Forecast Review: 2021 Performance

19 August 2021

Making the most of the market

Australian business performance has been resilient throughout 2021. Strategy, working capital and cash flow management have remained high on the agenda for many businesses. This has helped to create stronger than forecast balance sheets, which, combined with substantial investible funds from private equity and superannuation funds, as well as a low cost of capital, has contributed to record levels of M&A.

In this review, we reflect on our previous forecasts and anticipate what’s to come for businesses in the remainder of the year.

M&A ‘Boom’ 

The fallout of the pandemic has added complexity to analysing sustainable earnings levels while demand for quality targets continues to drive up pricing. Well-run businesses that have invested in technology and processes, and that have been performing due diligence, are well placed to take advantage of this attractive pricing. However, given the frenzy, we are also seeing many under-prepared businesses coming to market which has a material impact on price negotiations and ultimately, deal execution.

The pandemic has challenged business models and, in particular, has highlighted a number of limitations with traditional strategic planning approaches. Accordingly, our transaction, valuation and due diligence teams have been working on significant mandates to prepare clients and realise the true value in a transaction.

Driving efficiencies and working capital improvement  

Working capital and cash flow management remain a priority. For many operators, significant investment in new stock will be required to support higher activity levels. The ability to self-fund may be compromised by increasing cash burn as revenues lag costs and JobKeeper and other repayment holidays end. Critical and regular assessment of demand patterns will be vital to avoid over-stocking and the unnecessary locking up of cash in working capital.

The new Payment Times Reporting Scheme (PTRS) legislation has also now come into effect. For all of the benefits it is expected to bring, the new legislation will add a layer of complexity to business compliance and reporting that will take some effort to bed down by 30 September 2021. With additional transparency around payment behaviours, businesses that meet the reporting criteria may need to assess existing supplier terms, as well as the impact that any changes in the payment cycle will have on working capital and cash flow.

A disrupted global supply chain is having flow on effects for businesses  

The tight global shipping market continues to disrupt supply channels, with the first quarter of 2021 proving to be the busiest Q1 on record (by TEU movement). This heightened demand is driving elevated freight rates, poor reliability, equipment imbalances, and substantial congestion.

Notwithstanding our above comments, uncertainty in the supply chain will continue to impact inventory strategies and customer service. It has already accentuated gaps in procurement professionalism and S&OP processes in firms that have not yet invested in these areas. Together with the ongoing lack of commercial airfreight capacity, increased lead times and cost headaches are expected to remain until at least midway through 2022.

The challenge for businesses for the remainder of the year is in balancing the need to reduce risks posed by supply chains as well as the ever-changing health and economic impacts of COVID to an acceptable level, while also pursuing profit restoration.  Our supply chain specialists identified this challenge in a previous forecast and are available to assist clients when managing these complexities.