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Oil slump blamed for record profit warnings

RBS hqScotland has recorded its highest ever number of quarterly profit warnings, mainly because of the oil price slump.

Nine were issued by listed companies registered in Scotland out of 76 in the whole of the UK, according to EY’s latest Profit Warnings report.
The Scottish companies came from sectors ranging from industrial engineering, support services to travel and leisure. They included transport company FirstGroup, Royal Bank of Scotland, the stem cell company Collagen Solutions, Fife shop and office fitter Havelock Europa, and the oil and gas services company Plexus.

The quarter also saw warnings from Shell, Pearson, JD Wetherspoon, TalkTalk and Home Retail Group.

The Scottish figure is three more than in the previous quarter, more than three times greater than the first quarter average (2.5) for the last ten years, and seven more than Q1 last year.

Colin Dempster (below) head of restructuring at EY Scotland, said: “The main driver behind the significant increase in the number of profit warnings by Scottish companies appears to be the impact of the low oil price on the supply chain with four out of the nine companies citing the falling oil price as the cause.

Colin Dempster“The oilfield services sector in Scotland is suffering most and we have already seen significant cost cutting. The concern must be that with oil showing no signs of a sustained recovery that the major players in the market will undertake a further round of capex cuts in H2 2016 which would have a significant effect on Scotland’s oilfield services sector.

“Weak oil prices 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, 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.”

UK picture

UK quoted companies have issued a remarkably high number of profit warnings given the substantial downgrade in profit expectations at the end of 2015. UK quoted companies issued 76 profit warnings during the first three months – down from 77 in the same quarter of 2015 and 24 fewer warnings than the previous quarter.

In the twelve months to the end of the first quarter 17.2% of UK quoted companies issued profit warnings compared with 16.5% at the same point in 2015.

“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%).

Resilience and flexibility are vital                                 

Mr Dempster commented: “Resilience and flexibility remain vital in these markets and we expect to see companies maintain their focus on operational improvement, and on capital and portfolio management.

“Outside a major shock, a further dive in expectations makes a further profit warning peak unlikely. However, the level of profit warnings is unlikely to dip too low while there is still so much uncertainty in the outlook and significant potential for misreads.”

Volatile, Uncertain, Complex and Ambiguous (VUCA)

The economic environment in 2016 can be most aptly described by the acronym VUCA, as explained by Mr Dempster: “The year began with volatility in spades, until central bank action and rising oil prices inspired a late quarter rally.

“But, these are clearly tough markets for companies to read and predict, with mixed signals and the potential for further sharp changes in sentiment, prices and demand. The ambiguous outlook gives potential for misreads and we’re unlikely to see a significant drop in the number of UK profit warnings, despite the drop in expectations and sustained growth.
“There is the potential for significant upside, if the clouds clear in 2016. The second half of the year could see a rush of action in new debt and equity issues and deals, if oil finds a sweet spot, inflation remains within acceptable bounds and geopolitical uncertainties lift to raise confidence.  ‘Be prepared’ seems be a good motto for the rest of 2016.”

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