Q4 13 Red Flag Alert

RNS Number : 0435Y

Begbies Traynor Group PLC

20 January 2014

 



 "Feel Good" Factor Returns as Critical Business Distress Falls for Three Straight Quarters

·    Growing consumer debt boosting many sectors

·    Entrepreneurial spirit prevails as new company incorporations at highest ever level

Latest Red Flag Alert Report for Q4 2013

According to the latest Begbies Traynor Red Flag Alert for Q4 2013, which monitors the financial health of "Corporate UK", levels of 'Critical' financial distress among UK businesses continued to recover during the final quarter of 2013, as improving business confidence drove strong growth across the UK's core services sectors and encouraged growing numbers of entrepreneurs to incorporate new businesses during the past year.

Across all sectors, UK businesses experiencing 'Critical' financial problems reduced 1% from 2,951 in Q3 2013 to 2,933 in Q4 2013, with the Hotels, Food Retailing and General Retailing sectors experiencing seasonal reductions in 'Critical distress, falling 24%, 22% and 7% respectively, fuelled by Christmas trading as well as increased consumer spending due to improving job security and property prices - adding to a discernable "feel good" factor.  Also finishing the year in a stronger position were the UK's important services sectors (Financial Services, Professional Services and Support Services), which experienced quarterly reductions in 'Critical' distress of 23%, 21% and 4% respectively.

On an annual basis, the improvement in 'Critical' distress levels was still more marked, decreasing some 4% compared to 3,044 in Q4 2012, as the vital services sectors again experienced the largest improvements in distress levels, with the Financial Services sector reducing 21%, Professional Services by 12% and Support Services by 11% over the 12 month period. Other industries which closed the year stronger than they started it were Food Retailing, Bars & Restaurants and Automotive which saw annual reductions in 'Critical' distress of 31%, 9% and 7% respectively.

Julie Palmer, Partner at Begbies Traynor, commented: "Christmas came late for UK retailers in 2013, as consumers more than ever left their festive shopping to the last minute, taking advantage of the growing number of reliable next-day delivery and click-and-collect services offered by the best in class online and high-street retailers. Still, UK consumers refused to scrimp this festive season, resulting in positive increases in sales volumes among food and general retailers compared to the previous quarter. However when compared to Q4 2012, levels of 'Critical' distress among general retailers were actually 16 percent higher this year, as physical retail volumes struggled to keep pace with last year's excessive spending¹ resulting in heavy discounting across the high street.

"After a slow third quarter, the important UK services sectors finished the year strongly with increasing confidence, resulting in improved M&A opportunities, as well as a return of investor confidence due to an improving stock market, providing a boon to the professional and financial services sectors. 

"Strengthening business and consumer confidence has also aided the UK's automotive industry which witnessed a 7 percent decrease in year on year critical distress in Q4 2013. This improving confidence is partly due to corporates updating their fleets following a period during the recession when the average age of fleets slowly ticked up, but also burgeoning consumer sales on the back of improving confidence and the availability of attractive finance deals."

Improving business confidence drives entrepreneurial recovery

Separate analysis of the Red Flag Alert dataset reveals that of the 2.68 million companies actively trading in the UK today, more than c. 518,000 were incorporated during 2013 (representing nearly 20% of the total). When compared to the c. 352,300 which were incorporated during 2012 (c.13% of the total), this indicates a significant and growing influx of entrepreneurial start-ups to the economy over the past 12 months as business confidence has recovered. It is also evident that the advent of the internet has enabled many individuals to start online businesses without the need for substantial capital and this, combined with unemployed people starting their own businesses, has provided a real boost to the number of start-ups.  Since the start of 2014, 18,183 new businesses have already begun trading in the UK (as at 17 January 2014).

Julie Palmer, Partner at Begbies Traynor, added: "As reported in a recent Markit/CIPS study, optimism among UK businesses is currently at its highest level since March 2010, with a growing number of businesses saying they intend to increase investment in capacity, marketing and new products during the coming year. This optimism has nurtured the revival of the UK's entrepreneurial spirit, with new start-ups now representing nearly a fifth of all companies trading in the UK today.

"While this emerging trend is good news for UK innovation and competition, if these fledgling businesses are not supported they could easily hold back the economy's current growth trajectory. It is notoriously difficult for young companies with limited trading history to secure credit to support the next stage of their development, as financial institutions prefer to lend to businesses with a proven track record. Key to their survival will be appropriate and fair access to finance and the removal of tax and regulatory obstacles that could trip them at the first hurdle."

Earlier stage 'Significant' distress levels at a record high, particularly among SME's

During the fourth quarter of 2013, the number of UK businesses experiencing earlier stage 'Significant' levels of financial distress increased by 3% to 224,579 compared to 218,128 during Q3 2013; the highest level of 'Significant' distress reported since at least early 2011².  On a quarterly basis, 'Significant' distress increased across every sector apart from Print & Packaging, which decreased by 1%, and Real Estate, which remained flat in the three month period.

On an annual basis, the increase in distress was even more significant, rising 16% from a base of 193,592 during Q4 2012, with increases across every sector covered by the research, except construction, which saw a small 3% decrease in 'Significant' distress. The sectors experiencing the largest increases over the past year were Real Estate, Hotels, Sports & Recreation, Leisure and Media, which saw 32%, 28%, 23%, 21% and 20% rises in 'Significant' distress over the past 12 months. 

Julie Palmer commented: "With earlier stage 'Significant' distress across all sectors reaching record highs this quarter, we are seeing growing fragility particularly among the small businesses community, as smaller and newer companies struggle to keep up as the economic recovery gathers pace. As is common at this stage of any recovery process, businesses with inexperienced management teams or limited credit availability are simply unprepared to step up a gear and fund and execute the business strategies required to remain competitive in a growing market. Such businesses will need to take urgent action to avoid slipping into more critical distress and to ensure they are well placed to take advantage of the economic recovery.

"Our data shows that independent hotels and gyms are particularly at risk in the current economic climate as ambitious larger chains continue to slash prices and develop lower cost models, forcing smaller independent players to compete through price and operate at unsustainably low margins. With hotel occupancy levels and revenue per room in the last quarter of 2013 falling, the hotels sector is in a difficult position as it enters the lean Q1 trading period. However, while consumer interest groups continue to berate the gym industry over rigid long term contractual commitments, we should see the sector's fortunes improve, at least in the short term, as people renew their memberships to work off last month's seasonal overindulgence.

"In addition, the structural and technological changes within the media sector continue to take their toll on many businesses. The switch to digital and online marketing campaigns has severely impacted this sector, as seen recently with Trinity Mirror closing the Liverpool Daily Post. Media firms without a credible digital offering are particularly vulnerable, as more and more marketing budgets are being invested in search engine optimisation rather than print advertising."

Regional recovery remains patchy

Comparing 'Critical' financial problems by region on a yearly basis, almost all regions across the UK experienced a reduction in distress levels with the North West, North East and East of England seeing the most significant reductions, falling 16%, 15% and 13% respectively. On the other end of the scale, Scotland, Yorkshire & Humberside and Wales saw levels of 'Critical' distress increase year on year, rising 65%, 12% and 11% respectively.

When comparing regions on a quarterly basis, the research reveals a mixed picture, with the South West, London and Wales all experiencing reductions in 'Critical' distress of 10%, 9% and 13% respectively during the final three months of the year. Meanwhile difficult trading conditions in Northern Ireland, the North East, Yorkshire & Humberside and Scotland saw distress levels in these regions increase by 37%, 21%, 12% and 8% respectively during the fourth quarter.

Ric Traynor, Executive Chairman of Begbies Traynor Group, concluded: "As we welcome in the New Year, this quarter's Red Flag statistics show that the economy is still moving in the right direction, as 'Critical' distress levels are down for the third quarter running, across almost all regions of the UK. With businesses feeling more confident about their outlook for 2014, so too are consumers, thanks to strengthening property prices, improving job security and wage inflation.

"While this positive sentiment is encouraging, we cannot overlook the fact that a large population of businesses continue to suffer from 'Significant' distress resulting from funding, management or accumulated debt issues. The next year will be a key period for these businesses to either sort out their problems and prosper or finally reach the end of the road."

- Ends -

For further information contact:

MHP Communications

Katie Hunt / Jade Neal / Giles Robinson / Ben Griffiths

Tel:        [phone]

Email:   [e-mail]

Notes to editors:

¹ According to the British Retail Consortium (6.1.14) in December 2013 there was a 19.2% growth in internet purchases from a year earlier, the fastest increase in four years. However, UK retail sales in total rose by just 0.4% on a like-for-like basis.

² Red Flag data has been produced on a comparable basis since Q1 2011

Critical problems by Sector:

Sector	Q4 2012	Q4 2013	Percent change	Q3 2013	Q4 2013	Percent change
Automotive	95	88	-7%	83	88	6%
Bars & Restaurants	150	136	-9%	120	136	13%
Construction	571	545	-5%	494	545	10%
Financial Services	75	59	-21%	77	59	-23%
Food & Bev Mfr Beverage Mfrg	14	15	7%	12	15	25%
Food Retailing	42	29	-31%	37	29	-22%
General Retail	132	153	16%	165	153	-7%
Hotels	19	26	37%	34	26	-24%
Ind Transport & Logistics	61	68	11%	61	68	11%
Leisure	21	29	38%	30	29	-3%
Media	44	51	16%	62	51	-18%
Other Mfrg	206	194	-6%	216	194	-10%
Others	109	118	8%	122	118	-3%
Printing & Packaging	20	27	35%	23	27	17%
Professional Services	77	68	-12%	86	68	-21%
Real Estate	207	232	12%	238	232	-3%
Sports & Recreation	32	27	-16%	16	27	69%
Support Services	181	161	-11%	167	161	-4%
Telecoms & IT	95	84	-12%	95	84	-12%
Travel & Tourism	47	47	0%	35	47	34%
Uncoded	730	662	-9%	659	662	0%
Utilities	5	4	-20%	5	4	-20%
Wholesaling	111	110	-1%	114	110	-4%
All Sectors	3,044	2,933	-4%	2,951	2,933	-1%

Critical problems by Region:

Region	Q4 2012	Q4 2013	Percent change	Q3 2013	Q4 2013	Percent change
East of England	277	240	-13%	232	240	3%
London	498	475	-5%	523	475	-9%
Midlands	410	407	-1%	394	407	3%
North East	95	81	-15%	67	81	21%
North West	386	325	-16%	335	325	-3%
Nrthn Ireland	58	56	-3%	41	56	37%
Scotland	95	157	65%	146	157	8%
South East	695	645	-7%	642	645	0%
South West	202	188	-7%	210	188	-10%
Uncoded	21	17	-19%	29	17	-41%
Wales	93	103	11%	118	103	-13%
Yorkshire & Humberside	214	239	12%	214	239	12%
All Regions	3,044	2,933	-4%	2,951	2,933	-1%

Significant problems by Sector:

Sector	Q4 2012	Q4 2013	Percent change	Q3 2013	Q4 2013	Percent change
Automotive	6,216	7,491	21%	7,239	7,491	3%
Bars & Restaurants	11,450	12,942	13%	12,497	12,942	4%
Construction	14,720	14,221	-3%	13,862	14,221	3%
Financial Services	3,797	4,074	7%	3,931	4,074	4%
Food & Bev Mfr Beverage Mfrg	662	733	11%	703	733	4%
Food Retailing	2,483	2,878	16%	2,766	2,878	4%
General Retail	11,409	13,051	14%	12,644	13,051	3%
Hotels	2,552	3,256	28%	3,128	3,256	4%
Ind Transport & Logistics	2,396	2,507	5%	2,443	2,507	3%
Leisure	5,071	6,133	21%	6,003	6,133	2%
Media	6,820	8,154	20%	7,817	8,154	4%
Other Mfrg	5,953	6,347	7%	6,273	6,347	1%
Others	18,452	21,645	17%	21,043	21,645	3%
Printing & Packaging	780	871	12%	880	871	-1%
Professional Services	13,397	16,865	26%	16,243	16,865	4%
Real Estate	15,136	19,954	32%	19,900	19,954	0%
Sports & Recreation	3,698	4,533	23%	4,350	4,533	4%
Support Services	15,019	17,592	17%	16,957	17,592	4%
Telecoms & IT	10,499	12,564	20%	12,211	12,564	3%
Travel & Tourism	3,177	3,215	1%	3,122	3,215	3%
Uncoded	36,918	42,121	14%	40,818	42,121	3%
Utilities	121	133	10%	126	133	6%
Wholesaling	2,866	3,299	15%	3,172	3,299	4%
All Sectors	193,592	224,579	16%	218,128	224,579	3%

About Begbies Traynor Group

Begbies Traynor Group plc is a specialist professional services consultancy providing independent professional advice and solutions to businesses, financial institutions, the accountancy and legal professions and individuals in the areas of recovery, corporate finance, investigations and risk management.  It is listed on AIM (Ticker: BEG).  Further information can be found at: www.begbies-traynorgroup.com.

About Red Flag Alert

Red Flag Alert measures corporate distress signals through a comprehensive and complex methodology, drawing on factual legal and financial data from a wide range of relevant sources for companies that have been trading for over a year.

The release refers to the numbers of companies experiencing 'Critical' problems which are those with CCJs totalling over £5,000 within a three month period or winding-up petitions against them or which have entered Corporate Voluntary Arrangements.

The release also refers to the numbers of companies experiencing 'Significant' problems, which are those with minor CCJs (of less than £5k) filed against them or which have been identified by Red Flag's proprietary credit risk scoring system which screens companies for a sustained or marked deterioration in key financial ratios and indicators including those measuring working capital, contingent liabilities, retained profits and net worth. 

Red Flag Alert is commercially available to all businesses, on an annual subscription basis, to help them better understand risk and exposure and help prepare them for the future.  Further information about Red Flag Alert can be found at: www.redflagalert.com

 

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