- Profit warnings issued by Scottish-quoted companies rose by 43% in Q1 2020, compared with Q1 2019
- The increase has been bigger UK-wide, with more than three times as many profit warnings in Q1 year-on-year
- 77% of all UK warnings in Q1 2020 cited COVID-19
- Companies will need to take a ‘slow and steady’ approach to restarting operations amidst continued uncertainty
The number of profit warnings issued by Scottish-listed businesses reached a record level in the first three months (Q1) of 2020 - the highest seen in any previous quarter in the last 20 years - according to EY’s latest Profit Warnings report.
Ten profit warnings were recorded by EY between 1 January and 31 March 2020 in the region. This is a 43% year-on-year increase on the same quarter of last year (Q1 2019), when there were seven profit warnings.
UK-wide profit warnings soar
301 profit warnings were recorded by EY between 1 January and 31 March 2020, almost equal to the entire number issued in the whole of 2019 (313) and 5% higher than the total for 2018 (287). Compared to the same period last year (Q1 2019), warnings rose from 89, representing a 238% year-on-year increase.
Over a fifth of the UK’s quoted companies issued a profit warning in Q1 2020, more than the percentage of companies warning in the whole of 2008 (17%). Unsurprisingly this hike was attributed to the COVID-19 crisis, which has temporarily paralysed many businesses, with very few sectors immune from its effects.
Although 77% of profit warnings blamed COVID-19 in the first quarter of 2020, it is worth noting that significant parts of UK plc were struggling before the pandemic. In January 2020, EY recorded warnings had increased by 43% year-on-year, when compared to the same month last year.
Colin Dempster, EY Partner and Head of Restructuring for the firm in Scotland said: “COVID-19 has intensified the pressures businesses were already experiencing as a result of political uncertainties and rapid structural changes, which contributed towards UK profit warnings reaching a ten-year high in 2019.
“Scottish businesses have proved to be relatively resilient so far. While profit warnings are at an all-time high in Scotland, compared to other UK locations and the UK as a whole, the increase in Scotland’s figures has been more subdued in Q1. In January to March, warnings have increased 43% in 2020 versus 2019, while all other UK locations have at least doubled their figures year-on-year in the quarter.
“This will be partly due to the fact there are fewer listed businesses based in Scotland from sectors which have been more adversely affected by COVID-19, such as travel & leisure and hospitality.”
FTSE Travel & Leisure sector most dramatically impacted
In Q1 2020, the sectors issuing the highest number of profit warnings were those most exposed to the impact of national lockdowns, and in many cases were already showing signs of stress before the COVID-19 crisis.
By percentage of companies warning, FTSE Travel & Leisure was the most dramatically affected, with 70% of the sector issuing a profit warning, followed by Industrial Materials (63%) and Retailers (61%). All but five of the 42 FTSE sectors EY tracks issued COVID-19 related warnings in Q1 2020.
A difficult reboot
COVID-19 is expected to deliver the biggest blow to UK GDP since the First World War. The economic forecasting group, EY ITEM Club, estimates that UK GDP will fall by 6.8% in 2020, if the UK lockdown begins to lift at the end of May, and the UK experiences a slow ‘U’ shaped recovery without any major relapses.
EY expects the number of profit warnings to fall, but distress levels to rise – with echoes of 2008 to 2009 and the aftermath of the financial crisis. Notably, there were more insolvencies in 2009 than 2008. The report anticipates a significant increase in corporate insolvencies when the lockdown lifts.
Colin said: “Companies face a unique set of additional challenges as they work to safeguard business continuity and the health of employees and customers. The true test may be yet to come, when the life support of government packages comes to an end and they resume full financial responsibility for wages as well as the payment of VAT and rent, both of which are likely to have accrued for months.
“It is wise for companies to take a slow and steady approach to restarting operations that allows for flexibility, so they can react to continued uncertainty for some time to come.”