South East: Eight listed companies issue profit warnings

Eight listed businesses in the South East issued profit warnings in the second quarter of 2017, five less than the previous quarter and 13 less than the same period of last year, according to EY’s latest Profit Warnings report. Three of the profit warnings recorded in Q2 2017 in the South East were from AIM-listed businesses.

Across the UK quoted companies issued 45 warnings in Q2 2017, 40% lower than the previous quarter, almost a third lower than Q2 2016 and well below the post-crisis second-quarter average of 58. According to EY’s latest Profit Warnings report this is the biggest single quarterly percentage drop in profit warnings since the second quarter of 2009.

A stronger than expected global economic backdrop and falling forecasts have combined to significantly lower warnings, according to the report. A fifth of warnings cite internal operational problems, with external factors, such as exchange rates and price pressures, slipping down the list as earnings expectations adjust.

Neil Hutt, transactions partner at EY in Reading and across the Thames Valley, commented: “A low level of profit warnings should not lead to complacency. The reality in the market is that earnings forecasts have dipped and the economy’s relative outperformance has enabled more companies to meet already low expectations. Profit warnings may not rise dramatically without a shock, given the companies seem to have come to terms with passing a lower bar; but trickier conditions will catch out more companies and expose any weaknesses.”

Wider UK trends:

Retailers issue record number of profit warnings

FTSE General Retailers issued seven profit warnings in the second quarter of 2017, four more than last quarter and equal to 2016’s five-year second quarter high. In the year-to-date, 28% of the FTSE sector has warned.

According to the report, the reasons behind retail profit warnings have shifted, with the initial focus on weakened sterling giving way to the impact of inflation on consumers’ spending power and weakened consumer confidence.

Construction is hitting a wall

Profit warnings from the FTSE Construction & Materials sector hit a two-year high six months ago. Since then three further companies have warned, with a fifth of the sector warning in the year-to-date, according to the report.

Despite official data showing the sector growing relatively strongly until June, there are signs that political uncertainty is slowing activity and hitting confidence outside of the residential sector. The report says that recent profit warnings have also highlighted the increasing risks carried by contractors as prices rise and bite into already tight margins.

Hutt added: “The unexpected nature of the general election limited the usual pre-vote hiatus in construction activity; but the unexpected result has the potential for greater disruption. Contract issues also loom large across the sector due to tight margins and the challenge of managing complex contracts open to a high number of risks. The impact is clear in our profit warning data with four out of five of the heavy construction companies warning citing contract issues in the last year.”