Profit warnings rise 27% for West Midland plcs
UK quoted companies issued the most profit warnings since the height of the financial crisis last year, with the West Midlands showing a 27% year-on-year increase.
Analysis suggests mounting risks across the Eurozone and the United States, combined with a slowdown of growth in China, knocked business confidence and reduced demand, encouraging a climate of inertia.
According to Ernst & Young’s latest quarterly Profit Warnings report, UK quoted companies – Main Market and AIM listed – issued 86 profit warnings in Q4 2012, 26% more than the previous quarter, taking the 2012 total to 287 – the highest since 2008.
In the West Midlands there were 22 warnings issued in 2012 (2011: 16), a rise of 27%.
Sectors worst hit were: Industrial Engineering (6), General Retailers (3), Software & Computer Services (3), Health Care and Equipment Services (2) Personal Goods (2) and Aerospace & Defence (2).
Tom Lukic, Ernst & Young restructuring partner, said: “Profit expectations dropped sharply in 2012 as economic growth forecasts fell and escalating risks in key global economies unnerved businesses, leading to delayed investment and purchasing decisions. The UK economy lacked the strength to gather momentum against this difficult global backdrop and finished 2012 with nothing more than a low growth landscape on the horizon.”
Industrial companies saw the largest increase in the number of profit warnings in 2012, with customers reacting to a volatile economic landscape by delaying orders and destocking. The FTSE Electronic & Electrical Components and FTSE Industrial Engineering sectors both issued 17 warnings in 2012, up from five and eight respectively in 2011.
The transport sector also suffered from falling expectations. Almost 40% of FTSE Industrial Transportation companies issued a profit warning in 2012, compared with 16% in 2011.
“The falling economic expectations and rising uncertainty that characterised 2012 led to falling demand across industrial sectors, especially in the final quarter of last year. Slower than expected demand from China in particular landed heavy blows on companies reliant on emerging market growth, which could have cancelled out declining sales elsewhere,” added Mr Lukic.
E&Y said that unusually, the overall rise in profit warnings was not accompanied by a rise in warnings from consumer-facing sectors, including retail. FTSE Travel & Leisure companies issued just 11 profit warnings in 2012, down from 14 in 2011. Warnings from the FTSE General Retailer sector fell to just 17 in 2012, from 39 in 2012 – the lowest number since 2002.
Mr Lukic said this did not necessarily mean that the consumer service sector was under considerably less stress.
“Profit warnings are a matter of performance against expectations and a squeeze on consumer spending was factored into retailers’ 2012 forecasts,” he said.
“The number of warnings in these sectors stayed low because the consumer squeeze was just about in line with expectations and the summer celebrations added a welcome boost to trading that the weather couldn’t entirely dent.”
Retail sales, while within forecasts, were still essentially flat this Christmas and the advisor said there was an obvious discrepancy between low numbers of profit warnings and the retail administrations that have occurred at the start of this year.
“The inconsistency highlights the extreme polarisation of consumer sectors exposed to the greatest technological changes and transformation in consumer behaviour. Those who have adapted best and those who continue to offer the best products, value and service have emerged as strong winners. In a flat market, this inevitably creates significant losers,” added Mr Lukic.
