Are FY17 business capex trends set to continue?

August 31, 2016

Australian businesses have entered fiscal 2017 (FY17) in a cautious mood amid continued volatile economic and political conditions. Despite extremely low interest rates and sustained domestic economic growth, worries over the fallout from Brexit and the upcoming U.S. election, along with mooted post-election changes from Canberra, have damaged sentiment.

The July 2016 Alleasing Equipment Demand Index (the Index), which examines  expectations for FY17, highlights the cautious mood of Australian CEOs and CFOs, finding that almost two-thirds of businesses will leave their capital expenditure (capex) budgets unchanged this fiscal year. By comparison, just 16 per cent have planned to increase capex and a further 19 per cent are set to decrease spending.

However as per the focus of this article, one in five corporates are expecting to increase capex spending in FY17 (on a segment level), compared to 18 per cent of small and medium-sized businesses (SMEs) and just 10 per cent of micro businesses. On a location basis, New South Wales (NSW), Victoria and Tasmania were the most upbeat on capex spending. Manufacturers, retailers and property and business services are the most bullish compared to other sectors.

Capex drivers

For those businesses planning to increase capex in 2016-17 financial year, the Index sought to uncover reasons behind their decisions. Four in 10 were confident in the state of their own business, with 72 per cent of the four in 10 expecting revenue and profitability to improve. In contrast to those businesses with a positive outlook, businesses intending to cut capex identified the main driver for this outlook as economic conditions (42 per cent), with some 69 per cent of these companies expecting revenue to fall.

The Index also found differences across industry sectors with relation to a negative outlook. The main capex driver for manufacturers were rising operating costs (19 per cent), project requirements (nearly 19 per cent) and confidence in their own business (18 per cent). For construction firms, project requirements (12 per cent) were identified as the main driver, followed by business confidence (10 per cent), while retailers placed importance on the health of their own business (12 per cent) and increased operating costs (12 per cent).

Importantly, the largely steady state capex approach comes at a time when the federal government is warning of the risks of digital disruption, and when the number of Australian businesses negatively impacted by assets overdue for replacement has hit a new high of 66.5 per cent. Some 17 per cent of those surveyed also showed a desire to keep such assets off-balance sheet as a key driver for their decisions, thereby creating liquidity while avoiding increased leverage.

Location differences and financial concerns

State-based comparisons of equipment finance demand, business confidence and capex intentions reveal changing economic drivers. In less than five years, NSW and Western Australia (WA) have swapped places as the fastest and slowest growing states respectively, with NSW benefitting from increased construction and infrastructure spending, while WA suffers the fallout from the end of the mining boom.

This trend is flowing through to equipment demand, with nearly one in two NSW-based firms planning to increase their asset base during the September quarter 2016, compared to 20 per cent in Victoria, 16 per cent in Queensland and only seven per cent in WA.

Finance strategies also differ, despite a general trend towards increased use of operating leases and chattel mortgages. In Victoria and Tasmania, operating leases are the preferred method of funding at nearly 35 per cent, compared to Western Australia where only 18 per cent favour operating leases.

The survey also showed a further decrease in planned outright equipment purchases to just 16.5 per cent.

A disproportionately high number of businesses in Victoria (25 per cent), Tasmania and Western Australia (23 per cent) are unsure which asset financing strategy to use.

For Australian businesses overall, the results reveal that a lack of confidence is preventing firms from investing in critical assets that will drive new projects, revenue and profitability. The pressure is on CEOs, CFOs and corporate leaders alike to make forward-thinking decisions on investment, in order to get the capital they need for critical assets which spur jobs and growth.

To read more, download your copy of the Alleasing Equipment Demand Index today.

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