Economy already faltering
Profit warnings rocket as ‘true test yet to come’
Travel and leisure was the hardest hit sector
Profit warnings issued by UK stock market quoted companies rocketed in the first quarter of this year, showing the economy was already faltering ahead of the coronavirus lockdown.
EY’s head of restructuring in Scotland Colin Dempster says UK companies are now facing a “unique set of challenges” and warns that the “true test may be yet to come” when the life support of government packages comes to an end.
EY’s regular monitor noted 301 warnings in the three months to the end of March – which includes just one week of the lockdown – compared to 313 for the whole of 2019.
The Q1 figure is up from 89 in the corresponding quarter last year, representing a 238% year-on-year increase. There were 10 in Scotland against seven in Q1 2019.
Over a fifth of the UK’s quoted companies issued a profit warning in Q1 2020, more than the percentage of companies warning in the whole of 2008 (17%), the height of the financial crash.
Although 77% of profit warnings blamed COVID-19, EY says significant parts of the economy were struggling before the pandemic. In January 2020, EY recorded that warnings had increased by 43% year-on-year, when compared to the same month last year.
Mr Dempster said: “COVID-19 has intensified the pressures businesses were already experiencing as a result of political uncertainties and rapid structural changes, which contributed towards UK profit warnings reaching a ten-year high in 2019.
While profit warnings are at an all-time high in Scotland, the relatively low number is partly due to there being fewer listed businesses based in Scotland from sectors which have been more adversely affected by COVID-19, such as travel & leisure and hospitality.
Across the whole UK market travel & leisure was the most dramatically affected, with 70% of the sector issuing a profit warning, followed by industrial materials (63%) and retailers (61%). All but five of the 42 FTSE sectors EY tracks issued COVID-19 related warnings in Q1 2020.
Colin Dempster: The true test may be yet to come
COVID-19 is expected to deliver the biggest blow to UK GDP since the First World War, says EY.
The economic forecasting group, EY ITEM Club, estimates that UK GDP will fall by 6.8% 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.
Mr Dempster said: “Companies face a unique set of additional challenges as they work to safeguard business continuity and the health of employees and customers.
“The true test may be yet to come, when the life support of government packages comes to an end and they resume full financial responsibility for wages as well as the payment of VAT and rent, both of which are likely to have accrued for months.
“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.”
Confidence slumps among CFOs
Business confidence has seen its largest quarterly fall on record, according to Deloitte’s latest CFO survey, reversing sentiment in Q4 2019 which showed the largest increase in sentiment following the general election.
The latest survey among 104 CFOs took place between 8 and 22 April and showed 84% of CFOs less optimistic about the prospects for their company than they were three months ago.
This is the lowest business confidence reading on record and, in stark contrast to Q4 2019 where a majority (53%) of CFOs said they were more optimistic about the financial prospects of their company.
Ian Stewart, chief economist at Deloitte, commented: “The COVID-19 pandemic has seen business confidence drop from an all-time high to an all-time low in just three months.
“CFOs expect the lockdown to ease in May and June and demand in their own sectors to start recovering later this year. But there is no expectation of a quick snap back in activity, with most CFOs assuming revenues will not return to pre-crisis levels for at least a year.”