CFOs looking beyond the clouds
Confidence subdued, but companies still seeking growth
16 October 2014: After almost a year of strong confidence levels, CFO optimism dipped for the second quarter in a row, according to the latest Deloitte Quarterly CFO survey. Whilst 28% of CFOs were more optimistic about their financial prospects than they were three months ago, this was almost offset by the 26% that were less optimistic.
The majority of Australian CFOs (93%) believe the current levels of uncertainty will last more than a year. Deloitte chief operating officer, Keith Skinner, observed: “Continuing low interest rates, improvements in the US economy and a falling Australian dollar have offset some of the negatives, but CFOs seem to increasingly accept that clouds of uncertainty will remain in the medium-term. Despite the challenges, they remain focused on growth and are expecting revenues to improve, albeit at more modest levels than last quarter. So, it’s cloudy, but companies aren’t expecting rain just yet.”
While business confidence remains in positive territory (net 2%, down from 6% last quarter), Australia’s CFOs are becoming more cautious, with concerns over China, the subsequent impact on commodity prices and continued uncertainty around Europe and Federal Government policy clouding business confidence. This has led to a reducing risk appetite – which has dropped to its lowest level since June 2013, with only 30% of CFOs saying now was a good time to take on risk.
This compares starkly with the survey results of UK-based CFOs for the same period which recorded risk appetite at its highest levels in seven years with 72% of UK CFOs seeing this as a good time to take on risk.
Is this a good time to be taking greater risk onto your balance sheet (Australian CFOs)?
Political uncertainty remains a major drag
Federal Government policy uncertainty continues to weigh heavily on the minds of CFOs as the Budget struggles to find passage through the Senate. Consistent with last quarter 50% of CFOs identified uncertainty around Federal Government policy as having a negative impact on their confidence, the highest number since before the election.
Policy compromises made to the May Budget negatively affected the business confidence of 74% of CFOs surveyed and almost a third (32%) said that it was also affecting their investment plans.
While a third of CFOs want the Government to prepare a mini-budget to speed up the rate of fiscal repair, 37% are more pragmatic, favouring continued negotiations with the Senate to achieve the best possible fiscal repair within the current political circumstances.
Mr Skinner said: “The fact that political uncertainty is creating as big a drag on confidence as commodity price falls is telling. CFOs are sending a clear message that they want the Budget stalemate resolved quickly, by whatever means necessary, to give them greater confidence to invest.”
How has your level of optimism been impacted by the following factors?
The survey was conducted as the Australian dollar was falling and this had a positive impact for almost 40% of respondents, up from just 18% last quarter.
Gearing on hold despite cheap and available credit
This quarter, CFOs have reported in net terms that credit is cheaper and more easily available than at any time since the survey began in 2009. Over 60% of respondents rated credit as either somewhat or very cheap, up from 48% in Q2 and 86% described it as somewhat or very available, up from 78% last quarter. Both bank debt and internal funding remained the most attractive sources of funding this quarter, continuing the trend of 2013 and 2014.
However, more CFOs expect their own gearing to fall, as opposed to rise, in the next 12 months. This is the first time this has been the case since the beginning of 2013.
Mr Skinner observed: “The fact that CFOs see internal funding as so attractive to support growth reflects the ongoing resistance of CFOs in taking on risk and is a reminder that growth expectations are likely to be modest in the short to medium-term.”
Still focused on growth
Overall, CFOs remain positive around key business performance indicators, including increased revenue, margins, headcount, discretionary spending and cash flow, although confidence in all of these growing is lower than last quarter. Over a third of CFOs (39%) are looking to increase capital expenditure, while a similar amount expect an increase in dividends and share buybacks following calls in the last 12 months from institutions, the media and analysts for companies to either optimise capital through growth initiatives or return free cash to shareholders.
Plans for M&A remain consistent with last quarter, with over half of CFOs planning to increase activity in this area. Similarly, plans for organic growth and introducing new products and services are as strong as they have been for the past two years. The survey also showed increased interest in new capital raisings and renegotiating financing facilities compared to last quarter.
Lower interest rates not translating into action
To try and uncover effective growth catalysts, for the first time the survey examined how CFOs set their hurdle rates of return used when evaluating capex and investment decisions and how this compares to the company’s weighted average cost of capital (WACC).
While WACC rates have softened, these changes do not appear to be influencing companies’ hurdle rates, which could well have been set many years ago and in very different economic conditions to now. Most CFOs reported their companies consider a hurdle rate of 10%-13% or 13%-16%. Close to a third of respondents said that their hurdle rate was the same as their WACC rate, with the remaining two thirds of respondents indicating their hurdle rates were higher than their WACC rates – by amounts spread evenly from 1%-5%+.
Almost half (48%) of CFOs said they rarely changed their hurdle rates if ever, indicating that while lower interest rates were having a positive impact on a number of sectors, they may well be less effective in stimulating capital expenditure or business investment.
In conclusion, Mr Skinner said: “The confidence speed bump we saw last quarter has been extended, but only slightly. It’s worth noting that almost a third of CFOs we interviewed were more optimistic about their financial prospects than they were three months ago and most companies are still acting with modest growth in mind, looking for opportunities beyond the clouds.”
About the survey: The Deloitte CFO Survey targets the CFOs of major Australian listed companies. It has been conducted on a quarterly basis since the third quarter of 2009. This survey covers the third quarter of 2014 and took place between 9 and 26 September 2014. 46 CFOs participated, representing businesses with a combined market value of approximately $281 billion or 17 per cent of the Australian quoted equity market.
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Last Updated: Thursday, 16 October 2014
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