After a record breaking first quarter in 2020, when UK quoted companies issued 301 warnings – almost equivalent to the full year total for 2019 (313) - EY recorded 165 profit warnings in Q2 2020, which was almost 100 more than the same quarter last year and a 139% year-on-year increase.
Notably, 63% of companies warning in the second quarter of 2020 hadn’t issued a profit warning in the previous 12 months, indicating that the impact of COVID-19 is spreading beyond already vulnerable companies.
Alan Hudson, Turnaround and Restructuring Leader at EY, UK & Ireland, comments: “Unsurprisingly, the most immediate and dramatic impact of COVID-19 has been acutely felt by companies whose existing structural challenges have been exacerbated by the pandemic.
“However, many businesses that were essentially sound before the virus struck, have also been forced to fundamentally reassess their expectations and business plans too. It’s vital that UK boards don’t underestimate the depth and extent of both the immediate and long-term challenges ahead.
“It is still a highly uncertain time for businesses, who are adjusting to new ways of working and changing levels of demand, with potential cliff-edges to come in government support and further twists and turns likely in Brexit negotiations. The UK economy is opening up, but it’s early days.”
EY’s report highlighted that the level of uncertainty is such that 42% of UK-based FTSE 350 companies had withdrawn their earnings forecasts by the end of the second quarter.
The ripple effect
In Q2 2020, the impact of COVID-19 rippled across the UK economy and along supply chains, shifting the epicentre of profit warnings. The immediate impact of the virus was felt in Q1 by sectors most impacted by lockdown – travel, leisure, hospitality, and retail – but this has since spread to industries most exposed to the knock-on effects of changing corporate and consumer behaviour.
Among the top FTSE sectors warning in Q2 2020, FTSE Industrial Support Services (17 warnings) and FTSE Software & Computer Services (10) were impacted by contract disruptions and corporate cost conservation. Meanwhile, FTSE Media warnings (11) reached a record high as a result of falling advertising spend and trade event cancellations. Warnings issued by companies in the FTSE Finance and Credit Services sector are up more than five-fold year-on-year, as concerns increase around some consumers’ financial health.
Lisa Ashe, Turnaround and Restructuring Partner at EY, UK & Ireland comments: “We expect supply chain vulnerability to be one of the biggest areas of risk for companies in the next six months. Supply chain resilience will no doubt feature highly on corporate agendas, not least because of the additional challenges associated with Brexit. There are already large-scale restructurings in the market that could have considerable impact along supply and value chains.”
Profit warnings from consumer-facing companies were less prominent in Q2 2020, however this is only after an exceptionally high level of warnings and forecast adjustments in March. The FTSE Retail and FTSE Travel & Leisure sector still has the highest number of companies warning three or more times in a 12-month period, which EY found gave a company a one in five chance of a distress event – such as an administration, CVA, debt restructuring or distressed sale - occurring in the year ahead.
A pivotal moment for UK plc
EY’s profit warnings report also noted that an exceptionally high percentage of all profit warnings came from the FTSE 350 – 35% in H1 2020, which was double the 2019 total.
Lisa concluded: “The size of a business appears to offer no protection, with more FTSE 350 companies than ever issuing profit warnings. Boards need to guard against complacency and be ready to take swift and decisive action to reshape their business to face a different future than they imagined just a few months ago. Companies could find that previously healthy parts of their business are no longer profitable. This is a pivotal moment for UK plc.”