Profit warnings are heading for record
Virus impact spreads from weak to strong
LONDON-LISTED companies are close to breaking the annual record for the number of profit warnings issued following a first half surge in earnings downgrades, according to research firm EY.
The accountancy giant said that due in large part to the pandemic, 466 profit warnings were issued by Uk-quoted companies during the first half of the year.the annual record for most earnings downgrades is 506, set in 2001, when the economy suffered the twin blows of the dotcom crash and 9/11.
Market-listed companies issued a quarterly record of 301 warnings during the first three months of 2020 due to the virus. A further 165 were released during April to June. EY said a third of companies released downgrades during the first half.
Nearly two thirds of the second quarter profit warnings came from companies that had not downgraded their profit expectations during the past 12 months.
Alan Hudson, EY turnaround and restructuring leader, said this indicates the economic impact of the virus has spread from weak to healthy companies. He said:
“Unsurprisingly, the most immediate and dramatic impact of Covid-19 has been acutely felt by companies whose existing structural challenges have been exacerbated by the pandemic.
“However, many businesses that were sound before the virus, have also been forced to fundamentally reassess their expectations and business plans. It’s vital that UK boards don’t underestimate the depth and extent of both the immediate and long-term challenges ahead.”
During the first quarter, the companies with the most profit warnings were in the sectors most affected by lockdown, such as travel, leisure, hospitality and retail.
Of the profit warnings issued in the first half, 35 per cent came from FTSE 100 and FTSE 250 companies, double the 2019 total. “The size of a business appears to offer no protection, with more FTSE 350 companies than ever issuing profit warnings,” EY partner Lisa Ashe said.
“Boards need to guard against complacency and be ready to take swift, 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.”
However, the second quarter saw that list of companies change to reflect the second order impact of the outbreak, with media groups, industrial and support services companies and consumer finance firms being the most common source of earnings downgrades.
Government borrowing is skyrocketing due to the pandemic. On Tuesday, the Office for National Statistics is expected to say the Treasury borrowed £38million from debt market investors in June, more than five times the amount it borrowed during the same month last year.
On Friday, the closely watched Markit/ CIPS purchasing managers index is tipped to show Britain’s powerhouse services sector returned to growth last month.