Cash surplus for FTSE 350 'higher than forecast'

Britain's major companies are expected to generate more cash than previously forecast in the next three years despite the worsening economy.

Analysts expect companies in the FTSE 350 index to produce a cash surplus of about £302bn, according to the KPMG Cash Counter survey. The figure is 52 per cent higher than forecasts predicted in January 2007, before the credit crunch started. FTSE 100 companies will drive the cash generation, with more than £278bn produced by the end of 2010, up nearly 61 per cent on estimates at the start of last year.

The big increase will almost all come from oil, gas and mining companies, which are enjoying a cash bonanza as the result of soaring commodity prices. KPMG said oil and gas prices would remain strong and could bounce back to their highs after recent falls due to the slowing world economy. Excluding oil, gas and mining companies, the FTSE 100's surplus cash forecast has risen 1.7 per cent, suggesting the City expects earnings at big international corporates to hold up.

But the more UK-focused FTSE 250's three-year surplus cash flow is expected to fall 6.7 per cent to £23.6bn from January 2007's estimates. KPMG said that the strong forecasts for both indexes could reflect over-optimism by analysts about the effects of the credit crunch. In contrast to the period before the credit crunch, when companies were returning capital to shareholders, surplus cash is more likely to be held back to give companies flexibility to navigate tougher economic times. They may also use the money to make acquisitions, especially with fewer competing bids from private equity buyers, KPMG said.

David Simpson, a partner in KPMG's corporate finance practice, said: "The findings of KPMG's latest Cash Counter analysis are surprising in that they show robust corporate cash flow despite the current gloomy economic environment. In particular, when oil, gas and mining companies are excluded, non-resource companies exhibit great strength in forecast surplus cash flows. This suggests that current City estimates are perhaps too high, and that we are yet to see the full impact of the credit crunch."

With relatively low debt to earnings, FTSE 350 companies are positioned to make acquisitions but in a more uncertain outlook for future earnings they will need to tread carefully and consider paying back debt and investing in growing existing businesses, KPMG added.

Neill Thomas, the head of KPMG's debt advisory practice, said: "Although the overall debt burden of UK plc continues to look very manageable, the credit crunch and demand issues are taking their toll on certain sectors and companies."