Stephen Gustafson
(Episode 376; 11 minutes 17) The first quarterly CFO survey from Deloitte shows that the financial chiefs of Australia’s top businesses have mixed attitudes towards the future. The division is, in part, related to a company’s ability to access funding at the right price.
So why is there such a difference in opinion amongst CFOs? I talk to Stephen Gustafson, partner assurance & advisory at Deloitte, about the survey which quizzed 75 CFOs from ASX300 companies about their views on the economy and the health and prospects of their own businesses.
Has the recent crisis changed their attitude towards gearing? When do they think the economy will bounce back? What do they think of their share price right now? There are some interesting findings.
Add your own thoughts, if you wish, in the Talkback section at the end of this post.
Subscribe to BTalk Australia on iTunes.
View all BTalk Australia podcasts here.
- Transcript
Phil Dobbie: Hello, I’m Phil Dobbie. Welcome to BTalk Australia. Today there’s a positive outlook for the economy, this time from the CFO’s; although it’s not unbridled optimism, there’s a bit of caution around.
Yes, cautious optimism seems to be the phrase to sum up what CFO’s think of the near future, according to the latest Deloitte to CFO survey, but it’s a view that’s a little polarised. To explain why, I’m joined by Stephen Gustafson, a Deloitte assurance partner. Now Stephen, the big divide is those who have access to credit and those who are still struggling to access it. So, why does such a divide exist?
Stephen Gustafson: I think we’ve seen different people enter into the financial crisis at a sort of different point of financial health and with the extreme conditions we’ve had over the last 18 months, some companies have been in a better position to cope and others haven’t. And, as banks have become more discerning in their view of risk and priced that risk accordingly, I think it has, to an extent, polarised the market and therefore creates opportunities for some and threats for others.
Dobbie: So in other words, if you were in ill health going in it’s going to be a longer struggle, which is going to push you a long way back, isn’t it?
Gustafson: Potentially it is and I think the consequence of having some companies with a stronger positioning relative to the competitors means that there could quite possibly be consequences for those who aren’t positioned as strongly and are still, if you like having to act defensively, to shore up their balance sheet and preserve financial health.
Dobbie: Now, the CFO’s are also divided on their outlook generally about the economy, aren’t they? Some say that they see the spending bouncing back and it’s all good news; others are a little less optimistic. Do you think this is also related to the health of their business?
Gustafson: No doubt the individuals would be influenced by their own conditions. Overall, the headline is one of cautious optimism and we were sort of particularly happy to see the CFO’s feeling that the worst of the credit crunch is passed for most of them, and in fact I think 88 percent of those that we surveyed felt the worst had passed and to add to that, a further 72 percent of those who responded felt that the prospects for their company were better than three months ago.
So overall there’s a good sense of optimism in the Australian market, but you only have to look to when they felt the recovery would be coming and it’s over 60 percent felt that that wouldn’t be until the second half of 2010, and that’s why we see very much that sort of cautious attitude for the year ahead where it’s a watch-and-see mechanism, but certainly optimism that we’re coming out of the worst of it.
Dobbie: But the vast majority are at least saying next year. I think it’s only, like 10 percent are actually saying it’s going to be 2011 before we see it. So, as you say, cautious optimism seems to be the key.
Gustafson: That’s right.
Dobbie: Now gearing is the other interesting finding. Do you think the experience of the last year has taught business perhaps that they should borrow less?
Gustafson: Certainly you can say that. To have the liquidity crunch we had and people revisit the value of gearing and the pressures it can put on a business; there’s no doubt that’s going to reassessment across the board. Interestingly though, and perhaps aligned with the optimism that is emerging, we’ve got a spread of CFO’s in their views on gearing moving forward with a relatively equal number saying they are going to decrease their gearing and a similar percentage saying they are likely to increase their gearing.
So, certainly if we look backwards, I think the level of gearing has dropped significantly, but with the optimism beginning to emerge and companies facing opportunities, I think in certain cases we’re going to see some of that optimism come through in acquisition activity.
Dobbie: The historical average for gearing ratios is about 65 percent. We’ve come a long way down, but we’re really just on the historical average now, so I wonder if that means we’re going to stay there, generally?
Gustafson: Yes, that’s going to be a function of the market moving forward. It’s hard to call where we would go. If you look at those Reserve Bank graphs, they show us moving above and below the sort of average lines right through history, so I dare say, we’ll continue to move around in line with the market at the time.
Dobbie: Now, talking about lines going up and down on graphs — the value of businesses on the market — a lot of CFO’s now do believe that they’re undervalued on the market. So, I wonder if they’re right on that? I mean, obviously they hope that they are. It’s going to be difficult to tell though, isn’t it?
Gustafson: It definitely is. They were some interesting responses we had because we had the percentage of CFO respondents who felt the market was undervalued was significantly overshadowed; we had a higher percentage feel their own stock is undervalued. So clearly, I think people were quite bullish about their own stock and the fact it was undervalued more so than the market. But as we looked at that, we felt that that was consistent with that theme of cautious optimism where CFOs who understand their own business and who feel the worst has passed are going to feel that their own stock is underpriced, but maybe that sort of wider caution in the market is still hanging there and hence just people being concerned about the pricing of the market overall.
Dobbie: But if everyone’s there saying: oh look, generally the market is about right but we’re undervalued. Someone’s got to be disappointed, aren’t they?
Gustafson: They will and I’m sure that will happen going forward, but hopefully we see strong earnings recoveries coming through and I can only guess from the responses we’ve had that there’s a belief within CFOs that they can recover those earnings and that’s what’s behind their responses on the pricing of their own stock.
Dobbie: Now over the last 12 months the focus for a lot of business obviously has been on reducing debt. What do you get a sense from this report now is the focus for business. Is it still to reduce costs or is there a bit more focus on growth now?
Gustafson: Absolutely a focus on growth and, in fact, again consistent with the optimism coming though the survey, when we asked the question of the top issue for CFOs in the next 12 months, the number one answer (by I think over 50 percent of CFOs) was growth. So, certainly, people are beginning to sense the opportunity in the market and want to move forward if they’re in a position of financial health to be able to do so, to grasp the opportunities that are there. So, growth being top on the agenda supported by the sort of strategies that are being followed where a number of businesses have indicated that M & A activity and taking market share of weaker competitors were strategies that they were going to pursue in the coming year.
Dobbie: Which neatly brings us onto the final question, which is the role of the CFO in all of this over the last 12 months. I guess the role has changed quite a lot and the research looked into that to see the role of the CFO through the economic downturn. How has that changed?
Gustafson: Yes, that’s right. We use some terminology there for the different roles that a CFO does place and those roles were that of a strategist and also a catalyst for change versus some of what you might call the more traditional roles as operator of the business and steward for the financial assets. And what our survey showed is that the CFOs in the past year have been forced to concentrate on the sort of core financial health of the business and those stewardship and operator roles, and there’s a very clear bias in the dedication of their time in the past year towards those roles. But when we asked that same question with a view to how do you expect your time to be in the coming year and then also how you expect or how you would ideally spend your time, the bent is far more towards that of the strategist and the catalyst for change.
So we look at that mix of results and clearly, economic conditions have dictated the roles of CFOs in the past year and hopefully they see that freeing up moving forward.
Dobbie: Do you think they’re now seeing themselves as becoming more strategists than they were before perhaps? Perhaps they feel as though if they had more involvement with the strategy moving forward, they wouldn’t have gotten into this mess.
Gustafson: I’m not sure we can conclude that from the survey we asked, but, and certainly this is the first of the surveys, so we don’t have a bank of data going back across the years to be able to compare that to. We simply asked the last year how you spent your time and hence, the focus on that sort of stewardship and operator role. But ideally now we see CFOs are a clear member of the executive team and the desire to be actively involved with strategy and as a catalyst for change clearly came through the survey.
Dobbie: Yes, I’m sure people are listening to them. Not that we always did, of course, listen to our CFOs, but perhaps we might be listening to them a bit more closely from now on. It’s been a pleasure talking to you, Stephen. Thanks for your time today.
Gustafson: No problem at all. Cheers.
Dobbie: And, I have to apologise for the Dobbie family making a bit of noise outside of the studio while we were talking.
