Australia companies head offshore to boost revenue

JEMIMA WHYTE AND BIANCA HARTGE-HAZELMAN

Institutional investors are increasingly open to the merits of Australian companies expanding offshore, as local growth looks set to be outpaced by foreign economies.

“There’s no doubt that there have been plenty of Australia companies that have gone offshore in search of new revenue opportunities. And more recently even some of the newer listed companies on the Australian stock exchange, like Virtus, are now looking at opportunities in offshore markets,” Auscap Asset Management’s Tim Carleton told Nine’s Financial Review Sunday program.

But he warned that management could be distracted by offshore expansion.

“There are opportunities offshore, but we need to make sure the managers are focusing on the same sort of return on capital metrics that they were focused on in their domestic business, and that leaving the domestic market or expanding into the international market doesn’t take their focus away from the domestic market.”

Geoff Wilson, chairman of Wilson Asset Management, which has $840 million in funds under management also told the program the decision to expand offshore won’t be right for every Australian company.

“It is very difficult because over the last 30-odd years I have been working in the markets I have seen a lot of companies fail by going offshore. Now let’s go say 15, 20 years ago where Westpac, when they went into the US [and] lost billions of dollars, so its very difficult. Part of you thinks, let’s stick to Australia then the other part is, hey, let’s be a global company, let’s expand offshore. Really, being able to successfully expand offshore and that is the risk.”

Macquarie Research’s Tanya Branwhite estimates four out of every 10 Australian companies that have expanded offshore are in for significantly better earnings in the years ahead, with higher growth overseas than those that stayed home where conditions are weaker.

“Australia is, in our view, heading into a much weaker, a much lower demand environment, with lower growth and a lower level of consumption. Indeed, we’re not going to be that much different from the rest of the world. And the international growth piece becomes much more relevant because these companies have access to a much greater pool of growth opportunities,” she told Financial Review Sunday.

CHALLENGES AHEAD FOR DOMESTIC COMPANIES

International industrials are forecast to return a compound annual growth rate of 7.3 per cent out to financial year 2016, according to Macquarie research.

Domestically focused companies face more challenging times as domestic demand is expected to recede in a sub-trend growth environment, and revenues are forecast to grow at a compound rate of just 3.4 per cent in the next three years, the report said.

Forty-two per cent of Australian industrial companies now generate more than 30 per cent of their revenue outside Australia. That’s up from 39 per cent in 2000, .

Navitas founder Rod Jones said the company expected to generate as much as 60 per cent of its earnings from overseas markets within five years.

The education provider, which lost a key contract with Macquarie University earlier this month (a loss that shrank its market capitalisation to about $2 billion from $3 billion), earns about 30 per cent offshore at present.

“We made a deliberate decision to move in that direction about 10 years ago and it’s starting to pay off big time for us,” he told the program.

“But there’s a lot of hard work in getting to the point that we are at.”

Auscap’s Mr Carleton said a number of companies with offshore earnings looked pricey on their valuations.

“As it turns at the moment, a lot of high growth companies,particularly those with offshore earnings, are priced at levels that we don’t find particularly attractive,” Mr Carleton.

“And so we come back to the premise that unless we find a company attractively priced, it doesn’t matter how good the business is, we’ll tend to stay away from that business.”