UK-listed profit warnings fall year-on-year for first time since 2021
Profit warnings issued by UK-listed companies has fallen year on year, for the first time since 2021. A growing number of warnings cited tougher borrowing conditions, however, suggesting that further hikes in interest may trigger further turbulence across the national economy.
Every quarter, Big Four firm examines the number of profit warnings issued by UK-listed firms, to give an indication of the health of the economy. For the last seven quarters, that has seen EY declare a year-on-year increase in the number of businesses cautioning at muted trading figures and falling profits – the longest run of such news since 2008’s Great Recession.
For the first time since 2021, however, EY has found that profit warnings have fallen year-on-year. UK-listed companies issued 76 warnings in the third quarter of 2023, 10 fewer than the same period in 2022.
Despite this 12% year-on-year decline, though, the broader picture for 2023 remains grim. Indeed, even for the third quarter, those profit warning levels were 18% higher than the post-credit crisis quarterly average. And a number of major new hurdles are presenting them, suggesting that UK businesses are a long way from being out of the woods yet.
Jo Robinson, EY-Parthenon’s UK&I turnaround and restructuring strategy leader, commented, “While it’s encouraging to see UK profit warnings fall for the first time in two years, the growth of credit-related warnings indicates that pressure on businesses is unlikely to ease for the foreseeable future. In fact, we’re seeing economic stresses extend up the value chain, spreading to mid-market companies.
To that end, EY found that one-third of businesses issuing profit warnings cited heightened interest rates, and the toughening conditions around borrowing – the highest rate since 2008. At the same time, broader economic uncertainty also played a role across many of this quarter’s warnings, with 21% citing delayed or cancelled contracts and 18% citing weaker consumer confidence. Additionally, 20% of warnings cited the slowing housing market as a factor, while the same number referenced cost pressures.
This is impacting some sectors more than others. In particular, house builders and their supply chain face pressure, as 45% of FTSE household goods and home construction companies have issued a profit warning in the last 12 months. Six companies within the sector issued profit warnings during the third quarter of 2023 – 27% of the whole sector.
Small and medium-sized housebuilders are also feeling the effect of mortgage rate disruption linked to rising interest rates, which is resulting in tighter margins. However, EY did add that there was less price or land value shock than seen during the global financial crisis in 2008. The largest housebuilders have relatively low exposure to the slowing market, and will EY believes they have lower operational leverage and stronger balance sheets in comparison to 2008.
Amanda Blackhall O'Sullivan, EY-Parthenon special situations advisory leader, added, “On the other hand, construction contractors and material suppliers typically operate on higher costs and tighter margins, so may face a tougher period ahead. Earlier this year we saw smaller construction companies feeling the brunt of unprecedented cost, labour and supply chain stresses, and these will be exacerbated by a slowing market. As projects take longer to develop, we’re seeing stress move up the value chain and larger suppliers and sub-contractors are feeling the pressure.”