Moody's: Stable Outlook for Australian Corporate Sector in 2013

Moody's Investors Service says that stable outlooks dominate the Australian corporate sector over the next twelve months, owing to a broadly supportive domestic economy.


"Australia's supportive GDP growth in the next 12 months, while lower than that of other key Asia-Pacific economies, is driving the stable outlooks for most sectors due to their dependence on the domestic economy for revenue and earnings," says Ian Lewis, a Moody's Vice President and Senior Credit Officer.


The report details Moody's expectations for the operating conditions of key sectors over the next 12 months. The vast majority of sectors -- including the REITs, telecoms, retail and consumer, airlines, oil and gas, as well as building and construction sectors -- show stable outlooks. Base metals, which is largely dependent on global demand, has a negative outlook.


"Moody's further considers that refinancing risk for Australian corporates over the next 12-18 months will be manageable, given their moderate debt maturity profiles and our expectation of further disintermediation for corporate funding," says Lewis.


"We expect that the sector will also turn increasingly to the bond markets for funding, partly because of Basel III considerations which could lead to potential credit spread widening over time, for some issuers.


Nonetheless, we expect growth in bank credit of 3%-4% for at least the next 12 months," says Lewis.


In terms of specific sectors, metals and mining -- which has boomed for much of the last 10 years -- as a whole faces challenging business conditions over the next 12 months, and while prices have recently improved for some commodities, downward pressures remain.


In such an environment, Moody's expects continuing volatility for the sector, and low overall growth in earnings and cash flows in 2013. At the same time, companies that directly service the resources sector -- including railway companies and explosives companies -- should continue to navigate through 2013 without undue impact.


"At the same time, we consider that a sharp slowdown in China would be a downside risk for Australian corporates. While Moody's believes that such a scenario is unlikely, such a scenario could slow Australia's GDP growth to 1%-2% and materially impact the metals and mining, airlines and discretionary retail sectors, and broadly affect other sectors as well," says Lewis.


For the retail sector, Moody's expects overall growth rates approximately in line with Australia's GDP growth rate. But discretionary retailers will experience weak sales and uneven earnings growth, especially because the growth in e-commerce has reduced barriers to entry, thereby compelling companies to compete more efficiently with imported products ordered online and to invest more actively in e-commerce.


Therefore, Moody's has a negative view on the discretionary sector.


The outlook for the airline sector is stable, although it is weakly positioned and Moody's expects high fuel costs and price-sensitive consumers, as well as severe competition in an environment of soft demand, to remain challenges.


The REITs sector will have to contend with headwinds from subdued business confidence, patchy demand for white-collar employment, and the challenging retail environment. However, balance sheets in the sector remain solid, supported by a low level of developmental activity.


The telecoms sector will see its margins -- especially in the mobile and data segments -- come under increasing pressure, while over the medium term, it will ramp up implementation of 4G Long-Term Evolution (LTE) technology and the associated requirement for additional costly spectrum could potentially challenge the credit profiles of some issuers in the sector.


In the oil and gas sector, oil prices will remain at levels that support solid earnings and cash flow. And the building and construction sector will see flat growth in earnings and cash flow as housing starts remain subdued.


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