South West profit warnings reach their highest figure for four years in 2019

Lucy Winterborne, EY’s Head of Restructuring in the South West. Picture by Andrew Higgins/Thousand Word Media

Profit warnings issued by listed businesses in the South West in 2019 were their highest since 2015, according to EY’s latest quarterly Profit Warnings report.

In the region, 25 profit warnings were issued, the highest yearly total since 2015, but still well below 2008 levels which saw a peak of 44 profit warnings issued. One positive in an otherwise difficult year, was the dip in profit warnings in the fourth quarter (October-December) to just three, the lowest rate of the year and the lowest rate for a fourth quarter since 2007.

The FTSE sectors that were hit the hardest in the region throughout the year were: Retailers (five) and Software & Computer Service (four).

Lucy Winterborne, EY’s Head of Restructuring in the South West, commented: “2019 was a challenging year, full of twists and turns that undoubtedly contributed to a remarkably high level of profit warnings. A toxic combination of protracted uncertainty and rapid sector change left many companies facing an uphill struggle to meet their earnings forecasts in 2019.

“It’s therefore not surprising that 2019 saw the highest number of profit warnings issued for four years. However, business owners should be encouraged that the year ended positively and perhaps 2020 will bring greater certainty.”

UK warnings also ‘exceptionally high’

UK quoted companies issued 313 profit warnings in 2019, rising by 9% year-on-year (287 in 2018) to reach the highest annual total of warnings since 2015. Particularly striking is the proportion of FTSE listed companies warning in 2019 (17.8%), which marginally surpassed 2008 (17.7%) at the peak of the financial crisis.

In Q4 2019, 22% of UK profit warnings blamed ‘political uncertainty’, according to the report. Over a third of warnings also pointed to delayed or cancelled contracts, a clear indication of the impact of uncertainty on earnings.

Impact of uncertainty on corporate decision making

Sectors with the largest exposure to the impact of uncertainty on consumer and business discretionary spending issued the most profit warnings in 2019.

FTSE Retailers issued the most warnings in 2019 (32), followed by FTSE Industrial Support Services and FTSE Software & Computer Services, which both issued 25 warnings, hit by the impact of delayed decision making that also led to a seven-year high in warnings from FTSE Construction & Materials.

FTSE Technology Hardware & Equipment had the highest percentage of companies warning in 2019 at 56%, with earnings hit by the US-China trade dispute and slower growth in key end-markets – especially automotive.

2020 outlook

Winterborne concludes: “Easing political tensions and promises of UK fiscal expansion could help more companies beat depressed expectations in 2020. The median share price fall on the day of warning fell to a two-year low in the second half of 2019, which suggests that investors have priced in some of their concerns.

“But, underlying stresses and tensions mean that profit warning numbers could rise quickly again. Companies need to remain flexible, agile and alert to changes on multiple horizons.”