, compared with national GDP of $255 billion.
“Not all of these assets could be leased or re-financed, but it is clear that adjusting even a small percentage could have a significant impact. By releasing these funds back into a business the capital constraints that are inhibiting growth may be overcome,” says Alleasing’s Daniel Blizzard.
*Non-financial assets are classified as machinery, equipment, transport vehicles, non-residential buildings, marketing assets etc. as stated by Statistics New Zealand.
| An Alleasing release | february 16, 2017 ||