South East: Protracted uncertainty 'taking its toll', EY report shows

The number of profit warnings issued by listed companies in the South East remained steady in the first quarter of 2019, according to EY’s latest Profit Warnings Report.

Sixteen warnings were recorded by quoted businesses based in the region in Q4 2018 and again in Q1 2019. When comparing year-on-year, the number of profit warnings fell by 16% on Q1 2018, when 19 were issued.

The South East saw 16 warnings spread across 11 sectors, including: construction & materials; electronic & electrical equipment; household goods & home construction; industrial transportation; and general retailers.

UK picture

In contrast to the regional picture, profit warnings across the UK increased year-on-year in Q1 2019 to 89 – 22% higher than the same quarter in 2018 (73) and the highest number issued in the first quarter since the global financial crisis a decade ago.

Neil Hutt, partner in EY’s transaction advisory team in the South East, commented: “Protracted uncertainty is taking its toll. The ‘no deal Brexit’ countdown was especially disruptive for businesses exposed to blows to consumer, corporate and investor confidence – as well as those reliant on cross-border EU supply chains and regulation.

“However, it is hard to split out Brexit stresses from mounting global trade and growth concerns, including the recent weakening of the global economic outlook, and rising concerns over US-China trade relations.”

The UK FTSE sectors issuing the most profit warnings in Q1 2019 were retailers (12), financial services (10) and travel & leisure (8).

Retail

According to EY’s report, FTSE retailers issued 12 profit warnings in Q1 2019, one fewer than Q1 2018. Retail sales remain volatile, but surprisingly rose at the start of the year, with consumers bolstered by wage rises that continue to outstrip inflation and low employment.

Neil Hutt explained: “Improving disposable incomes and sector restructuring may provide some breathing space, but retailers can find their core markets turning sour incredibly quickly. Online growth and development is relentless, requiring continuous investment when margins are tight, and consumers are still reluctant to pay full-price.”

Brexit anxiety

The report also found that the number and percentage of profit warnings citing Brexit has risen throughout the last year, from no-related warnings in Q1 2018, to nine – or 10% of profit warnings – in Q1 2019, and 12% in the period to 10 April.

So far in 2019, the most frequently cited reasons for making a profit warning were: falling sales, contract issues, and increasing costs & overheads.

Hutt concluded: “Our business community in the South East is certainly feeling the effects of these national and international pressures at a local level. Businesses are playing catch-up in an era of unprecedented structural change, when great investment is required just to keep up.

“Balance sheet restructuring has brought some breathing space in troubled sectors like retail, but unless companies can invest to adjust to new sector dynamics, they’ll hit the buffers again.”