Profit warnings in region double year-on-year

Twelve profit warnings were issued by listed companies based in the Midlands in the second quarter of the year, double what was seen in the same quarter in 2018.

According to EY’s latest Profit Warnings Report, the warnings were made across ten sectors, including construction, automotive, general retailers and support services.
Half of all profit warnings were issued by businesses with a turnover of less than £200m, with many continuing to blame uncertainty over Brexit.

Despite the number of overall profit warnings staying largely unchanged from Q1 2019, there was a boost for businesses in the West Midlands, with profit warnings more than halving, from 10 to four.

However, this story was not mirrored in the East Midlands, where the number of profit warnings increased significantly from two in Q1 to eight in Q2 2019. This is double the number seen at the same time in 2018 and the highest since Q4 in 2008.

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 day after the warning the median share price fall was 20.9% – 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.

Dan Hurd, EY’s head of restructuring in the Midlands, said: “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.”

“In the Midlands it’s a bit of a mixed bag, with some positive movements from the last quarter. However, it is worrying that we are seeing an increase in the number of sub £200 million turnover businesses issuing profit warnings, which may reflect a desire to hold off on investment decisions 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.”

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. Those sectors with the greatest exposure to falling confidence and the costs of planning for no-deal disruption, such as Financial Services and Travel & Leisure, have felt the greatest impact.

Whilst 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.

Hurd 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, they predict a mild recession under a ‘no-deal’ scenario – a 40% probability in their estimation.

Hurd said: “If the UK leaves the EU without a deal and GDP growth falls to just 0.2% in 2020 – as predicted by EY ITEM Club – 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.”