Profit warnings drop to lowest level since recession
THE number of profit warnings issued by PLCs in Yorkshire fell in the first three months of 2016 to the lowest first quarter total since the global recession hit in 2008.
According to EY’s latest Profit Warnings report, quoted companies in the region issued five profit warnings in the first quarter of 2016, compared with six in Q1 2015 and ten in Q1 2014.
The number of Yorkshire and the North East profit warnings reached a three year high in 2014, and have been steadily dropping since.
In comparison UK quoted companies issued 76 profit warnings in the first quarter of 2016, one less than the same period of 2015, but 24 fewer than the previous quarter.
Hunter Kelly, restructuring partner at EY in Yorkshire and the North East, said: “These results for Yorkshire and the North East suggest that in comparison with 2015 Yorkshire and North East PLCs are perhaps adapting better to the increased volatility of the last few years.
“However, it’s still a tough environment in which to plan and forecast and political factors such as Brexit and global dynamics hasn’t increased predictability for many factors, including currency movements or competitor pricing activity. There are clear advantages for firms that can demonstrate market understanding and the business resilience necessary to match an unpredictable world.”
According to report, the level of warnings in the UK was higher than expected, especially given the much substantial downgrade in profit expectations at the end of 2015.
Weak oil prices once again featured highly, but that is not the only factor denting expectations.
The volatile start to 2016 created uncertain and difficult conditions for companies reliant on the contract cycle. Central bank action has soothed market concerns in part, but the global economy is still struggling to build momentum. Meanwhile, companies are clearly still coming to terms with the intense competition that comes as a result of overcapacity and disruption across many sectors.
The FTSE sectors issuing profit warnings in the Yorkshire and North East included Industrial Engineering (2), Pharmaceuticals and Biotechnology (1), General Financial (1) and Support Services (1). This compares with the national picture where the FTSE sectors leading profit warnings in Q1 16 were: Support Services (9), General Retailers (8) and Media (7).
The FTSE sectors with the highest percentage of companies warning in the year-to-date are: Oil Equipment, Services & Distribution (50%), Mobile Telecommunications (50%) and Electronic & Electrical Equipment (48%).
Mr Kelly added: “Resilience and flexibility remain vital and the markets expect to see companies focus on operational improvement, and on capital and portfolio management. Outside a major shock, a significant increase in profit warnings feels unlikely. However, neither is the level of profit warnings likely to fall much further as there is still too much uncertainty and significant potential for management and investor misreads.”
“I have learned a new phrase, Volatile, Uncertain, Complex and Ambiguous (VUCA) and it is hard to think of a more apt description for the outlook in 2016. The year began with volatility in spades, with a rapidly falling stock market only for it to recover. This highlights how tough it is for companies to read and predict, with mixed signals and the potential for sharp changes in sentiment, prices and demand despite the UK apparently in a period of sustained growth.
“Having said that there is the potential for significant upside, once Brexit is out of the way and the second half of the year could see some pent up demand for action in new debt and equity issues and deals. “Be prepared” seems to be a good motto and not just for scouts.”
