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Biggest setbacks since credit crunch

Profits warnings rise on wet weather, oil and media slump

Irn-Bru CommonwealthScotsmanA surge in the number of Scottish listed companies issuing profit warnings has been attributed largely to the oil price slump and macro-economic factors such as the slowdown in China.

Across the UK the number of warnings was its highest since the financial crisis, indicating a more cautious outlook to growth prospects.

AG Barr, Aggreko, Johnston Press and SSE were among six Scottish companies in the last quarter which informed shareholders to expect lower earnings.

Soft drinks firm Barr was impacted by the wet weather, while Johnston Press continues to struggle with declining print sales and advertising.

EY said 79 profit warnings were issued across the UK, a third more than the previous quarter (57) – the biggest percentage increase in almost four years.

Among the companies declaring a slide in profits were Balfour Beatty, Pearson and Roll-Royce. The Tunisia terror attack and the economic crisis in Greece will hit figures at travel companies such as Tui.

Global growth concerns and market instability once again hit forecasts this summer, as China wrestled with its economic transition and US interest rates moved back onto the agenda.

Colin Dempster head of restructuring at EY in Scotland said: “Six [in Scotland]  is a significantly high number of profit warnings in one quarter compared to historical averages.

“As well as the factors affecting the UK, the slowdown in Scotland’s North East, for so long a real engine of growth, is starting to impact the broader Scotland picture.

“The key word here is confidence and when that starts to erode, consumers vote with their feet.”

Overall, 5.6% of UK quoted companies issued profit warnings in Q3 15, the highest third quarter percentage since the credit crisis.

The FTSE sectors leading profit warnings in Q3 15 were: Support Services (16), Software & Computer Services (10), Media (9) and Travel & Leisure (8).

Divergence and disruption contribute to increased warnings

Alan Hudson, EY’s head of restructuring for UK & Ireland, said:  “Macro-economic concerns created by Chinese stock market volatility and the possibility of US interest rate moves have created uncertainty for UK listed businesses, but the macro environment is only part of the story.

“Even in the UK’s consumer sweet spot, some companies are struggling to forecast and meet earnings expectations as technological disruption requires them to rapidly adapt and invest.

“Many businesses are still thriving, but global growth is undoubtedly patchier, whilst demand, prices and currencies are more volatile. These are testing conditions in which to operate and forecast. The increasing need to invest to keep pace with new entrants and developments only amplifies the challenge.

“Record M&A activity reflects companies’ efforts to adapt to new patterns of growth and rapid changes in technology and behaviour. Active capital allocation and a strong focus on operational resilience are vital weapons in this disrupted recovery.”

Disruptive forces create earnings challenges for Travel & Leisure

Companies in the FTSE Travel & Leisure sector issued eight profit warnings in Q3 15, the highest number for almost eight years.

In the last twelve months, 22% of the FTSE sector has issued a profit warning compared with 12% at the same point in 2014.

To some extent this increase is due to one-off events. Tunisia and Greece are obviously major UK holiday destinations and volatile exchange rates also hit exposed travel companies early in the season. But, the sector isn’t immune to disruptive forces that will create further earnings challenges.

high streetColin Dempster adds: “As well as travel and leisure, retail has also been hit hard. To cash in during the final quarter of this year the retail sector will need to win the unremitting and costly battle to keep pace with changing consumer behaviour.

“Black Friday will be the first and arguably the biggest test, followed by the long run into Christmas. It’s all about who can capture consumer imagination, hold their pricing nerve and literally deliver the goods.

“Christmas or not, consumers are looking for value and for seamless service across all channels, with the bar constantly moving upwards. Fulfilment has become one of the main battle grounds, with competition for speed and convenience hotting up.”

Economic outlook

Colin Dempster concludes: “The outlook for Scotland is mixed. We can expect a continuance of the low oil price to have a wider effect in 2016 as it ripples down the supply chain and the crisis in the steel industry will also affect general business confidence.

“Other sectors are faring better with Financial Services seeing continued growth. Even Scotland’s tourism industry might see a benefit as Britons again favour staycations for next year’s summer breaks.”

From a UK perspective Alan Hudson adds: “With markets changing so fast and companies’ profits being buffeted by many forces, we expect to see a greater divide in corporate experiences. Even in the same sector, companies could have very different outlooks depending on their operational agility and how well they have allocated their capital in terms of investment – and deals.

“Many of the issues highlighted in recent profit warnings relate to long-term adjustments in global and sector growth patterns that will require companies to look beyond the current cycle.

“In response, companies have been consistently readying for the fight against low growth, shifting risks and disruptive realities with a strong focus on operation improvement and capital allocation.

“M&A has reached record levels in 2015, as companies have reshaped their businesses to generate the capital needed to invest in faster growing areas and invested in deals that will help them to consolidate, cut capacity, reduce costs and capture the expertise necessary to  meet the demands of the new economy.

“We expect to see more of the same in the next twelve months as the global economy continues to adjust.”

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