Profit warnings drop 40% for West Midland plcs
THE West Midlands saw a 40% drop in the number of profit warnings issued in 2013, compared to the previous year, a new report has said.
The picture outlined in the EY Profit Warnings report suggests an improving trend in the region’s economy. However, EY has warned the pattern for the UK as a whole could be skewed because of a tough final quarter.
The report said quoted companies in the West Midlands issued only two profit warnings in Q4 2013, compared to four in the previous quarter.
The two profit warnings in Q4 both came from the Industrial Engineering sector, which saw the highest proportion of companies issuing profit warnings in the West Midlands in 2013. However, the region does have a higher proportion of such industries when compared with the rest of the UK.
For the UK as a whole, profit warnings fell to a three-year low in 2013 but the year ended with a bitter twist that saw 73 warnings issued in Q4 – a rise of 30% on the previous quarter. EY said the late spike appeared in contrast to improving economic data and promising start UK plc had made to the second quarter.
However, it said late summer tensions in global markets reduced expectations, with downgrades spilling into Q4.
In total, UK quoted companies – Main Market and AIM listed – issued 255 warnings in 2013, compared to 287 in 2012. The FTSE 350 felt the brunt of the headwinds, issuing 31 warnings in Q4 2013, as many profit warnings in the final quarter as in Q4 2008, the height of the financial crisis.
Tom Lukic, EY’s restructuring partner in the Midlands, said: “The fall in the total number of warnings in 2013 (13) compared with 2012 (22) is significant, as it indicates a combination of improving conditions and more reliable forecasting across West Midlands businesses.
“The 30% quarterly rise in UK profit warnings in the final quarter of last year seems at odds next to the improving economic data and outlook generally, but global growth anxieties reduced profit expectations in late summer, with earnings downgrades continuing into the final quarter of 2013.
“An improving economic outlook should see profit warnings fall further in 2014, although perhaps by less than the pace of recovery might suggest. The year has started with a faster pace of alerts than 2013, with companies still feeling the impact of slower global markets, with the added complication of weaker currency translation as sterling strengthens in anticipation of higher UK interest rates.”
The sectors with the highest number of companies issuing profit warnings for Q4 2013 were FTSE Support Services (14), FTSE Software & Computer Services (8) Aerospace & Defence, Media and Industrial Engineering (all with 5).
Profit warnings from business services, industrial sectors and companies exposed to volatile natural resources markets and the US shutdown led the way in Q4 and 2013 as a whole. The sectors with the highest proportion of companies issuing profit warnings in 2013 were Aerospace & Defence (55%) and General Industrials (54%).
To put the performance in context, EY said an improving economy and rising activity was no guarantee of falling profit warnings. The number of profit warnings from FTSE Support Services companies stayed within a whisker of 2012’s figure, despite rapidly improving industry surveys. Support Services is the UK’s largest FTSE industry group, but 45 warnings from 37 companies still equates to almost one quarter of the sector warning in 2013.
Lukic added: “The FTSE Support Services sector continues to issue a high number of warnings, despite an improvement in outlook across various industry surveys. Activity may be increasing, but the public and private sector alike are keeping a tight control on costs, resulting in tight margins, intense competition and little room for error for many in the sector.”
In contrast, the substantial consumer and housing revival kept profit warnings low across consumer-facing sectors in 2013. FTSE General Retailers were particular notable by their absence in the top five sectors warning. In 2011, the sector led the way with 39 warnings, compared with a record low of nine in 2013.
The FTSE General Retailers sector issued two profit warnings in the final quarter of 2013, with one further warning a piece for the FTSE General Retailers and FTSE Food & Drug Retailers sectors in the first three weeks of 2014. This compares with four warnings from all retail sectors in Q4 2012 and six in Q1 2013.
