- Arguably construction experienced a sector recession in 2019
London, 2nd March 2020: Profit warnings issued by UK listed businesses in the FTSE Construction & Materials sector in 2019 more than doubled year-on-year, according to EY’s latest Quarterly Profit Warnings Report.
Reaching a seven-year high, eighteen profit warnings were recorded by EY in the sector last year, compared to eight in 2018 and nineteen in 2012 – its highest peak in the last decade. 28% of companies in the FTSE Construction & Materials sector warned in 2019.
Richard Harrison, Financial Restructuring Director at EY, said: “2019 was an exceptionally testing year for the construction sector, with economic and political uncertainty contributing to a wave of contract delays and cancellations. Although the UK economy overall didn’t fall into recession, arguably the construction sector did.”
In the first half of 2019 – between January and June – twelve warnings were issued by companies in the FTSE Construction & Materials sector, compared to six in the second half of the year, when political uncertainties were heighted by the General Election.
Harrison added: “There is a feeling of increased confidence in the market post-election, which will help to fuel stability and encourage growth in the sector. But Brexit uncertainty remains, and the ability of clients and contractors to agree a mutually acceptable balance of risk and reward still weighs heavy on the construction industry.”
UK profit warnings ‘exceptionally high’ in 2019
According to EY’s report, UK quoted companies issued 313 profit warnings in 2019, rising by 9% year-on-year (287 in 2018) to reach the highest annual total of warnings since 2015. Particularly striking is the proportion of UK listed companies warning in 2019 (17.8%), which marginally surpassed 2008 (17.7%), to reach an 18-year high (2001: 22.7%).
FTSE Retailers issued the most warnings in 2019 (32), followed by FTSE Industrial Support Services and FTSE Software & Computer Services, which both issued 25 warnings, followed by FTSE Construction & Materials (18) – all particularly hit by the impact of delayed decision-making.
FTSE Technology Hardware & Equipment had the highest percentage of companies warning in 2019 at 56%, with earnings hit by the US-China trade dispute and slower growth in key end-markets – especially automotive.
Ian Marson, Head of Construction in EY’s Transaction Advisory business, said: “Contractors in the construction and support services sectors have faced untold headwinds since as far back as 2009, without any breathing space to fully recover. In recent years political uncertainty has added to that pressure for companies in this low-margin sector.
“Indeed, in the next 12 months, we expect to see more large players in the market grapple with meeting their banking covenants, refinancing, changes in the availability of skilled labour, and possible new trade tariffs. In the short term, companies need to ensure they return to health through careful contract selection, turning down lower profit contracts and focusing on specialist areas where they can reliably achieve higher margins.
“However, outside this immediate horizon, there is a fundamental need for construction firms to innovate and use technology, automation and data to disrupt the status quo and drive real and sustainable changes in profitability.”