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Capital Confidence - EY - Australia

Australasian Capital Confidence Barometer, October 2012

Capital Confidence

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What is the primary focus of your company's organic growth?

What is the primary source of your company's deal financing in the next 12 months?

What is your company's current debt to capital ratio?

What is your perspective on the state of the global economy today?

What is your perspective on the state of your local economy today?

What do you believe the valuation gap today between buyers and sellers is?

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.

Which markets are likely to pursue acquisitions in the next 12 months?

Singapore Indonesia Malaysia Mainland China South Korea Australasia
58% are likely 35% are likely 50% are likely 22% are likely 4% are likely 32% are likely



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.

Which markets are likely to make asset sales or divestments in the next 12 months?

Singapore Indonesia Malaysia Mainland China South Korea Australasia
33% are likely 43% ar likely 35% are likely 9% are likely 12% are likely 23% are likely





On a positive note, at home 41% of Australasian respondents believe the outlook for our local economy will be stable. A further 41% believe it will improve, which is only slightly down from 49% last barometer.

Investing has overtaken optimising as the number one focus for organisations, with 32% of Australasian respondents saying it was their priority capital agenda issue.

Revenue and margin pressure mount

Organisations across the board are looking to invest most heavily in core products and existing markets, and it appears Australasian respondents (26%) are significantly more interested in increasing research and development spend than our global counterparts (16%).





Doubts on debt

Australasian respondents continue to demonstrate very conservative behaviour, with the majority of our respondents avoiding debt funding where possible. Cash is the preferred financing source, with 57% of Australasian respondents saying it would be their primary vehicle to fund future deals.

Revenue and margin pressure continues to be the most significant challenge in light of the Eurozone crisis, with 31% of Australasian respondents saying it was a concern. This is down from 38% last barometer, and also lower than that of our global counterparts at 41%.

Debt to capital ratio of Australasian organisations still remains very low, however it has increased slightly, with 53% having less than 25% gearing, compared to 64% for Australasia, and 73% for Australia last barometer. This increase can be attributed to a general decrease in company profits and also an increase in the number of organisations paying dividends.

It's understandable that organisations remain debt averse and are deleveraging as a result of an uncertain operating environment, however it should be kept in balance and not become an impediment to well considered growth opportunities.

Scarce funding

Credit availability has not returned to pre-global financial crisis levels and continues to be a challenge for some, including Australasia, with 27% of respondents saying that it is an issue, compared to only 21% globally.

Should economic conditions improve considerably, fostering a renewed focus on growth, it is possible that in the absence of foreign financial institutions entering our market, traditional funding channels may not be able to fund all investment.

The good news is that there are a number of alternative funding arrangements for organisations. Public and retail bonds, private placement markets, hybrids/convertibles, and export credit agencies are some of the options that should be considered for those seeking growth.

Confidence – Reservation across nations

The confidence of Australasian organisations in both the global and local economies has softened, with 82% now believing the local economy is stable or improving, down from 91% in April. Similarly, 74% believe the global economy is stable or improving, down from 82%.

The financial crisis is not the only factor causing uncertainty.

In China, the slowing rate of growth and the impeding leadership transition that could potentially facilitate significant shifts in policy, is giving rise to concern. While in the US, the looming fiscal cliff and uncertainty surrounding the upcoming presidential election is also casting doubt around policy direction.

On a more positive note, at home 41% of Australasian respondents believe the outlook for our local economy will be stable. A further 41% believe it will improve, which is only slightly down from 49% last barometer.

Factors contributing to this decline are likely to be associated with growing concerns around rising labour costs and industrial relations generally, the continuing high dollar and our significant exposure to softer commodity markets. In Australia, the uncertainty and heightened political debate that comes with minority government is also fostering concern and frustration in some quarters.

Decreasing demand from China is also causing unease. Twenty-five per cent of Australia’s exports go to China and 60% of these shipments are iron ore, which leaves the Australian mining sector considerably reliant and exposed on the well being of the Chinese economy, and consequently their appetite for our commodities.

Closing the gap

Doubt has seeped in across the board, with Australasian respondents now notably less confident about economic growth, employment growth, corporate earnings, credit availability and equity valuations than they were six months ago.

While Australasian respondents say the number of deal opportunities and likelihood of closing deals is relatively on par with conditions last barometer, the perceived quality of deals has dropped.

It is positive to note that the valuation gap appears to have closed slightly, with 33% of Australasian respondents believing that it is now less than 10%, compared to 19% last barometer.

Our observation is that where transactions are being assessed, vendors have accepted there may be a valuation gap and have continued to pursue the opportunity. In a number of cases they are being asked to consider mechanisms to bridge the gap such as earn-outs, deferred payments and retention of equity. There can be practical ways for buyers and sellers to bridge a valuation gap where the strategic rationale to proceed is compelling.

Another encouraging sign for our local economy is the number of Australasian respondents planning to keep their current employment levels (61%) and looking to create jobs and hire talent (21%).




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