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The Capital Agenda - EY - Australia

Australasian Capital Confidence Barometer, April 2012

The Capital Agenda

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Do you expect your company to pursue acquisitions in the next 12 months?(Yes)

Which are the top 5 regions in which you are most likely to invest?

What will be the primary purpose of your refinancing?

Australasia: Which of the following capital management issues is your company placing the greatest attention and resources?

If you have excess cash, which of the following will be your focus over the next 12 months?

For transactions completed recently, what were the most significant issues that contributed to deal not meeting expectations?

Understanding your capital agenda – key highlights

Intra-Asia-Pacific cross border activity as well as inter Asia-Pacific cross border activity is increasingly perceived as a barometer for the global community’s economic health.

In the 6th global survey, we found economic outlook, optimism, business health and willingness to divest or engage in M&A activity varied by market cross Asia-Pacific.

Where are companies planning to invest over the next 12 months?

1. China 6. Canada
2. India 7. UK
3. United States 8. Germany
4. Brazil 9. Australia
5. Indonesia 10. Thailand

It seems the focus for many companies is on creating a stronger foundation, in order to be in a position to capitalise when the market turns.

A strong Capital Agenda needs to be at the heart of all strategic boardroom and management decisions. The findings of our Barometer provide useful insights into the ways companies are optimising, investing, preserving and raising capital.

Investing – focus on organic growth

Although there has been a noticeably positive shift in overall confidence and outlook, organisations both in Australasia and globally have not yet accelerated their acquisition plans and instead remain primarily focused on organic growth.

Locally, the greatest capital management focus is on organic growth (27%). Similarly, more than half (55%) of local organisations intend to use any excess cash on organic growth.

About a third of organisations both locally and globally say they intend to pursue acquisitions in the next 12 months, down from 41% (global and local) in October 2011 but still at a reasonable level.

Asia Pacific remains the number one region for local and global investment, with 89% of Australasian and 46% of global respondents nominating it as the region in which they are most likely to invest.

Most Australasian companies continue to see Australia or New Zealand as their highest priority market for acquisitions, with the top four global destinations being China, India, Indonesia and Malaysia.

Raising – Corporate balance sheets strong

Corporate interest in capital raising is growing and is now the capital agenda priority for a quarter (25%) of Australasian organisations, a jump up from 15% in October 2011.

However, of those with capital raising as their primary focus, the large majority are doing so via refinancing, with only 16% planning to raise money by way of M&A or an IPO.

It is worth noting, however, that debt to capital ratio levels remain at very low levels — 73% of Australian respondents have debt to capital ratios of less than 25%. Additionally, 62% say cash is the likely primary source of any deal financing in the next 12 months, with debt the likely main source for just 21% and equity 17%. Hence the need to raise capital is relatively lower than at other stages of the cycle.

Of the local respondents intending to refinance loans or other debt obligations in the next 12 months, for about at third of those the primary purpose of refinancing is optimising capital structure, followed by extending maturity (27%), retiring maturing debt (20%) and reducing interest costs (15%).

Overall divestment intentions remain at similar levels to six months ago, with 23% of Australasian businesses and 31% globally intending to make asset sales in the next 12 months.

Consistent with the broader sentiment, the main driver of planned divestment activity for more than half (55%) is to focus on core assets, with 18% intending to use sale proceeds to fund growth plans.

Preserving – Shift away from capital preservation

After spiking to 30% locally in our October 2011 barometer, preservation is now the primary capital management focus for just 13% of respondents, both in Australasia and globally, which is a positive trend.

The shift in the attention and resources of businesses away from capital preservation to capital optimisation is also reflected in the notable decline in negative sentiment and increase in positive sentiment across a range of indicators.

Compared to six months ago, Australasian respondents have a more positive outlook about economic growth, employment growth, corporate earnings, credit availability and equity valuations, both globally and locally.

However, local businesses’ confidence in the global outlook is fragile and caution prevails. When asked what measures have been put in place to manage risk or take advantage of opportunities presented by the Eurozone crisis, more than half (52%) of local respondents nominate cost reduction measures and a further 17% nominate supply chain transformation.

Optimising – Companies shift focus to capital optimisation

Capital optimisation is the primary capital management focus for 31% of respondents, both locally and globally, up from 25% (Australasia) six months ago.

As was the case in October 2011, refinancing remains a key part of businesses’ capital optimisation strategy, with 34% of Australasian respondents citing it as the primary purpose for intended refinancing in the next 12 months.

Additionally, asked how they will use excess cash in the next year, 21% of Australasian organisations still nominate paying down debt.

It seems the focus for many companies is on creating a stronger foundation, in order to be in a position to capitalise when the market turns.

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A view across Asia-Pacific

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