Firms given stimulus to invest
Election result cuts profit warnings to two-year low
Between April and end June, quoted companies issued just 57 warnings, six fewer than the same period of 2014 and a drop of 26% compared to the previous quarter.
Rising disposable incomes, low interest rates and a buoyant housing market provided sufficient economic momentum for listed businesses, according to EY’s latest report.
The General Election came in the middle of this period and the result encouraged businesses press the button on contracts, thereby easing pressure on company cash flows.
Overall, 4% of UK quoted companies issued profit warnings in the second quarter, making this the lowest number and percentage of companies warning since the third quarter of 2013.
Among those that issued warnings in the period were fashioner retailer French Connection (April) and tool rental company HSS Hire (June) which was one of the first companies to float this year.
The Main Market saw a significant drop in warnings. However, profit warnings from AIM companies remained steady at 35 (4.2%) against 37 (4.4%) in Q1 2015.
The FTSE sectors leading profit warnings in Q2 were Software & Computer Services (10) Support Services (7), Electronic & Electrical Equipment (7), Media (5) and General Retailers (5).
Improving landscape but expectations could rebound too fast
Profit warnings normally tail off during the summer, but this is an especially dramatic fall in warnings given the post-crisis highs recorded in previous quarters.
Alan Hudson, EY’s head of restructuring for UK & Ireland, said: “This period was a quarter of two halves.
“In April, UK profit warnings again hit a seven-year high. However in May an improving global economic outlook and an unexpectedly decisive General Election result appeared to set the ball rolling on many contracts and investment decisions. This helped companies meet lowered forecasts and feel more confident about the future.
“The danger is – as ever – that expectations rebound too fast. Summer has brought renewed uncertainties and challenges. Even with helpful economic winds, there are obviously deep and enduring issues dragging on profits.”
Derek Hyslop, executive director of restructuring at EY in Scotland, added: “With the recent EY Scottish ITEM Club forecast suggesting that the Scottish economy is generally lagging the continuing UK recovery, it is important that Scottish companies continue to focus on their operational and financial resilience.
“This is true of Scottish companies generally, but in particular for those in the oil and gas sector given the ongoing challenges posed by the oil price fall.”
Software & Computer Services sector issues highest number of warnings
Companies in the FTSE Software & Computer Services sector issued 17 profit warnings in the first half of 2015, the most of any FTSE sector. The UK quoted sector is one of the largest and covers a diverse range of businesses.
However, this volume of warnings now means that a quarter of the sector has warned in the last 12 months and recurring themes suggest that many companies in the sector lack the resilience needed to make the most of the significant opportunities that lie ahead.
The sectors’ strong international focus brings geographical and currency challenges into play. The strong dollar has dented the growth prospects of several markets, especially emerging economies.
The weak euro hurts UK companies exposed to the region – and ongoing Eurozone uncertainty adds a further unsettling element. However, “disruptive” areas like cloud computing, big data, smart mobility, social networking and the ‘Internet of Things’ are growing at considerably faster rates, whilst also being the key drivers for new system and application growth.
Tech winners & losers
Simon Pearson, EY technology transaction partner, said: “As in every period of rapid and significant change, some companies emerge as winners and others get left behind. A number of large technology businesses, who previously dominated their sector, have fallen by the way side in recent years.
“Indeed, dominance and size can be a hindrance if vested interests and over reliance and attachment to old models blinker management and inhibit their ability to adapt.”
Smaller companies should be more nimble, but many fast growing companies have heighted expectations and they are naturally vulnerable to problems with a single dominant contract. The UK profit warning data shows just that, with all but one of the 17 warnings issued this year coming from companies with a turnover below £200m.”