Profit warnings halve in West Midlands in Q1
THE number of profit warnings issued by quoted companies in the West Midlands halved in the first quarter of 2014 compared with a year earlier. The performance has been highlighted as further proof of economic recovery.
According to EY’s latest Profit Warnings report, plcs in the West Midlands issued three profit warnings in Q1 – one less than the previous quarter in Q4 2013 and the lowest first quarter total since 2011.
This is in stark contrast to the UK picture which saw the highest number of profit warnings issued in the first quarter since 2011. Nationally, the economy picked up speed in the first quarter of this year but so did the number of profit warnings, with UK quoted companies issuing 74 warnings in Q1, one more warning than the previous quarter.
The three warnings issued in the West Midlands came from the following sectors; Industrial Engineering (one), Software & Computer Services (one) and Support Services (one).
Tom Lukic, EY’s restructuring partner in the Midlands, said: “The significant decline in profit warnings in the West Midlands – dropping by half compared to last year – provides further support to the returning confidence in the economy and is a positive start to the year for West Midlands businesses.
“For the small number of businesses that issued warnings in the West Midlands; difficult trading conditions, pricing pressures from cost conscious customers and sales being short of forecasts were all cited as reasons behind the profit warnings issued in Q1 2014.
“Although confidence is returning and the economy is moving to a stronger position, the rest of 2014 looks set to bring new challenges that will continue to test earnings forecasts and raise questions of risk and reward in capital allocation. Businesses now need to think carefully about capital needs and allocation in the next 12-18 months and how they will achieve growth in this environment and deliver increased earnings, whether through efficiency savings or transactions.”
Nationally, the strengthening pound and weakening emerging markets dominated UK profit warnings in Q1 2014, with just over a quarter of warnings citing adverse exchange rates, against an average 3% in the previous four quarters. Just shy of 20% companies cited ‘pressure on pricing’ in their profit warning, compared with a five-year average of 6%.
Companies in the FTSE 100, most exposed to emerging markets and with high foreign currency exposure, issued 14 warnings in Q1 2014 – more than at the height of the financial crisis. FTSE sectors issuing the highest number of profit warnings in Q1 2014 were FTSE Support Services (12), FTSE Food Producers (five) and FTSE General Retailers (five).
“The pace of UK profit warnings continued unabated in the first quarter of 2014, with expectations coming under pressure from a number of quarters. The UK recovery remains in full swing, with vital global markets also growing. However, UK profit forecasts are still under pressure given growing pains in developing markets, the strengthening pound and pricing pressures closer to home,” added Lukic.
“Despite these concerns and the increasing tension between Ukraine and Russia, market anxieties largely eased during the first quarter. This is due in good part to investors’ quest for yield in an increasingly low return environment – a quest that has seen investors take on more risk in search of greater reward. While the economic backdrop should continue to improve in 2014, it will be far from plain sailing for UK plc.”
