A 20-year analysis of profit warnings, which includes the impact of events such as the dot.com crash, 9/11, and the financial crisis, reveals that 10% of UK PLCs go bust within a year of issuing three or more successive warnings, according to a report released by EY on Monday.
EY, which has been analysing listed company profit warnings for the last two decades, has recorded over 6000 warnings by more than 2000 companies since 1999. On average 15% of UK quoted companies issued warnings each year and no sector has been immune from warning.
Alan Hudson, Head of Restructuring at EY, UK & Ireland said, “When EY started tracking UK profit warnings in 1999, just 13% of households had internet access, the first smart phone was still a decade away and fax machines still had a prominent place in our offices.
“In the last two decades we’ve seen radical changes not only in technology, but also our economy and capital markets. In 2019 news travels fast, and capital also moves with increasing pace. Combined with a heightened level of uncertainty, this has significantly changed the speed of stakeholder response to profit warnings.”
‘Profit warning Thursday’
January is the month in which most companies are likely to warn, whilst Thursday is the most common day. By sector, Support Services companies, including outsourcers have issued the highest number of profit warnings in total in the last 20-years (over 850 warnings), whilst General Retailers have seen the greatest proportion of its companies warn on average each quarter (9%).
Hudson said, “Both sectors have significant exposure to fluctuations in business and consumer confidence. But both sectors are also structurally vulnerable to profit warnings. Outsourcers, due to their exposure to the contract cycle, and retailers, due to radical changes in consumer buying behaviour.
The biggest spikes in UK profit warnings in the last twenty years have followed significant global economic shocks. In 2001, a combination of the dot-com crash, 9/11 and a global recession, led to the highest number and percentage (22.7%) of UK quoted companies warning in the last 20-years. This is followed by another peak during the global financial crisis (2008), when EY recorded 449 profit warnings from 17.7% of UK quoted companies.
Hudson said, “Our figures demonstrate that profit warnings can increase dramatically when companies don’t have time or agility to adjust to rapid changes in the economy.
“Companies have had some time to prepare for a variety of Brexit scenarios. However, a further economic shock could cause profit warnings to spike higher later this year, with warning levels already elevated by rising uncertainty.”
Count of three and out
EY’s analysis also shows that the third profit warning is very often a bruising or even a knock-out blow. Since 1999, 18% of companies issuing profit warnings have warned three or more times within a year, according to EY’s analysis. Of these companies, 10% go into administration and a fifth will delist within a year.
EY research also found that by the morning of the third warning, a quarter of CEOs and a fifth of CFOs have left their companies. Within a month of their third warning, more than 10% of companies have also reported a covenant breach or reset, rising to 25% within a year.
The impact of three warnings on investor confidence is also demonstrated by the fact that just 9% of companies regain their original share price a year after issuing three or more warnings.
One of the most striking parts of EY’s analysis is the speed within which companies are moving from their third profit warning to their first restructuring event, such as an administration, CVA or debt restructuring.
In most cases, the median gap between a company’s third profit warning and a restructuring event, has shrunk to just 91 days since 2016. This compares to 156 days pre-2016.
Hudson added, “Investors and stakeholders are clearly acting faster when companies issue a chain of profit warnings.
“If companies are forced to reforecast their earnings, it’s essential that they act boldly and quickly to grasp and deal with the fundamental issues behind their profit warning. Companies often underestimate their problem ,or hope that something will change.
“As capital moves with increasing pace, it is more important than ever that we understand the triggers behind profit warnings and build resilience to help companies reshape their results and stop a profit warnings chain reaction.”