Home Business News Profit warnings from UK-listed companies continue to rise and remain above average for fifth consecutive quarter

Profit warnings from UK-listed companies continue to rise and remain above average for fifth consecutive quarter

by LLB Finance Reporter
24th Apr 23 8:41 am

UK-listed companies issued 75 profit warnings between January and March 2023, the highest first quarter total since the early stages of the pandemic in 2020, according to EY-Parthenon’s latest Profit Warnings report.

The report reveals that the number of warnings issued in the first quarter of 2023 exceeded the 72 issued in Q1 2022 and that quarterly profit warnings have remained above the 10-year quarterly average, excluding 2020, for five consecutive quarters. The highest number of Q1 warnings was in 2020, when 305 were issued.

Persistent economic uncertainty has played a significant role in many of these profit warnings. More than a third (35%) of profit warnings cited delayed, reviewed, or cancelled contracts, up from 21% in the same period in 2022, as customers paused or cut spending amid volatile and unreliable demand.

The report found that since the start of 2022, 98 companies have issued at least two profit warnings, while a significant cohort of UK companies have faced particularly challenging conditions after entering the three warning ‘danger zone’. Of the 31 companies that have issued three warnings since the start of 2022, 29% have since delisted or are in the process of being sold. This marks a greater-than-average market dropout rate, as typically just one-in-five companies delist within a year of their third warning, most due to insolvency.

Jo Robinson, EY-Parthenon Partner and UK&I Turnaround and Restructuring Strategy Leader, comments: “Economic forecasts may have seen some improvement in recent months, however the extraordinary strength of headwinds over the last two years has left some businesses facing recession-like conditions. This has taken its toll on business confidence and, as pressures move through the supply chain, we’ve seen a higher number of companies warning of delayed or cancelled contracts in comparison to the last quarter.

“This economic uncertainty risks prolonging recovery, even as forecasts improve. Many companies may struggle to build momentum as they contend with increased working capital demands and finance costs.

“We would normally expect to see insolvency activity peak nine to twelve months after a profit warning peak, so the coming year will be crucial. While the UK economy appears to be turning a corner, recovery is not guaranteed. Businesses should continue scenario planning and building solid operational and financial foundations to withstand further shocks and capitalise on growth.”

Technology and Telecoms warnings at a three-year high as sector faces volatility

One-in-five (22%) of Q1 profit warnings were issued by UK-listed companies in the technology and telecommunications sectors with warnings almost tripling year-on-year to 16 in total.

FTSE Software and Computer Services companies issued nine profit warnings in total, the sector’s highest level of warnings since Q2 2020, while warnings from telecoms sectors were the highest since 2018. These sectors have been particularly vulnerable to cost-cutting and uncertain demand, with contract issues cited in over two-thirds (69%) of technology and telecommunication sector warnings.

Many technology companies have also faced difficulties in accessing capital, as increased interest rates, recent turbulence in the global banking markets and other external headwinds create a challenging fundraising environment.

Will Fisher, EY UK Strategy and Transactions TMT Leader, comments: “Significant disruption and uncertainty, particularly in consumer facing markets, is having a knock-on effect on the TMT sector as businesses revaluate their cost bases and delay purchasing decisions. The result is short-term revenue growth challenges for TMT companies, many of which are also trying to prioritise profitability and cash flow as they face a tighter and more expensive lending environment.

He continued: “To navigate these revenue growth and profitability challenges, TMT companies need to look at how they can manage costs and pricing, reduce supply chain vulnerabilities, focus on talent retention and recruitment, and continue to adapt to their customers’ needs – including those on sustainability. Given the uncertain timetable, they may need to take tough decisions about whether they cut costs to protect their funding position, potentially at the expense of their ability to quickly capitalise on the return of revenue growth opportunities.”

A reprieve for retail but challenging times ahead

Remaining sectors with the most warnings in Q1 2023 were FTSE Retailers (5), FTSE Travel & Leisure, and FTSE Electronic & Electrical Equipment, FTSE Pharmaceuticals & Biotechnology, and FTSE Media (all with 4).

The five warnings from FTSE Retailers marks a decrease from the nine issued in both Q4 2022 and Q1 2022, representing the sector’s lowest quarterly total since Q4 2020. However, persistent inflation, high interest rates and tightening consumer spending will challenge an already delicate sector.

Almost a third of listed retailers (30%) have issued two or more profit warnings since the start of 2022, well above the 8% all-sector total. Of the consumer sector companies that moved into the ‘three warning’ danger area since the start of 2022, 30% have gone into administration or have been put up for sale.

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