Profit warnings issued by listed businesses in the South West reached a record-breaking high in the first three months of 2020 – higher than any previous quarter in the last twenty years – according to EY’s latest Profit Warnings report.
19 profit warnings were recorded by EY between 1 January and 31 March 2020 in the region, more than double the number for the same period in 2019, representing an increase of 138%.
Unsurprisingly the significant increase in warnings was attributed to the COVID-19 crisis, which has temporarily paralysed many businesses, with very few sectors immune from its effects. In the South West profit warnings were spread across a wide range of sectors, but the businesses most affected were those operating in Travel & Leisure (4).
Lucy Winterborne, head of Restructuring at EY in the South West commented: “Political uncertainties and rapid structural change pushed UK profit warnings to a ten-year high in 2019. COVID-19 has created new problems, but it has also accelerated structural change and exacerbated existing weaknesses.
“When lockdown lifts, it will undoubtedly ease some pressures, but these underlying issues will remain – alongside new challenges.”
“COVID-19 has had a massive impact on the operations of most businesses, regardless of size. Whilst the challenges being faced by those in the Private Mid-Market have been widely reported, these latest figures show that larger listed businesses are also coming under increased pressure. We are recording profit warnings on a scale and pace that far exceeds anything we’ve seen since EY analysis began in 2007.
“When compared to other regions in the UK and outside of London, the number of profit warnings in the South West is not out of kilter. Given the nature of our market and business demographic it is not surprising that one of the region’s biggest sectors, Travel & Leisure, is where listed businesses in the South West have recorded the most profit warnings this quarter.
“Some businesses will be able to weather the COVID-19 storm more effectively than others. Those with cash reserves or the ability to raise additional finance are more likely to bounce back at a faster rate, whilst for others it will be a slower, more difficult journey. The sector a business operates in will also inevitably influence the speed of recovery once lockdown measures are eased and the country settles into a new normality, although this is unlikely to happen in the short term. Some of the measures implemented by Government, including the Coronavirus Large Business Interruption Loan Scheme and the COVID-19 Corporate Financing Facility, may go some way to supporting larger businesses through this current crisis.”
A years’ worth of UK profit warnings issued in Q1 2020
301 profit warnings were issued by UK-listed businesses in Q1 2020, almost equal to the entire number issued in the whole of 2019 (313) and 5% higher than the total for 2018 (287). Compared to the same period last year (Q1 2019), warnings rose from 89, representing a 238% year-on-year increase.
Although 77% of profit warnings blamed COVID-19 in the first quarter of 2020, it is worth noting that significant parts of UK plc were struggling before the pandemic. In January 2020, EY recorded warnings had increased by 43% year-on-year, when compared to the same month last year.
By percentage of companies warning, FTSE 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.
A difficult reboot
COVID-19 is expected to deliver the biggest blow to UK GDP since the First World War. 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.
Winterborne commented: “We know from previous crises that one of the biggest tests comes when companies need to reflate balance sheets, restock inventory and depend on supply chains that have been similarly tested.
“This time, companies face a unique set of additional challenges as they work to safeguard business continuity and the health of employees and customers. 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.”
