Profit warnings soar as pandemic batters business
Profit warnings issued by quoted East of England companies reached their highest peak of any quarter since 2005 in the first three months of 2020, according to EY’s latest research.
Seven profit warnings were recorded in the region by EY between January 1 and March 31 – more than double the number in the same quarter last year (three) – representing a 133 per cent year on year increase.
Compared to other parts of the UK, listed businesses in the East of England reported the fewest number of profit warnings in Q1, on a par with the North East.
Unsurprisingly, the significant national increase in warnings was attributed to the COVID-19 crisis, which has temporarily paralysed many businesses, with very few sectors immune from its effects.
Stuart Wilkinson, Office Managing Partner at EY in the East of England, said: “The sectors issuing the highest number of profit warnings were those most exposed to the impact of national lockdowns and in many cases were already showing signs of stress.
“COVID-19 has created new problems but it has also accelerated existing structural change and exacerbated existing weaknesses. When lockdown lifts it will undoubtedly ease some pressures but these underlying issues will remain.
“These latest profit warning figures are not a surprise and we expected to see a significant increase in the number of listed businesses issuing profit warnings, impacted by COVID-19, and the resulting lockdown measures introduced by the Government.
“No sector has escaped the impact of COVID-19 and across the UK businesses operating in the Travel & Leisure and Retailers have understandably been the hardest hit due to a lack of consumer spend.
“The fact the East of England reported one of the lowest numbers of profit warnings in the UK during the first quarter of the year reflects the business environment of the region, which features a larger concentration of businesses operating in the private middle market and SMEs.
“Some of the measures implemented by the Government, including the Coronavirus Large Business Interruption Loan Scheme and the COVID-19 Corporate Financing Facility, may go some way to supporting larger businesses through this current crisis.
“However, regardless of size, businesses will still have had to contend with the same challenges, including cashflow and managing employees.”
A total of 301 profit warnings were issued by UK-listed businesses in Q1, almost equal to the entire number issued in the whole of 2019 (313) and five per cent higher than the total for 2018 (287).
Compared to the same period last year (Q1 2019), warnings rose from 89, representing a 238 per cent year-on-year increase.
Although 77 per cent of profit warnings blamed COVID-19 in the first quarter of 2020, it is worth noting that significant parts of UK plc were struggling before the pandemic.
In January, EY recorded warnings had increased by 43 per cent year-on-year. By percentage of companies warning, FTSE Travel & Leisure was the most dramatically affected, with 70 per cent of the sector issuing a profit warning, followed by Industrial Materials (63 per cent) and Retailers (61 per cent). All but five of the 42 FTSE sectors EY tracks issued COVID-19 related warnings in Q1 2020.
COVID-19 is expected to deliver the biggest blow to UK GDP since the First World War. The economic forecasting group, EY ITEM Club, estimates that UK GDP will fall by 6.8 per cent in 2020, if the UK lockdown begins to lift at the end of May, and the UK experiences a slow ‘U’ shaped recovery without any major relapses.
EY expects the number of profit warnings to fall but distress levels to rise – with echoes of 2008 to 2009 and the aftermath of the financial crisis. Notably, there were more insolvencies in 2009 than 2008. The report anticipates a significant increase in corporate insolvencies when the lockdown lifts.
Wilkinson said: “We know from previous crises that one of the biggest tests comes when companies need to reflate balance sheets, restock inventory and depend on supply chains that have been similarly tested.
“This time, companies face a unique set of additional challenges as they work to safeguard business continuity and the health of employees and customers.
“It is wise for companies to take a slow and steady approach to restarting operations that allows for flexibility, so they can react to continued uncertainty for some time to come.”