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Low appetite for M&A - Southeast Asia Capital Confidence Barometer: October 2012 - April 2013 - EY - Singapore

Southeast Asia Capital Confidence Barometer – October 2012 – April 2013

Low appetite for M&A

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Spotlight on Indonesia

Having been one of the top five most desired investment destinations for both Global and Southeast Asia respondents six months ago, Indonesia has lost some of its flavor in the current survey. Despite this, Indonesia respondents remain most positive among all of the Southeast Asia respondents:

  • 89% of Indonesia respondents considered that their local economy is either stable or improving, down from 100% six months ago. Only 11% of the respondents consider it to be declining and it is a noticeable minority.

  • 56% of Indonesia respondents view their local regulatory environment to be positive for business, up from 17% six months ago.

  • 74% of Indonesia respondents expressed that they are unlikely to pursue acquisitions over the next 12 months, up from 65% six months ago. Similarly, 78% of Indonesia respondents expressed that they are unlikely to divest any part of their business over the next 12 months, up from 57% six months ago.

  • 52% of Indonesia respondents expect the corporate earnings to improve, down from 61% six months ago.

  • Only 41% of Indonesia respondents expect access to credit to improve, down from 61% six months ago.

  • However, balance sheets appear to have strengthened, with 63% of Indonesia respondents indicating that their leverage is now below 25%, from 41% six months ago.

Spotlight on Malaysia

Despite slipping in rankings among the top investment destinations, Malaysia respondents gave a stronger vote of confidence about the prospects for their home market compared to six months ago. Some key reflections of the Malaysian respondents are as follows:

  • 77% of Malaysia respondents felt that the local economy is either stable or improving compared with 73% six months ago.

  • 73% of Malaysia respondents identified capital allocation topping their boardroom agenda with another 69% identifying efficiency, productivity and cost control as another priority focus area.

  • 42% of Malaysia respondents have a leverage ratio of less than 25%, one of the lowest among Southeast Asia respondents. However, closer to 40% of the respondents expect the level of debt on their balance sheets to increase in the next 12 months.

  • 42% of them also expect to refinance their existing borrowings over the next 12 months, which is one of the highest among Southeast Asia respondents. Optimizing capital structures and reducing the overall cost of funding appear to be the biggest drivers of this trend.

  • 43% of Malaysia respondents expect their corporate earnings to improve compared with 27% six months ago.

  • 42% expect to pursue acquisition opportunities in the next 12 months with a view to improving profitability and accessing new markets. Half of the respondents also expect the number of deal opportunities to improve and closure rates to be high, up from 27% six months ago.

Spotlight on Singapore

Singapore is the only Southeast Asia market that retained its ranking as one of the key investment destinations selected by the Global respondents.

However, Singapore respondents expressed some of the most pessimistic views among those surveyed in the region:

  • Reflecting the vulnerability of the local economy to external shocks, none of the Singapore respondents believe that the global economy has shown any sign of improvement. An overwhelming 85% of the Singapore respondents felt that the global economy is deteriorating and 56% of them do not expect the current environment to change for at least one to two years.

  • 39% of Singapore respondents expressed that the local economy is declining, up from 30% six months ago, while 61% of respondents expect their businesses to come under significant revenue and margin pressures due to the continuing Eurozone crisis, up from 42% six months ago.

  • Gearing levels of corporate balance sheets have increased, with 46% of respondents indicating their gearing ratios to be below 25%, down from 56% six months ago. 27% of Singapore respondents expect gearing levels to increase within the next 12 months, capitalizing on the low-interest regime and the liquidity in the local debt-market.

  • 36% of Singapore respondents indicated that they expect employment growth to decline, up from 15% who expressed similar sentiments six months ago.

  • 63% of Singapore respondents expressed capital optimization to be high on their corporate agenda.

  • 51% of Singapore respondents expect to pursue acquisitions over the next 12 months, down from 58% six months ago, yet still substantially higher than any other Southeast Asia market responses.

    Access to newer markets, intellectual property and technology seem to be factors motivating them to pursue acquisitions. Number of deals, quality of deals as well as closure rates have declined compared to six months ago.

What is your current debt to capital ratio?

Do you expect your debt to capital ratio to change over the next 12 months?

Percentage (%) of respondents who expect to pursue acquisitions in the next 12 months:

Please indicate your level of sentiment in the following drivers of confidence at the local level

Which are the countries in which you are most likely to invest?

Number of respondents who expects to pursue acquisitions in the next 12 months

Please indicate your level of sentiment in the following drivers of confidence at the local level



The low appetite for growth through acquisitions appears to be a consistent trend globally.

Corporate balance sheets in Southeast Asia continue to be strong with low levels of leverage.

49% of the Southeast Asia respondents indicated that the debt-to-capital ratio of their balance sheets is below 25% a position that mirrored sentiments expressed six months ago (Figure 12)

28% expect the leverage to increase over the next six months as their look to optimize their capital structures and only 19% expect it to decline.

Attitude to debt

With relatively low cost of funds in most markets, attitude to debt among the Southeast Asia respondents remain largely consistent with six months ago (Figure 13).

Any refinancing activity to be undertaken is seen as one of the measures to optimize capital.

Cash and equity remain the preferred sources of financing for growth opportunities, including acquisitions, among the Southeast Asia respondents.

41% expect to utilize debt, compared with 34% globally, to finance their acquisitions.

Recognizing the appetite for hybrid “equity like” instruments, 7% of the Southeast Asia respondents and 12% of the Global respondents, for the first time, expressed that they see such sources as an effective means of financing growth opportunities, particularly acquisitions.

Is M&A activity on hold?




63%

of the Southeast Asia respondents said they will not pursue M&A activity in the next 12 months.



Despite cashed up balance sheets and an ability to access capital, the desire for growth through M&A activities appears to have significantly reduced (Figure 14).

Despite the lower appetite for acquisitions, quality of deals, and number of deal opportunities seem to remain stable (Figure 15).

Investment interest switched to developed markets

Within 5 months, Global respondents have dropped Southeast Asian nations altogether from their top-10 list of target investment destinations; instead, they are now focused on developed and BRIC markets (Figure 16).

Among the Southeast Asia respondents, too, the shift in market focus is noticeable with a renewed appetite for the BRIC economies and some developed economies.



Spotlight on Indonesia


Spotlight on Malaysia


Spotlight on Singapore




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