Warnings at new high
Supply disruption a new hazard as profits hit
The travel sector was hard hit in the first half of the year
* Profit warnings issued in the first half of 2020 hit a 20-year high in Scotland
* Scotland has the smallest increase of profit warnings across UK locations
* 94% of listed businesses in Scotland cite COVID-19 as the reason for warning
* Travel & Leisure sector most affected in Scotland
Disruption to supplies is a potential hazard facing companies as they adjust to the twin challenges of the pandemic and Brexit, according to a restructuring specialist.
Fiona Taylor, associate partner at EY Scotland, says supply chain vulnerability will be one of the biggest areas of risk for companies in the next six months.
Ms Taylor believes the issue will feature highly on corporate agendas, not least because of the additional challenges associated with Brexit.
“There are already large-scale restructurings in the UK market that could have considerable impact along supply and value chains,” she says.
“Boards need to guard against complacency and be ready to take swift and decisive action to reshape their business to face a different future than they imagined just a few months ago. Companies could find that previously healthy parts of their business are no longer profitable. This is a pivotal moment for Scotland and UK plc.”
Her comments came as new data from EY reveals an unsurprisingly high number of profit warnings as the economy almost ground to a halt.
Across the UK, almost a third (33%) of listed companies – compared to 18% in 2019 – issued a profit warning in the first half of 2020. EY recorded 466 profit warnings in H1 2020 – considerably more than the total number issued last year (313).
The number issued by listed businesses headquartered in Scotland in the first half of 2020 increased by 45% year-on-year, with 94% citing the impact of the COVID-19 pandemic.
EY recorded 16 profit warnings north of the border – a record breaking 10 in the first quarter and six in Q2. This was higher than any previous H1 in the last 20 years and compares to 11 in the same period last year.
Profit warnings were spread across a wide range of sectors in Scotland in with businesses operating in the Travel & Leisure (three) sector most affected.
While the increase of profit warnings for Scottish businesses (45%) has reached a record high for the first half of the year, it is the smallest increase across all UK locations, attributed to many of its businesses being in sectors that were more able to adjust to the new environment.
Year-on-year the biggest increases in profit warnings were seen in the North East, which was 5.5 times more than last year, followed by London with 4.6 times as many profit warnings than H1 2019, while East Anglia recorded four times as many.
|Year-on-year % increase in profit warnings|
Colin Dempster, Head of Turnaround and Restructuring Strategy at EY in Scotland, commented: “Scotland’s performance compared with other UK locations in terms of profit warnings, reflects the types of listed companies based here.
“A large proportion of the Scottish economy has been able to adapt to lockdown conditions for example, the services industry has been able to shift to virtual ways of working easier than other sectors where social distancing poses much more challenging conditions for operations.
“However, the oil and gas sector is also a key component of Scotland’s economy and has experienced a particularly challenging time across the supply chain due to a significant fall in both demand and the oil price. This is likely to have a subsequent impact on the wider business landscape.
“It’s vital that businesses in Scotland don’t underestimate the depth and extent of both the immediate and long-term challenges ahead.
“It is still a highly uncertain time for businesses, who are adjusting to new ways of working and changing levels of demand, with potential cliff-edges to come in government support and further twists and turns likely in Brexit negotiations. The economy is opening up, but it’s early days.”
CFOs anticipate a slow and gradual recovery, says Deloitte survey
Finance leaders expect a slow pick-up in activity, with no quick bounce back anticipated, according to Deloitte’s latest CFO survey.
Almost half of CFOs surveyed (49%) do not expect demand for their own businesses to recover to pre-pandemic levels until after Q2 2021.
The Deloitte CFO survey for Q2 2020, which gauges sentiment amongst the UK’s largest businesses, took place between 26th June and 8th July 2020.
A total of 109 CFOs participated in the latest survey, including CFOs of 23 FTSE 100 and 45 FTSE 250 companies. The combined market value of the UK-listed companies that participated is £404 billion, approximately 19% of the UK quoted equity market.