Profit warning levels not likely to improve
Friday, 18 March 2011 — The number of profit warnings being issued by Australian companies is not likely to drop significantly in the next 12 months, says Ernst & Young’s Corporate Restructuring Leader Vince Smith.
Ernst & Young’s half yearly profit warnings report shows 88 profit warnings issued by Australian companies between July and December 2010, slightly above the prior half year periods of 78 (January-June 2010) and 71 (July-December 2009).
Smith says businesses in the consumer discretionary, property, and industrials sectors will be most vulnerable throughout 2011, in what remains a challenging operating environment.
“We expect more of the same in the short term, so businesses and investors should continue to pay close attention to company forecasts,” he says.
“Clearly many businesses are still finding it challenging to identify when consumer confidence will return to more predictable levels in their sector.”
“While there is underlying confidence and renewed M&A activity, credit is still tight and there is lingering caution out there.”
While the three consecutive periods of modest-level profit warnings indicate a degree of stability and are well below the January-December 2009 record spike of 232, the level of profit warnings remains well above 2006-2007 levels.
The Ernst & Young analysis shows that for the second half of 2010 a much broader range of factors were cited, where as consumer spending and contract delays were cited as the main causes of profit downgrades during January-June 2010.
Key findings from the report include:
- The main reasons cited for profit warnings included adverse weather (14%), decreased consumer spending (13%), appreciation of the Australian dollar (10%) and decreased construction activity (10%).
- Adverse weather conditions significantly impacted production and contract fulfilment in the mining, construction and agriculture industries, with 14% listing it as a primary factor.
- Where decreased consumer spending was the primary reason behind profit warnings in FY09 – a primary factor in 46% of all downgrades – it was only a primary factor in 14% in the latest half year but remained an important contributory factor.
- Of the 88 warnings for the half year, 32 came in the July to September quarter and 56 from October to December.
- The largest number of warnings came from the industrials sector (22), followed by consumer discretionary (15) and financials (10).
- The number of warnings from companies in the healthcare sector doubled in the half year relative to the same half year in 2009, off the back of government funding cuts to the sector. Ongoing regulatory change is likely to continue in this sector which may impact forecasts.
- Small caps accounted for 45% of warnings, down from 54% during the previous half, while large caps (above $2 billion) accounted for 32% of warnings, up from 26% the previous half.
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