South East: Profit warnings see a three-fold increase in H1 2020

The number of profit warnings issued by South East listed businesses in the first half of 2020 (H1 2020) increased three-fold year-on-year, with 83% citing the impact of the Covid-19 pandemic, according to EY’s latest Profit Warnings report.

EY recorded 95 profit warnings in the region in H1 2020 (Q1 and Q2) – its highest in 20 years. In the first quarter of 2020, quoted companies in the South East issued 60 warnings, followed by 35 in Q2 – a 41% reduction.

Profit warnings were spread across a wide range of sectors in the region in H1 2020. However, in the South East the most impacted businesses were in the FTSE travel and leisure (16 in H1) and industrial support services (15 in H1) sectors.

Richard Baker, managing partner at EY in the South East, commented: “Unsurprisingly, the most immediate and significant impact of Covid-19 has been acutely felt by companies whose existing structural challenges have been exacerbated by the pandemic.

RichardBaker-Edit“Many businesses that were essentially sound before the virus struck, have been forced to reassess their expectations and business plans. It’s vital that businesses in the South East don’t underestimate the depth and extent of both the immediate and long-term challenges ahead.

“The South East is known for its tech economy. Anecdotally, we’ve heard that many businesses in this sector and operating in the private market have adapted well to the challenges they have faced on account of Covid-19. The ability to be flexible, diversify and utilise new technology will help  these businesses to find new markets and opportunities for growth as we emerge into what will become a new business norm.

“It is still a highly uncertain time for many businesses, who are adjusting to new ways of working and changing levels of demand, with potential cliff-edges to come in government support and further twists and turns likely in Brexit negotiations. The UK economy is opening up, but it’s early days.”

The ripple effect

Across the UK, almost a third (33%) of listed companies – compared to 18% in 2019 – issued a profit warning in the first half of 2020. EY recorded 466 profit warnings in H1 2020 – more than the total number issued last year (313).

In Q2 2020, the impact of Covid-19 rippled across the UK economy and along supply chains, shifting the epicentre of profit warnings. The immediate impact of the virus was felt in Q1 by sectors most impacted by lockdown – travel, leisure, hospitality, and retail – but this has since spread to industries most exposed to the knock-on effects of changing corporate and consumer behaviour.

Lisa Ashe, turnaround and restructuring partner at EY, UK & Ireland, said: “We expect supply chain vulnerability to be one of the biggest areas of risk for companies in the next six months. Supply chain resilience will no doubt feature highly on corporate agendas, not least because of the additional challenges associated with Brexit. There are already large-scale restructurings in the UK market that could have considerable impact along supply and value chains.”

Profit warnings from consumer-facing companies were less prominent in Q2 2020, however this is only after an exceptionally high level of warnings and forecast adjustments in March. The FTSE retailers and FTSE travel and leisure sectors still have the highest number of companies warning three or more times in a 12-month period, which EY found gave a company a one in five chance of a distress event – such as an administration, CVA, debt restructuring or distressed sale – occurring in the year ahead.

Baker concluded: “Boards need to guard against complacency and be ready to take swift and decisive action to reshape their business to face a different future than they imagined just a few months ago. Companies could find that previously healthy parts of their business are no longer profitable. This is a pivotal moment for UK plc.”