UK companies issued an ‘exceptionally low’ level of profit warnings in the first quarter of 2010
12 Apr 10
Despite the downturn, the first quarter of 2010 saw British companies issuing the lowest number of first quarter profit warnings in 10 years, according to research from Ernst & Young
There were 54 profit warnings issued from UK quoted companies during the first quarter of 2010 compared to 117 in the same quarter of 2009, a year-on-year fall of 54 per cent.
Colin Dempster, restructuring partner at Ernst & Young, said: “Despite this exceptionally low level of profit warnings, we would continue to question the real strength of the recovery and the private sector’s ability to take up the slack, once the significant props of government spending and stimulus fall away. The road to recovery is rarely straight or flat and this holds more bumps and twists than most. Companies still need to be watching their backs due to the very real chance that growth will stall, while also planning for the eventual recovery so they don’t miss the boat.
“Just one profit warning was issued in Scotland in the quarter; the lowest recorded regional figure. On paper, this figure may indicate that Scottish businesses are perhaps recovering more strongly. However, many Scottish Plcs are headquartered outside of the region. Whilst the profit warning may not have been recorded in Scotland, the reality is Scottish Plcs still face the same uncertain road ahead as their UK counterparts.”
Consumer sectors were conspicuously absent from the profit warning data, falling both in terms of absolute number and proportion of profit warnings. The FTSE General Retailer sector issued just four profit warnings compared to eight issued in the first quarter of 2009, and in stark contrast to the 18 retail profit warnings we saw in Q1 2008. This pattern is replicated across the entire range of FTSE Consumer Goods and FTSE Consumer Services sectors, which collectively issued just 13 profit warnings in Q1 2010, less than a quarter of the total number of warnings.
Dempster said: “We could extrapolate from these figures further evidence that the recession has been much easier than expected on consumer facing companies – and it is true that consumer spending has held up remarkably well. But it is also worth noting the large caveat to these figures: the incredible 33 per cent drop in the number of quoted retailers over the last three years, many of whom left the market due to insolvency.”
The sectors issuing far more profit warnings than any other sector are those supplying services to business and the industrial and manufacturing sectors. There were almost a quarter of all UK quoted Support Services companies warning in the last year, reflecting the difficulties experienced by companies reliant on discretionary budgets, whose customers are still protecting margins by investing and spending less.
There were also around a quarter of FTSE Industrial Engineering companies warning in the last 12 months and around a fifth of all FTSE Electronic and Electrical companies, with by far the most common reason given being “falling sales” and “delayed or discontinued contracts.
Dempster said: “The economic uncertainly, when combined with what looks like a very close and potentially indecisive general election, also makes it a very difficult time for companies to make forecasts for the year ahead. A combination of cost cutting, low interest rates and government stimulus programmes have helped to keep profit warnings relatively low in the last year.
“HMRC have been very accommodating on allowing many Scottish companies to spread overdue PAYE, NI & VAT payments through Time to Pay agreements. We have detected a more proactive approach from the tax authorities in the last few months on such arrangements.
“However, the beneficial impact of many of these factors will start to wane in the coming months as fiscal and monetary stimulus is withdrawn… if expectations become buoyed by optimism too quickly and outstrip an economy that is recovering slowly, prone to relapse and facing many uncertainties, we could see a greater negative imbalance and a faster increase in profit warnings later in 2010.”