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More evidence of slowdown

‘New economic realities’ prompt rise in profit warnings

Goals Soccer CentresThe second highest number of profit warnings by Scottish listed companies since 2009 was registered in the last quarter 2015, adding further evidence of a slowdown in activity.

There were six warnings in Scotland in the final quarter of last year, the same as Q3, while the UK and Ireland recorded a total of 100 – also the highest since 2009, according to analysis by EY.

These included Goals Soccer Centres (9 Nov), shop and office fitter Havelock Europa (18 Nov), distribution business Menzies (24 Nov) and transport group Stagecoach (9 Dec) which was affected by the Paris terror attacks.

Other high profile alerts included Home Retail Group (21 Oct), William Hill (23 Oct), Amec Foster Wheeler (5 Nov) Hornby (10 Nov), Rolls-Royce (12 Nov), Bovis (19 Nov), Jaguar Land Rover (24 Nov), Serco (7 Dec) and Game (23 Dec).

Scotland’s highest quarterly total in the last seven years was eight which was recorded in the final quarter of 2013.

In 2015 a total of 16 profit warnings were recorded in Scotland which represents 5% of the UK and Ireland total of 313.

Support services and travel & leisure were two of the sectors which issued the highest number of profit warnings in both Scotland and the UK and Ireland, while the latter also had electronic & electrical equipment, general retailers and media.

Colin Dempster head of restructuring at EY in Scotland said: “Although companies are benefiting from a period of economic growth they are also contending with intense competition and rapid economic and structural change in their markets.

“Oil & Gas is the most obvious example of a sector under pressure, but it is not the only industry struggling to get to grips with new realities.

“In this environment, companies need to undertake a realistic assessment of their business and their market, looking at their operational and capital resilience and where and how they can create value.

“This should help businesses build more robust forecasts and adapt quickly to change in these fast moving markets. Out of the 240 companies warning last year, 59 – or just under a quarter – warned more than once.

“With each warning leading to a median share price fall of just under 14% in Q4, failure to forecast accurately can be very costly.”

Pressure mounts on oilfield services

An average Brent Crude price of below $50 a barrel proved to be a powerful catalyst for further CAPEX cuts and efficiency drives from upstream customers, who had started the process of boosting weak returns when oil prices held above $100.

BPThe oil price shock added a new level of intensity in 2015, with 50% of all FTSE oil equipment, services & distribution companies warning. While this was the highest of any FTSE sector none of these was in Scotland.

Barry Fraser, EY transaction advisory services executive director based in Aberdeen, said: “It is hard to discount the idea that 2016 might be even tougher for oilfield services companies.

“Particularly when Brent Crude drops to below $30 a barrel and the market lacks obvious catalysts to sustain a price much above $50 – the point where so many companies struggled in 2015. With cash buffers and previous backlogs running out, we expect the industry to undergo a further difficult period of adjustment in 2016 and for the sector to make some fundamental changes to protect its future.

“To combat volatility, businesses need more flexible cost bases and greater diversity across geographies, customers and sectors to reduce vulnerability.

“M&A can play a key part in cost reduction and there are plenty of opportunities to consolidate a highly fragmented industry, with 1,500 oilfield service companies operating in the UK market and significant excess capacity.”

Economic outlook

Colin Dempster concludes, “Most businesses are standing up to the test, but the New Year brought new twists on familiar challenges. Geopolitical tensions are rising. China’s economic path has become less smooth, with uncertainty feeding into global markets. Low oil prices should be more of a blessing than a curse, but increasing market tensions threaten to swamp economic benefits.

“We expect to see companies building resilience by intensifying their focus on operational improvement and their capital and portfolio management.

“Without operational and capital flexibility, companies will struggle to adjust their business models to rapidly shifting markets. The one option businesses don’t have in this market is to do nothing. They have to adapt to the challenges ahead to thrive and survive.”

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