By Daniel Hunter
Profit warnings issued by listed UK companies fell to their lowest levels in almost two years in the second quarter, according to EY.
There were just 57 profit warnings in the second quarter of 2015, six fewer than the same period in 2014 and 26% fewer than the previous quarter.
An unexpected decisive General Election result provided greater certainty for businesses by the end of the period, whilst rising disposable incomes, low interest rates and a buoyant housing market provided sufficient economic momentum for listed businesses, according to EY’s latest Profit Warnings report.
Overall, 4% of UK quoted companies issued profit warnings in Q2 of this year, making this the lowest number and percentage of companies warning since Q3 2013. The Main Market saw a significant drop in warnings; however, profit warnings from AIM companies remained steady at 35 (4.2%) against 37 (4.4%) in Q1 2015.
The FTSE sectors leading profit warnings in Q2 were Software & Computer Services (10) Support Services (7), Electronic & Electrical Equipment (7), Media (5) and General Retailers (5).
Improving landscape but expectations could rebound too fast
Profit warnings normally tail off during the summer, but this is an especially dramatic fall in warnings given the post-crisis highs recorded in previous quarters.
Alan Hudson, EY’s head of restructuring for UK & Ireland, says, “This period was a quarter of two halves. In April, UK profit warnings again hit a seven-year high; however in May an improving global economic outlook and an unexpectedly decisive General Election result appeared to set the ball rolling on many contracts and investment decisions. This helped companies meet lowered forecasts and feel more confident about the future.
“The danger is — as ever — that expectations rebound too fast. Summer has brought renewed uncertainties and challenges. Even with helpful economic winds, there are obviously deep and enduring issues dragging on profits. Rising competition, disruptive new entrants and trends - combined with overcapacity and ‘noflation’ - provide tough conditions in which to raise prices and forecast accurately. Companies need to actively rejig their portfolios and focus on operational and capital resilience to thrive and meet rising investor expectations in this volatile environment.”