Growing demand drives confidence in the transport industry
Transport and logistics companies’ outlook has improved according our latest Future Business Index.
Findings from the Future Business Index (FBI) report have shown that Transport and Logistics companies posted the largest Index increase across the mid-market. Driven largely by a higher level of confidence in business conditions over the next 6 months, the Index rose sharply from 5.8 to 23.3 in the September quarter.
Mergers and efficiencies to drive growth
Nine out of ten transport companies surveyed in the FBI, stated that they are in a strong financial position, with the majority of businesses having a well-defined business strategy. Amongst freight forwarders, we have witnessed improved positivity as organisations shift their focus to growth initiatives based on improved operational efficiencies. These efficiencies, coupled with successful cost management strategies, have been driving improved profitability. In some instances, we are seeing an increase in dividends, which has been well received by the market. In addition, some boards are putting their support behind growth plans through mergers and acquisitions. Given the ideal conditions of cheap debt, improved business and consumer confidence and decreased volatility in the market, merger and acquisition activity is likely to increase in this environment.
However, positivity is not reflected across the entire industry, as freight forwarders with heavy exposure to the mining sector have dampened their outlooks. This is a symptom of the difficult transition from a resources-led to a non-resources-led economy, with a more diversified economic growth model. Cost pressures and weaker volume growth, along with a less optimistic view of future volumes have been the key reasons for a decline in confidence for these organisations.
The impact of a drop in the Australian Dollar
Whilst the biggest drivers for the transport industry are consumer confidence and GDP, the level of the Australian Dollar can also have some effect. The Report’s survey data was compiled prior to the recent drop in the AUD, so the impact on confidence in the sector will likely be seen in subsequent reports. With a lower AUD, imported goods become more expensive, which can lead to a decline in their demand and have an impact on domestic freight forwarding businesses. On a basic level, a reduced demand for imports will be offset to some extent by overseas demand for our more affordable exports. However, there may be additional implications given softer commodities prices and the large proportion of total exports they comprise.
Beyond freight forwarding, the decline in the Australian Dollar will also have an impact on the wider sector’s business costs. Given the large proportion of capital equipment that is imported, this will also become more expensive for organisations to fund.
The increased fuel excise and the recent drop in fuel prices have not had an effect on freight forwarding businesses as the costs of fuel are generally passed on to customers. However, for airlines the drop in fuel prices has had a significant impact as jet fuel is a major input cost and its reduction in price has driven a much more positive outlook.
Factors such as road congestion and the pressure of population growth on our transport infrastructure are generally viewed as challenges for the Government. However, for investors in infrastructure, these items represent strong demand drivers which will provide long-term investment opportunities.
Under the Federal Government’s planned $50 billion infrastructure contribution through the Asset Recycling Initiative, the privatisation of ports is a very attractive means for state governments to sell mature assets and raise funding for infrastructure projects. The scheme provides an additional 15 per cent of the asset’s sale value to state governments if the total port sale proceeds go directly into infrastructure projects. The Government believes this $50 billion contribution will ultimately be leveraged to $125 billion of expenditure, a massive economic investment in infrastructure and a huge boost to the organisations that have won tenders to deliver these projects.
What is the Future Business Index?
The Future Business Index is an analysis of the views of financial decision makers in companies with a turnover of $10m – $100m, measuring their outlook on business conditions, investment plans, business challenges, projected revenue and how prepared they are to navigate conditions for the six months ahead.