UK plc profit warnings rocket to three-year high

28th July 2014

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Profit warnings among UK businesses have surged to a three-year high despite the wider economy gathering further pace

Last week the first official estimate for economic growth for the three months to the end of June came in at 0.8%, above its pre-crisis peak while crisis lender, the International Monetary Fund (IMF) said it expects the UK to be the fastest growing advanced economy in 2014.

But despite the better backdrop intense competition, pricing pressure and currency headwinds are still denting expectations, taking UK profit warnings to their highest second quarter total for three years, according to EY’s latest Profit Warnings report.

The research found that UK quoted companies issued no less than 137 warnings in the first six months of 2014, up 9% on the same period of last year and the highest first half total since 2011. Between April and the end of June, there were 63 profit warnings, nine more than the same period last year but 11 less compared with the first three months of the year.

In the first half of the year, 19% of profit warnings cited competitive or pricing pressures, compared with 7% in 2013. Adverse currency movements triggered over a fifth of profit warnings in the first half of 2014, compared with just 3% last year.

E&Y said consumer goods manufacturers in particular found themselves in the crossfire of pricing, currency and competitive pressures. The percentage of companies warning in FTSE Consumer Goods sectors has almost doubled, from 9% in the first half of 2013 to 16% over the same period this year.

The percentage of companies issuing profit warnings also rose year-on-year from 3.8% in the second quarter of 2013 to 4.4% in 2014.

FTSE sectors issuing the highest number of profit warnings in the second quarter were Support Services, Software & Computer Services, with seven apiece and Household Goods and Electronic & Electrical Equipment each with four.

Keith McGregor at EY said: “For UK plc, the improvement in domestic demand has been a welcome fillip and this growth rests on a broader base than 2013, encompassing a rise in investment as well as consumption. However, translating this into profitable growth remains more problematic.

“The pounds rapid rise is one of the biggest pressures on earnings. Although, the problem highlighted in profit warnings isn’t one of sales but of currency translation. Recent history shows that UK exports are relatively insensitive to currency effects. However, the pound’s leap to multi-year highs has caught out a number of companies who translate foreign earnings back into pounds.”

He added that while the recovery has boosted demand, it has not eradicated the austerity mind-set of businesses or consumers. McGregor said: “Moreover, the low level of insolvencies means companies are competing in packed and competitive market place, lowering the normal level of returns.”

However with the countdown to a new era in monetary policy beginning in earnest and the potential for more volatile markets, the report warned that companies need to think carefully about their capital needs and allocations. In addition, low growth in international markets and low inflation will also pose significant challenges.

“Operational and financial fitness are vital to ensure companies make the most of any top line growth and attract investment.  M&A provides the other obvious answer to the growth conundrum. We expect deal volumes to stabilise after several years of decline, with the potential for a modest increase. However, we will continue to see higher value driving sentiment in merger and acquisition (M&A) across all sectors,” added McGregor,

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