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Australian corporates to benefit from 'modest' earnings growth in 2019

Publication Date: 23 Nov 2018 - By Gaurav Sharma (Editor ReachX) By Gaurav Sharma (Editor ReachX)
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Differentiated

Macro Equity Fundamental Environmental, Social & Governance Multi Asset Equity Australia & Oceania

Australian corporates will see modest earnings growth in 2019, supported by expected GDP growth of around 2.8% and the continuation of accommodative monetary policy settings.

In a note to its clients, rating agency Moody’s said average financial leverage for Australian corporates will remain steady in 2019 and 2020, based on the forecast small increases in EBITDA and overall continued conservative levels of capital spending. 

“The growth in the Chinese economy should also remain supportive for overall Australian corporate sector activity, while the weaker Australian dollar, which is down around 33% from its 2012 peak, will continue to benefit exporters and the resources sector," said Maurice O'Connell, Senior Credit Officer, at Moody’s.

"Appetite for increased debt will also remain low, while the key risk is that limited organic growth opportunities and the low cost of debt could encourage M&As or shareholder-friendly initiatives, leading to higher financial leverage," O'Connell added. 

The corporate sector will also see moderate levels of debt -- as a percentage of gross total debt -- maturing in the next 18 months, and high levels of cash-on-hand will continue to support liquidity for many issuers.

Furthermore, the proportion of negative ratings outlooks has declined as the recovery in resources-related earnings is reflected in improving ratings. A total 90% of rated corporates now have stable ratings outlooks, 6% positive and 4% negative.

Investment grade ratings are considerably more stable than high-yield ratings. According to Moody’s, the key credit themes for each sector are:

Mining-related companies: Investment spending and shareholder returns will continue to increase, likely funded from internal cash flow. Consequently, the sector's credit metrics will remain strong.

Retail and consumer: Ongoing industry changes and new entrants in the supermarket sector will ensure that the level of competition remains high, but credit metrics will remain broadly stable as EBITDA increases due to the growth in store networks and a focus on costs.

Australian real estate investment trusts (A-REITs): Steady vacancy rates and contracted rental income will support earnings growth of close to 3.0% in 2019.

Construction: Residential activity will decline but government infrastructure spending will remain high and resources-related capital spending will rise modestly off a low base.

Airlines: Competitive but rational domestic market and capacity management should enable ticket price increases to largely offset higher fuel costs.

 

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