Fourteen profit warnings were issued by listed companies based in the South East in the second quarter (Q2) of 2019 – the highest number of Q2 profit warnings since 2016 – according to EY’s latest Profit Warnings report.
The 14 warnings were recorded across nine sectors, including construction & materials; household goods & home construction; and support services. Notably, seven warnings were issued in the first half of 2019 (Q1 and Q2) by the construction & materials sector, compared to none in the same period 2017 and 2018.
Neil Hutt, partner in EY’s transaction advisory team in the South East, commented: “It’s a mixed picture in the South East. Whilst the number of profit warnings have dropped quarter on quarter, when comparing Q2 2019 to previous years, it’s clear the number of warnings remain relatively high.
“It is worrying that we are seeing an increase in the number of warnings issued by listed businesses in the construction & materials sector, which may reflect a desire to put investment decisions on hold until there is more certainty over what a post-Brexit Britain will look like.
“In the short to medium term I would expect to see businesses continuing to look closely at their structures to see where greater cost efficiencies can be found.”
In the UK overall, 69 profit warnings were issued between April and June this year – up 19% year-on-year – representing the highest second quarter total since 2008. The median share price fall on the day of warning was 20.9% in Q2 2019, compared to just over 12% between the start of 2010 and the end of 2017, exceeding the level recorded at the peak of the financial crisis (Q4 2008: 20.7%).
Hutt added: “There is now clear evidence that prolonged Brexit uncertainty has created a hiatus in business activity, with companies struggling to forecast and plan. And the economic impact is spreading, affecting a broad range of sectors.
“Slowing global growth and trade and geopolitical tensions add a further unpredictable dimension to the second half of 2019.”
The FTSE sectors issuing the most warnings in Q2 2019 were General Retailers (10), Chemicals (6), Construction & Materials (6), Financial Services (6) and Support Services (6). In the last year, 14 FTSE sectors recorded Brexit-related profit warnings, five of which were added in the second quarter of 2019.
While the UK economy grew by a better than expected 0.5% in Q1 2019, it is likely to have suffered a mild contraction in the second quarter. Lumpy retail sales suggest that UK households still have the urge to spend, but don’t have the confidence or means to buy at will.
Hutt added: “Consumer spending has been resilient until now, but sales of discretionary and high-value purchases – such as cars – are coming under particular pressure as confidence slips. There are signs that the spring sunshine brought consumer spending forward, but retail sales have lost momentum in Q2.
“Most consumer businesses will now be focused on the all-important final ‘golden quarter’. Profit warnings from retailers usually drop over the summer, but this isn’t a normal third quarter, and the usual patterns of warning could be turned upside down.”
Combined with EY’s profit warning data, the latest industry surveys suggest that we’re experiencing a sea-change in the UK economy as it labours under increasing uncertainties.
EY ITEM Club has maintained its 2019 UK GDP growth projections of 1.3% for 2019 and 1.5% for 2020, if the UK leaves the EU with a “deal” on 31 October 2019. But, in common with other forecasters, it predicts a mild recession under a ‘no-deal’ scenario – a 40% probability in their estimation.
Hutt concluded: “If the UK leaves the EU without a deal and GDP growth falls to just 0.2% in 2020, we expect to see further profit warnings from companies exposed to demand and supply shocks.
“Warnings would certainly increase in sectors with exposure to import and export disruption, including food producers and food retailers, where profit warnings are currently low.”