To be ultimately successful, Australia’s biggest companies have to compete internationally. But it can be risky.
If the failed attempts of National Australia Bank Ltd’s (ASX: NAB) UK venture and QBE Insurance Group Ltd’s (ASX: QBE) recent North American setback have taught us anything, it’s that even the biggest Aussie companies are risky investments. So should we just give-up on investing in growth stocks altogether? Absolutely not.
In fact, two big Australian companies are in the process of setting their shareholders up for long-term prosperity with their moves into Asian markets. Telstra Corporation Ltd (ASX: TLS) and Australia and New Zealand Banking Group (ASX: ANZ) have both realised the potential of the region and are quickly positioning themselves to benefit.
Telstra – International
Australia’s biggest telecommunications company was always going to venture overseas since it already dominated every market it sold products in. Until recently Telstra’s international division boasted a stake in Hong Kong CSL – a mobiles business providing key exposure to the Chinese market, it was sold for $US2.425b.
Now the key drivers of earnings will be the company’s stake in Chinese automobile listing website, Autohome.com.cn – listed on the New York stock exchange as Autohome (NYSE: ATHM) and Telstra Global. Telstra Global provides managed network services, data & voice and satellite services across Asia Pacific, China, India, EMEA and the US.
Apart from CSL, the company’s international business has been trucking along nicely, as of the first-half of 2014 it accounted for 8.3% of total group revenue, up from 7% just six months earlier. This is likely to continue well into the future as the company begins forming more agreements with big businesses in the region.
ANZ – Super Regional Strategy
ANZ is more aggressively pursuing growth in Asia with its ‘Super Regional Strategy.’ The group is targeting 25%-30% of group revenue from the Asia Pacific, Europe and Americas by 2017. Largely, this will come from the group’s International and Institutional Banking (IIB) and Global Markets divisions. IIB derives revenue from capital flows and commercial and retail banking whilst Global Markets makes money through its Funds Management, Insurance, Private and Corporate Banking business units operating in Australia, New Zealand and Asia.
Global Markets has experienced tremendous growth in recent years on the back of the continuous growth of Asian economies and individual wealth in Australia and New Zealand. However it contributes only 7% of the bank’s cash profits while IIB delivers some 37.4% (although not all from APEA markets). One pitfall of the strategy is that the earning power of funds invested in Asian markets has been impacted by stiff competition from other global banks. However in its 2013 annual report, the APEA markets provided some 17% of group revenue – just over 50% of management’s target by 2017.
Both Telstra and ANZ are iconic Australian brands with growing overseas exposure. Both strategies look to be promising long-term investments, however, if I had to choose, I believe Telstra’s expansion is much more appealing because of the synergies it can leverage from its Australian operations and its strategic holdings.
Since both companies derive a majority of their revenues from local markets it is vital we also consider their domestic operations. In this case, Telstra also wins hands-down because of its huge return on equity, profit margins, market dominance and the macroeconomic tailwinds at the back of the telecommunications/technology sector. Nevertheless, both ANZ and Telstra’s international expansions are likely to hold value for long-term shareholders.