Business conditions favour large corporates

16 May 2011

NAB ASX 300 Business Confidence Survey (March 2011) key findings:

  • Business conditions for Australian large corporates at +13 points is stronger in comparison to -3 points for broader economy
  • In contrast, business confidence was +6 points, compared with +10 points recorded in the Quarterly Business Survey
  • Large corporates currently able to manage cost pressures more effectively than smaller companies, but are more concerned about costs going forward
  • Almost 60 per cent of large corporates identified sales and orders as the major output constraint
  • Mining conditions are by far the strongest, manufacturing the weakest
  • Conditions for the ASX 300 outperform the broader economy in all sectors, except manufacturing
  • Large corporates expect the Australian dollar to weaken over the next 6 months

National Australia Bank's (NAB) inaugural ASX 300 Business Confidence Survey found that Australia's large corporates recorded stronger business conditions in the March quarter, but exhibit a weaker level of business confidence than the broader economy. The survey samples the top 300 companies listed on the ASX and will be released quarterly.

In the March quarter, business confidence for ASX 300 firms was +6 points, compared with 10 points recorded in the Quarterly Business Survey (QBS), which surveys the wider business market.

Spiro Pappas, Head of Institutional Banking, NAB commented the results indicate many of Australia's largest companies are concerned about rising labour costs and purchase costs which is affecting their confidence levels.

By industry, there is a notable distinction between the performance of firms in the ASX 300 and the QBS - most markedly in the mining sector.

"Business conditions for mining companies in the ASX 300 were by far the strongest, with manufacturing recording the weakest levels.

ASX business confidence is strongly positive in mining, but in contrast to the broader economy, negative in retail and manufacturing. These sectors have been impacted by the strength of the Australian dollar and relatively weak consumer confidence.

"The multi-speed economy has been commented on a lot recently, and these results are backing up the concerns raised," Mr Pappas said.

Large corporates recorded stronger trading and profit conditions than their smaller counterparts, with corporates at +11 and +16 respectively compared to negative territory in the QBS.

"We saw a decline in sales margins, however the impact on profitability was muted which indicates that we're seeing high levels of discounting with many businesses aiming for volume-driven profits. We're not anticipating the level of discounting to change over the coming quarter," Mr Pappas said.

Evidence of discounting by large retailers is clearly apparent in the survey, with the ASX firms reporting a -0.8% change in retail prices over the March quarter, while retailers in the QBS recorded a modest -0.1%.

Cost pressures on Australian companies have been rising steadily since early 2010; however large corporates have been able to manage these cost pressures more effectively with moderately softer increases in labour costs, purchase costs and overheads over the past three months. In addition, larger firms have been able to increase product prices marginally more than smaller firms.

"Interestingly many large corporates are considerably more pessimistic about costs over the next three months, particularly for labour and purchase costs. This could be a leading indicator of a trend in the broader economy," Mr Pappas said.

On average, corporates anticipated labour costs to rise by 0.9 per cent in the second quarter, compared with just 0.5 per cent in the QBS.

The survey found that large corporates clearly have a distinct advantage when it comes to capital expenditure and capital utilisation plans. Capacity utilisation for corporates has been around 84 per cent over the past three months.

"Despite the fact that many Australian large corporates have a weakened level of confidence this is not having any bearing on their capital expenditure plans with many expecting increased investment over the next 12 months," Mr Pappas said.

At an aggregated level, Australian large corporates expect the exchange rate to the US dollar to weaken over the next six months to 99 cents. By industry, many large corporates in the construction and retailing sectors expect the strongest outcome for the dollar, with US$1.03 and US$1.01 respectively, while Wholesalers expect the softest outcome at $0.98.

The survey found that many trade-exposed large corporates have a higher propensity to hedge their dollar exposure with 47 per cent of net importers and 66 per cent of net importers exposure hedged in comparison with 25 per cent and 35 per cent in the broader economy.

In terms of expectations, ASX 300 companies also expect to perform better than smaller peers recording a net balance of +37 points for Q1 2012, compared with +28 points in the QBS.

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Elisha Vincent
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