Profit warnings from UK-listed companies reach highest Q2 total since 2020
UK-listed companies issued 66 profit warnings between April and June 2023, marking the highest second quarter total in three years, according to EY-Parthenon’s latest Profit Warnings report.
The report found that warnings from UK-listed companies have risen year-on-year for the seventh consecutive quarter, the longest run of consecutive quarterly increases since 2008. The highest number of Q2 warnings recorded by EY-Parthenon was in 2020, when 166 were issued.
In the last 12 months, 17.9% of UK-listed companies have issued a profit warning, the highest level outside the Covid-19 pandemic since the 2008 global financial crisis.
Persistent inflation and rising interest rates have played a significant role in Q2’s warnings, driving a tighter and more expensive lending environment. Changing credit conditions were cited in one-in-five (20%) profit warnings during the quarter, the highest proportion since Q2 2008 and up from one-in-ten (9%) in Q1 2022.
Elsewhere, falling sales were cited in 59% of profit warnings. Contractual issues or delayed payments were cited in 23% of warnings, as were rising costs and overheads.
The report also revealed a rise in the number of companies issuing multiple warnings. In Q2 2023, 29% of companies that issued a profit warning were doing so for at least the third time in 12 months, up from 10% in Q1. Consequently, the number of companies in the ‘three-warning danger zone’ has risen from 31 at the end of Q1 2023, to 36 at the end of Q2 2023. Of the 36 companies that have issued their third warning in the last 12 months, eight (22%) have delisted or are in the process of delisting, mostly through administration or distressed sales.
The tightening credit landscape is likely to pose challenges to the remaining 28 companies in the ‘three warning danger zone’ with upcoming debt maturities. EY analysis found that these businesses have a combined debt of £2.8bn due in 2024 and 2025, while companies that have issued two warnings have a combined debt of £7.8bn due over the same period.
EY-Parthenon’s report also found that earnings downgrades were spreading into the middle of the listed market. More than a quarter (29%) of profit warnings during Q2 came from companies with revenues between £200m-£1bn, marking the highest proportion of warnings issued by this mid-market group of companies in four years.
Jo Robinson, EY-Parthenon partner and UK&I turnaround and restructuring strategy leader, comments: “The sustained rise in profit warnings over the last two years reflects the extraordinary mix of challenges faced by UK businesses over that timeframe. It’s now clear that the effects of these low-growth conditions are spreading to nearly all corners of the UK economy, and this quarter we’ve seen earnings pressure extend up the value chain into the mid-market.
“Rising interest rates have significantly changed credit conditions for companies that need to refinance, and businesses have started to feel the effect of a more expensive borrowing environment, especially in sectors where credit availability has been a key driver of activity. The number of businesses that had previously locked in low interest rates has postponed some of the challenges, but not indefinitely. We’ll likely see credit cost and availability play an increasingly significant role in restructuring activity as more businesses encounter a markedly different refinancing landscape.
“Insolvency activity typically peaks nine to twelve months after a profit warning peak. Conditions are likely to remain challenging and those businesses best placed to persevere will be those that can reshape their operations to withstand further shocks and capitalise on growth.”
Construction sector suffers following housing market slowdown
Companies within the FTSE Construction and Materials sector recorded six profit warnings during Q2 2023, representing 10% of Q2’s total profit warnings. This is the highest level of warnings from this sector since Q2 2020, with more than a quarter (28%) of FTSE Construction and Materials companies issuing a profit warning in the last 12 months.
Five of the six warnings issued by FTSE Construction and Materials companies in Q2 2023 cited a slowdown in house building as a key trigger.
Amanda Blackhall O’Sullivan, EY-Parthenon partner and creditor advisory leader, comments: “Most of this quarter’s warnings have been issued by a squeezed middle of subcontractors and suppliers, which have seen material cost and labour headwinds combine with a slowdown in the housing market prompted by rising interest rates.
“Construction’s biggest businesses have been largely protected from hardship so far, as they typically work across diverse portfolios that include projects within the still-buoyant infrastructure sector, with relatively low exposure to the UK housing market. However, if the sector’s slowdown continues then we may see this economic stress move further up the value chain.”
Retail pressures ease but sector remains vulnerable
The sectors with the most warnings in Q2 2023 were FTSE Industrial Support Services (seven), FTSE Construction and Materials (six), followed by FTSE Retailers (five) and FTSE Pharmaceuticals & Biotechnology (five).
Warnings from industrial FTSE sectors rose by 40% year-on-year as wavering business confidence has led to spending delays and cost cutting. Six of the seven profit warnings from the FTSE Industrial Support Services sector cited lower demand from business customers, including falling recruitment.
FTSE Retailers issued 10 warnings in the first half of 2023, representing a fall from the 16 warnings issued in the first half of 2022. However, more than a fifth of companies (six) remaining in the ‘three warning danger zone’ came from either FTSE Retailers or FTSE Personal Care, Drug and Grocery Store sectors, and these businesses may find themselves vulnerable if cost-of-living concerns continue to squeeze consumer incomes and spending.