Sunday, June 26, 2022

Midlands companies record 78% year-on-year decrease in Q1 profit warnings

Midlands quoted companies issued eight profit warnings in Q1 2021, a 78% decrease from record levels in Q1 2020, when 37 profit warnings were issued, according to EY-Parthenon’s latest Profit Warnings report.

Nationally, Q1 2021 saw the biggest year-on-year percentage fall in UK profit warnings on record. Midlands quoted companies issued the third highest number of profit warnings during the first quarter of the year, behind London (16) and the South East (10).

Profit warnings were pushed to record levels in Q1 2020 at the onset of the pandemic but began to fall from the middle of last year. Most FTSE sectors saw significant falls in profit warning numbers at the start of 2021, as the global vaccine roll out bolstered the economy and earnings forecasts, according to the report. However, the continued withdrawal of forecasts by 15% of FTSE 350 companies indicates ongoing uncertainty.

Consumer sectors are expected to benefit from a pent-up release in demand and household savings in 2021 — especially in the second quarter, as the economy re-opens. A stronger than expected economic outlook, is also likely to boost confidence. There will be some issues to look out for though, not least inflationary risks which will grow as the recovery gains pace and monetary policy remains accommodating.

Perhaps unsurprisingly, the FTSE sectors issuing the most profit warnings in Q1 2021 were Retailers (eight) and Travel & Leisure (five). When measured by the percentage of companies in a sector issuing a warning, the top FTSE sectors were Beverage (22%), Personal Goods (20%) and Retailers (17%).

Midlands businesses operating in the Consumer Discretionary sector, which includes makers of household appliances, issued the highest number of profit warnings during Q1 2021 (five), with other profit warnings being issued by businesses in a variety of different sectors.

Dan Hurd, EY-Parthenon UK&I Turnaround and Restructuring Partner in the Midlands, said: “Low levels of profit warnings are an indication of a temporary breathing space for companies. If they haven’t already, this is a time for UK business to reset and ready themselves to rebuild.

“The impact of the pandemic won’t automatically reverse when lockdown ends. For many businesses, pressures will intensify as they restart operations, government support tapers, and working capital becomes stretched.”

Insolvency danger zone

Among the quoted businesses in the Midlands, 12 have issued at least their third profit warning since March 2020, while eight of these companies also confirmed they used the furlough scheme in January.

Overall, a total of 64 listed companies have issued at least their third profit warning in a 12-month period since the start of March 2020. None of these companies have entered administration, in contrast to the 15-20% figure EY-Parthenon says it would normally expect to see doing so within a year of their third warning.

The majority of these companies, 38 (59%), used the Government’s jobs furlough scheme in January and 24 (38%) also used at least one other form of government support. Most of these companies are focused in consumer areas, primarily FTSE Retail (19% of the sector) and FTSE Travel and Leisure (13%).

EY-Parthenon analysis demonstrates that government support, combined with a moratorium on winding-up petitions, has significantly reduced corporate insolvencies over the course of the pandemic: more than 6,000 extra companies would have entered an insolvency procedure by this point if insolvency levels had continued on the same trajectory as pre-March 2020.

Lisa Ashe, EY-Parthenon, Turnaround and Restructuring Strategy Partner, said: “A significant increase in insolvencies could have a wide-ranging impact on the wider business network. Stress is likely to spread up and down supply chains if businesses struggle to pay suppliers, or if vital parts of the chain stop working. Consequently, one business that introduces changes to become more resilient, has the potential to strengthen the wider business ecosystem.

“Recovery is coming, just not quite yet. To be a part of the recovery, companies need to take bold decisions to reposition their business model, operations and finances for a new post-pandemic environment.”

In the coming months, a variety of factors will affect financial planning for businesses. The furlough scheme is due to end in September 2021; deferred VAT and loan repayments have already begun; and, at the end of June, the suspension on creditors issuing winding-up petitions (where non-payment of debt is COVID-19 related) is set to expire.

Dan added: “With government support set to taper away this summer, we are likely to see the start of three overlapping waves of insolvency in the UK. Companies which would have otherwise become insolvent in the past 15 months are back under pressure; the withdrawal of government support is also challenging companies weakened by the pandemic; and there are those companies which may be unable or too slow to adapt to rapid market change.”

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