First half of 2019 sees spurt in company profit warnings

23 July 2019 Consultancy.uk

Sustained Brexit uncertainty is hitting the UK’s keystone industries hard, with strong ripple effects into the country’s chemical sector, among others. Seen as an important indicator of the economy’s health, the chemicals industry saw five of its six profit warnings blamed upon Brexit in the second quarter of 2019.

Continuing speculation on a No Deal Brexit has hit the UK economy hard. While it might impact the economies most closely linked to it on the continent, it is likely to have a far greater and more immediate impact on Britain. According to Oliver Wyman, a No Deal scenario could reportedly see households stung to the tune of £1,000 thanks to new regulations incurred alone. As a result, consumer confidence continues at a low rate, while the UK’s customer-based economy struggles to make ends meet.

At the start of 2019, this saw Begbies Traynor – the UK’s largest professional services consultancy specialising in the areas of corporate recovery and insolvency – find that the number of businesses in significant distress across the UK stood at 481,000, thanks to a particularly concerning leap of 15,000 during the final quarter of 2018. Now, a new analysis from Big Four firm EY has suggests that the situation is likely to get worse before the end of October.

First half of 2019 sees company profit warnings spurt

EY’s latest Profits Warnings Report has revealed that there were 69 profit warnings between April and June this year. That represents an increase of 19% on the same period last year, a serious acceleration on the 12% increase between the start of 2010 and the end of 2017, and the highest second quarter total of profit warnings since the start of the financial crisis in 2008. However, the impact of this on the affected companies’ share price was actually more severe than during the crisis. The median share price fall on the day the profit warning was issued was 20.9%, higher than the peak level recorded in Q4 2008, which was 20.7%.

Alan Hudson, EY’s UK Restructuring Head, said that if the UK leaves the EU without a deal on October 31st and GDP growth falls to 0.2% next year, this might just be the tip of the iceberg. He stated that he expects to see further profit warnings “from companies exposed to demand and supply shocks” at that point.

Hudson elaborated, “Warnings would certainly increase in sectors with exposure to import and export disruption, including food producers and food retailers, where profit warnings are currently low. There is now clear evidence that prolonged Brexit uncertainty has created a hiatus in business activity, with companies struggling to forecast and plan. And the economic impact is spreading, affecting a broad range of sectors. Slowing global growth and trade and geopolitical tensions add a further unpredictable dimension to the second half of 2019.”

EY’s figures show that in the last 12 months, 14 FTSE sectors recorded Brexit-related profit warnings, including the five added in Q2. As the high street crunch continues into the second half of the year, it is unsurprising that the sector with the most profit warnings was general retail, at 10, but arguably more worryingly, chemicals – an increasingly important weather vane indicating the health of the UK’s economy – was second, with six. That represents the highest level of warnings for the sector – which makes up 6.8% of all UK manufacturing – in a single quarter since 2001, as five of the six said delayed or discontinued contracts had hit them.

Speaking to Economia, Hudson said that the sector was “unique” in the global economy, adding, “Not only does it utilise an exceptionally wide range of raw materials, but almost every manufactured product has a chemical company somewhere in its supply chain. The UK chemicals industry is also heavily tied into global trade routes, appearing in the top 10 UK industry ranking for both imports and exports.”


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