Outlook for the transport, storage and communications sector

Transcription

1 Outlook for the transport, storage and communications sector Cork Gully LLP March 2013

2 Contents Introduction 1 Economic update 2 Focus on the transport and communications sector 4 Outlook for transport 6 Based on a solid heritage we are an advisory rm bringing clarity to complex restructuring, recovery and insolvency situations. The rm remains as committed to our founding principles today as we were a hundred years ago. Our partners and staff have worked together for over ten years, reorganising operations and structures to deliver sustainable stakeholder value. The current trading environment is increasingly complex, so the solutions we provide for our clients are more creative, more responsive and more effective than ever. Outlook for telecommunications 8 Appendices 1 Numbers of formal defaults in the transport and communications sector, by sub-sector 10 2 Forecast of annual formal defaults in the transport and communications sector 10 3 Year-on-year % change in formal default in the transport and communications sector in Great Britain 10 About Cork Gully 11

3 Introduction Economic update This report analyses trends in the transport, storage and communications sector. It also provides a brief update on the UK economic outlook. The latest economic data suggests that a triple-dip recession will just about be avoided. But the pace of recovery will be modest in the short-term, with signi cant downside risks to growth. The latest of cial data shows that the UK economy fell back into contraction in the nal three months of 2012, with output falling by 0.3%. Although these latest gures highlight the on-going fragile economic environment, this contraction was partly caused by a one-off distorting effect; the largest North Sea oil eld was closed for maintenance for longer than usual in Q Without this, output would have fallen by just 0.1%. Overall, the data indicates that economic fundamentals are not as bad as the headline negative growth gure suggests but the economy is struggling to build up any momentum. The UK economy is expected to see a return to weak growth for 2013 as a whole, though any recovery will not be without signi cant downside risks. The Eurozone remains in a prolonged recession as austerity measures are implemented to resolve the sovereign debt crisis. The single currency area s economy contracted at a quarter-on-quarter rate of 0.6% in the last quarter of 2012, with even Germany showing a decline in output in the quarter. Economic weakness on the Continent could hinder the UK s ability to export its way to a sustained recovery something which is vital at a time when government is cutting back and consumer spending power is being eroded by high in ation and weak earnings growth. The government s hands remain tied by commitment to de cit reduction, leaving the onus on the Bank of England to provide additional economic stimulus should circumstances necessitate this. The Base Rate will almost certainly remain on hold at 0.5% throughout this year and there could also be more quantitative easing undertaken if the global economic backdrop deteriorates further. Many sectors of the economy continue to operate below their pre- nancial crisis peak level as their recoveries either zig-zag in and out of growth or show expansion at a very subdued rate. The transport, storage and communications sector is no exception here. Freight activity has struggled to show notable growth since While the telecommunications sector has performed exceptionally well in recent years on the back of strong demand for high-tech goods, the latest business performance data for the sector show that turnover has started to decline. Formal defaults in the transport, storage and communications sector fell sharply in However, the latest economic data for the sector suggests that a pickup in default numbers this year is likely, with numbers starting to fall back again from 2014 onwards. The Of ce for National Statistics (ONS) rst estimate of GDP growth in Q showed the UK economy contracting at a quarter-on-quarter growth rate of 0.3%, following the strong growth of 0.9% seen in Q3 and raising concerns about the prospect of a triple-dip recession. The sector data showed output in the production industries fell at a quarter-on-quarter rate of 1.8% in Q4. Output in the construction sector increased slightly - by 0.3% - while in the services sector output was estimated to have been at compared with. However, data released since the start of the new year suggests that the economy will return to growth in Q Markit/CIPS Purchasing Managers Indices (PMIs) for the manufacturing, services and construction sectors suggested that these sectors were expanding in January. Furthermore, the presence of one-off factors pushing down growth in Q4 decreases the likelihood that Q will also show an economic contraction. Growth in was propped up by Olympics ticket sales, so the Q4 GDP gure is being compared against a quarter in which the economy was bolstered by temporary factors. Output in Q4 was also suppressed by an extended and later than usual maintenance period in the UK s largest North Sea oil eld, which reduced oil and gas extraction. Once this maintenance period ends, extraction will pick up. In his opening remarks following the publication of the Bank of England s February 2013 In ation Report, the current Bank Governor Mervyn King stated that he believed that a recovery is in sight, following last year when the economy saw zero growth. King argued that the weakness of the economy last year was largely down to falls in construction activity which were unlikely to be repeated in Although the latest data suggests a triple-dip recession will be avoided, there are reasons to believe that the economic views put forward by Mervyn King are too optimistic. Firstly, it wasn t just construction activity that declined last year, but manufacturing activity too. There is still little sign of Britain making things again despite the weakness of sterling since the nancial crisis which should have improved the UK s export competitiveness. The second reason to remain cautious lies in the fact that construction activity could stay very weak this year or even contract further. The latest data on new orders in the construction sector, produced by the ONS, showed the volume of new orders in at its third lowest on record. This suggests no recovery in demand for construction projects in the short-term. The February In ation Report explained that in ation is now likely to remain higher for longer on the back of rising utility prices and the increasing price of regulated goods and services such as alcohol and tuition fees. Stubbornly high global oil prices will also keep the rate of in ation elevated this year. As Figure 2 shows, consumer price index in ation stood at 2.7% in January the fourth consecutive month in which it has stood at this level. With price growth remaining above the Bank of England s central target of 2. and earnings growth running below in ation for most households, living standards in the UK will continue to be squeezed for some time. 1 2

4 So there is strong reason to expect the pace of economic growth to remain sluggish this year. In terms of business failures, this means that formal default numbers are likely to remain elevated in 2013 certainly above typical pre- nancial crisis levels. Although the latest formal default data, for Q4 2012, showed default numbers in the UK 13.7% lower than a year ago, this still leaves formal defaults 29.7% higher than in Q Figure 3 illustrates. Weakness in overall output [in 2012] in large part re ects sharp falls in construction that are unlikely to be repeated in The UK economy is therefore set for a recovery. That is not to say that the road ahead will be smooth. This hasn t been a normal recession, and it won t be a normal recovery. Bank of England Governor Mervyn King February 2013 Figure 1: UK GDP - annual growth 5% 4% 3% 2% 1% -1% -2% -3% -4% -5% Figure 2: UK Consumer price index (CPI) in ation 6% 5% 4% 3% 2% 1% Jan-2008 Jan- CPI in ation Jan- Jan Jan BoE central target 2017 Jan-2013 Focus on the transport, storage and communications sector Compared with before the nancial crisis, activity in the transport, storage and communications sector remains subdued. Despite this, formal default numbers have fallen. However, the ongoing weakness of the economy and a slowdown in the telecommunications sector could push up formal defaults in Growth in the transport, storage and communications sector is closely correlated with overall economic growth. When the economy is growing, more goods are delivered as businesses build up inventories of goods and service to sell which is good news for rms in the business of transport and storage. During a downturn, inventory destocking among businesses curtails growth in the transport sector. Similarly, demand for communication technology is also closely related to business activity. Despite this economic weakness, formal default numbers in the transport, storage and communications sector fell sharply last year. Data from the Insolvency Service for shows formal default numbers 21.7% lower than a year ago and we predict that, for the year as a whole, formal defaults are now likely to be 17.2% lower than a year ago. Formal default numbers in were even 28.3% lower than in, meaning that business failures in the sector are now lower than just before the UK entered recession in Sources: ONS, Of ce for Budget Responsibility forecasts Figure 3: UK corporate formal default numbers Q Q Q Q2 Q4 Q2 Q4 Q2 Q4 Q Q Figure 5 shows economic output in the transport, storage and communications sector based on ONS data. Output in the sector saw a peak-to-trough decline of 10.1% during the nancial crisis. Despite a recovery since the trough, output remains 5.2% below the pre-crisis peak according to the latest (November 2012) data. And, as gure 6 shows, year-on-year output growth in the sector has veered into negative territory in recent months. These formal default gures are somewhat at odds with the headline economic situation with the UK economy showing zero growth last year and output in the transport, storage and communications sector well below its pre-crisis peak. Subsequent analysis in this report shows that the latest business performance data suggests a rise in formal default numbers in 2013 is likely. Our central forecast is for the number of formal defaults in the sector to rise from about 730 last year to about 830 this year, with formal default numbers falling again from 2014 onwards. Sources: The Insolvency Service 3 4

5 Figure 4: Total formal defaults in the transport, storage and communications sector in Great Britain Figure 6: Three month year-on-year output growth in the transport, storage and communications sector 1,200 1, Figure 5: Index of output in the transport, storage and communications sector ( = 100) Nov Nov-2003 Nov-2004 Nov-2005 Nov Nov Nov Nov- Nov Nov Nov % 6% 4% 2% -2% -4% -6% -8% -1 Nov-2002 Nov-2003 Nov-2004 Nov-2005 Nov-2006 Nov-2007 Nov-2008 Nov- Nov- Nov- Source: ONS, The Insolvency Service Outlook for transport Freight activity across most of the transport sector remains subdued, re ecting continued economic weakness. Although formal defaults have fallen from their peak during the recession a rise this year cannot be ruled out. The outlook for the transport sector is closely tied to overall economic performance. When the economy as a whole is performing well, demand for both passenger and freight transport services increases re ecting rising demand for people (employees) and for goods which then need to be transported across the country, imported or exported. As Figure 7 shows, formal defaults in the land, sea and air transport sector rose sharply between 2007 and, but fell back in as the UK returned to economic Turning to road transport, Figure 9 shows that, after several years of strong growth prior to the nancial crisis, the number of miles driven in light vans and in goods vehicles fell during the recession of and has not recovered since. In 2012, the number of miles driven by these vehicles was 4.2% lower than in Overall, with UK economic growth subdued in the shortterm and with recession in the Eurozone hampering trade in goods and services, freight activity in the UK is unlikely to see any signi cant growth in This growth. The four quarter rolling average of formal default is likely to hold back further declines in formal default numbers picked up in as the economic recovery numbers in the transport sector this year. Indeed, formal started to wobble and remains above that seen in default numbers could start rising again. on the latest data. This link between economic performance and the transport sector is evident from data which shows freight activity in the UK falling during and showing no notable growth since then as the economy has more or less at-lined. As Figure 8 shows, air cargo tonnage has been broadly at in recent years; tonnage in was 0.3% lower than in. While the amount of freight moved by rail has recovered following the recession, it has not risen above its 2004 peak. And inward and outward bound port tonnage at the UK s major ports was 12.2% lower in than in Q

6 Figure 7: Formal defaults in the land, sea and air transport sector in Great Britain Figure 9: Billions of miles driven by light vans and goods vehicles Q Q Q Q Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q Q Figure 8: Cargo tonnes carried to and from UK airports and in and out of the UK s major ports, and volume of freight moved by rail, 2007 = Q Q Q Q Q Air cargo tonnage Port cargo tonnage Freight moved by rail Q3 Q3 Q Sources: Insolvency Service, ONS, Civil Aviation Authority, Department for Transport, Of ce of Rail Regulation Outlook for telecommunications Economic output in the telecommunications sector grew during even the worst year of recession and formal default numbers have recently reached a record low. However, a recent decline in the sector s output and turnover could push formal default numbers back up. Formal defaults in the post and telecommunications 1 sector have fallen sharply in recent years, even declining during when the UK economy as a whole contracted by 4.. There were 34 formal defaults in the sector in the lowest number since comparable formal default data began in. Figure 10 illustrates. Economic output in the telecommunications sector grew throughout 2008 and when the UK economy was in the midst of a deep recession, as Figure 11 shows. However, while high-tech sectors have fared relatively well in the post- nancial crisis world to date, there are early signs emerging of some loss of momentum. The latest data show economic output for the telecommunications sector was 1.9% lower over the three months to November 2012 than the same three months a year earlier. High-tech sectors such as telecommunications all show rapid growth following periods of signi cant technological innovation, as consumers and businesses adopt new technologies. However, once these technologies have largely been adopted, underlying growth in the sectors begins to slow and becomes more closely aligned to economic fundamentals. If the latest of cial data is anything to go by, it could be that the telecommunications sector is starting to have to get to grips with the overall weak economic environment, rather than relying on continuous recession-proof uptake of products and services. Turnover data from the ONS also suggest that growth in the telecommunications sector has veered into negative territory in recent months, meaning that formal default numbers could start picking up again. As Figure 12 shows, turnover in was 5.6% lower than the same quarter a year ago. 1 Insolvency Service data does not provide a split of postal sector and telecommunications sector formal defaults. 7 8

7 Figure 10: Formal defaults in the post and telecommunications sector in Great Britain Figure 12: Turnover in the telecommunications sector, billions Q Q Q Q Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q Q Q Q Q Q Q Q3 Q3 Q3 Appendices 1. Numbers of formal defaults in the transport and communications sector in Great Britain, by sub-sector Land, sea & air transport Supporting & auxiliary transport activities; activities of travel agencies Post & telecommunications Total Figure 11: Output in the telecommunications sector, three month year-on-year growth rate 2 15% 1 5% -5% Nov-2002 Nov-2003 Number Nov-2004 Nov-2005 Nov quarter rolling average Nov-2007 Nov-2008 Nov- Nov- Nov- Nov-2012 Source: The Insolvency Service, Halifax, HM Revenue & Customs Q Q Q Q Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q Q % -21.4% -33.3% -21.7% Source: The Insolvency Service 2. Forecast of annual formal defaults in the transport and communications sector in Great Britain 3. Year-on-year % change in formal default in the transport and communications sector in Great Britain f 2013f 2014f 2015f 2016f 2017f Number 1,100 1, Annual % Change 2.4% % -17.2% 13.4% % -2.3% -1.1% Source: The Insolvency Service 2 15% 1 5% -5% -1-15% -2-25% % % -17.2% 2012f 13.4% 2013f f -2.3% -2.3% -1.1% *De nition: A formal default is de ned as a company entering into administration, receivership, company voluntary appointment or liquidation. 2015f 2016f 2017f 9 10

8 About Cork Gully LLP In 1906 WH Cork established WH Cork & Co as a practice largely focused on helping businesses in the grocery trade. In 1935, WH Cork formed a partnership with his son Kenneth and another accountant, Harry Gully, creating Cork Gully. After WH Cork s death and a period of war service, Kenneth became the owner of the rm and built the business to become the leading name in the eld of restructuring. Sir Kenneth Cork (as he later became known) was chairman of the Cork Committee, which published the Cork Report in 1982, leading to a change in primary legislation and the subsequent introduction of the Insolvency Act Stephen Cork now leads the business, representing the fourth generation to be in the eld of restructuring. Stephen and the vastly experienced team he has brought to Cork Gully have advised both owner-managed businesses and main listed publicly quoted companies on the recovery strategies available to the Board as well as their nanciers. Our services are delivered by a team of seasoned professionals who have extensive experience of restructuring. The current trading environment is increasingly complex and fast moving, so the solutions we provide to our clients are more creative, responsive and effective than ever. More information can be found at Nature of assignments undertaken:- Restructuring Cash ow management Operational restructuring Distressed M & A Re nancing Return of capital Debt Advisory Debt advisory services Independent business review Workout of stressed and distressed property assets Managed exits Debt for equity swaps Compromise agreements Recovery Litigation support Forensic accounting Investigation services Asset tracing and recovery Creditor services Insolvency Contingency planning Advice to board of directors Administrations Company voluntary arrangement Receiverships Insolvent liquidations Disclaimer The content of this report is for general information purposes only and although Cork Gully has made every effort to ensure the content is accurate and up to date, it should in no way be construed as professional advice. Cork Gully does not accept any responsibility or liability in relation to its use. Users are advised to seek professional advice before taking or refraining from taking any action. Cork Gully makes no warranties or representations. In no event shall Cork Gully, its employees or agents, be liable for any direct, indirect or consequential damages resulting from the use of this report. The Cork Gully report is not used to provide professional services and nothing in it constitutes a binding offer to perform any professional service in any jurisdiction. Users of this report are responsible for obeying all applicable laws relating to the intellectual property rights inherent in this report. Cork Gully permits you to make copies of the content of this report as necessary and incidental to your use of it provided that it is for your personal use, that it is of a reasonable amount for personal use and provided that you do not copy or re-publish it in whole or in part without the express written permission of a partner of the rm. This permission is not guaranteed and may be refused without reason. Any legal action or proceedings arising between any person or organisation and Cork Gully in relation to this report will be governed by English law and under the exclusive jurisdiction of the English courts. Cork Gully LLP ( Cork Gully ) is a limited liability partnership registered in England and Wales. Partnership number OC Registered of ce 52 Brook Street, London W1G 9DQ. A list of members is available for inspection at the registered of ce. 11

9 Contact Stephen Cork Managing Partner Cork Gully LLP 52 Brook Street, London W1K 5DS T: +44 (0) F: +44 (0) M: +44 (0) e: