South East: Profit warnings hit historic high

Profit warnings issued by South East-listed businesses reached a record-breaking high in the first three months of 2020 – higher than any previous quarter in the past 20 years – according to EY’s latest Profit Warnings report.

A total of 60 profit warnings were recorded by EY between January 1 and March 31, 2020 in the region, which excludes those issued in London, compared to 17 in the same quarter last year, representing a 253% year-on-year increase.

Unsurprisingly the significant increase in warnings was attributed to the COVID-19 crisis, which has temporarily paralysed many businesses, with very few sectors immune from its effects. In the South East profit warnings were spread across a wide range of sectors. Some of the hardest hit have been the FTSE Travel & Leisure sector (13) followed by Industrial Support Services (8) and Household Goods & Home Construction (5).

Richard Baker, managing partner for the Thames Valley and South East, commented: “The sectors issuing the highest number of profit warnings were those most exposed to the impact of national lockdowns and in many cases were already showing signs of stress.

“COVID-19 has created new problems, but it has also accelerated existing structural change and exacerbated existing weaknesses. When lockdown lifts, it will undoubtedly ease some pressures, but these underlying issues will remain.

“The South East has recorded one of the highest profit warnings figures amongst the regions and is second only to London in the number issued by listed businesses in the UK. This reflects the business environment of the region, with many listed businesses having their headquarters here, due to its strong connectivity and access to skills.

“Whilst the figures have not come as a surprise, more worrying is that we’re likely to see an increase in the number of distressed businesses as a result of ongoing pressure in the UK-economy due to the continued lockdown. Although, one recent positive is the partial and managed easing of restrictions on the construction industry, which may support businesses operating in this sector to bounce back quicker.

“Some of the measures implemented by the Government, including the Coronavirus Large Business Interruption Loan Scheme and the COVID-19 Corporate Financing Facility, may go some way to supporting larger businesses through this current crisis. However, regardless of size, businesses will still have had to contend with the same challenges, including cashflow and managing employees.”

A years’ worth of UK profit warnings issued in Q1 2020

301 profit warnings were issued by UK-listed businesses in Q1 2020, almost equal to the entire number issued in the whole of 2019 (313) and 5% higher than the total for 2018 (287). Compared to the same period last year (Q1 2019), warnings rose from 89, representing a 238% year-on-year increase.

Although 77% of profit warnings blamed COVID-19 in the first quarter of 2020, it is worth noting that significant parts of UK plc were struggling before the pandemic. In January 2020, EY recorded warnings had increased by 43% year-on-year, when compared to the same month last year.

By percentage of companies warning, FTSE Travel & Leisure was the most dramatically affected, with 70% of the sector issuing a profit warning, followed by Industrial Materials (63%) and Retailers (61%). All but five of the 42 FTSE sectors EY tracks issued COVID-19 related warnings in Q1 2020.

A difficult reboot

COVID-19 is expected to deliver the biggest blow to UK GDP since the First World War. The economic forecasting group, EY ITEM Club, estimates that UK GDP will fall by 6.8% in 2020, if the UK lockdown begins to lift at the end of May, and the UK experiences a slow ‘U’ shaped recovery without any major relapses.

EY expects the number of profit warnings to fall, but distress levels to rise – with echoes of 2008 to 2009 and the aftermath of the financial crisis. Notably, there were more insolvencies in 2009 than 2008. The report anticipates a significant increase in corporate insolvencies when the lockdown lifts.

Baker commented: “We know from previous crises that one of the biggest tests comes when companies need to reflate balance sheets, restock inventory and depend on supply chains that have been similarly tested.

“This time, companies face a unique set of additional challenges as they work to safeguard business continuity and the health of employees and customers. It is wise for companies to take a slow and steady approach to restarting operations that allows for flexibility, so they can react to continued uncertainty for some time to come.”