- A third of the UK listed companies most at risk of insolvency made a claim for two or more government support measures
- The FTSE sectors under the greatest pressure remain Travel and Leisure, Retail and Industrial Support Services
More than half of the UK’s listed companies currently at heightened risk of insolvency made a claim for government support in December 2020 and could face a financial cliff edge when it comes to an end, according to the latest EY analysis of profit warnings.
Between March 2020 and March 2021, 63 UK listed companies issued at least their third profit warning within a 12-month period – almost double the 2019 total of 32. Statistically, up to one in five of these companies is likely to enter Administration within 12 months of the third warning.
More than half (35) of these companies claimed furlough support from the Government in December, and one third (21) are also claiming at least one other form of government support, including a CLBIL/CBIL, a CCFF, and/or the deferral of business rates and VAT.
In total, 174 UK listed companies issued at least their second profit warning within the 12-month March 2020-2021 period, with 42% (77) of them claiming furlough support in December 2020. The FTSE Travel and Leisure sector featured in this group more than any other sector (23), followed by FTSE Retailers (15) and FTSE Industrial Support Services (8).
Alan Hudson, EY-Parthenon UK&I Turnaround and Restructuring Strategy Leader, said: “The extent to which some of the UK’s largest firms have had to claim government support through the pandemic is evidence of the challenging environment in which many businesses have found themselves. Firms’ dedication to securing their future and continuing to provide for their customers, clients and employees is clear but, as government support comes to an end, many firms could be tested to their ultimate limit.
“Even stronger firms could face issues, and so supply chain resilience has never been more important. Disruption to even the smallest supplier could create significant challenges that ripple through the economy.
“The transition away from Government support measures won’t be straight forward, and could require a wholesale shake-up of firms’ strategies, recapitalisation models and operations if they are to avoid hitting a financial cliff edge.”
Travel and Leisure the hardest hit sector
According to EY’s research, the pandemic has hit the FTSE Travel and Leisure sector hardest. Between the beginning of March 2020 and March 2021, 40% of firms in this FTSE sector (23 companies) issued at least two consecutive profit warnings and claimed furlough in December, with 12 of these companies claiming more than £1m in December 2020 to pay their staff. Five of these claims are from companies within the high-risk bracket for likely insolvency, having issued their third or more profit warning within the last 12 months.
Amanda Blackhall O’Sullivan, EY-Parthenon Partner, Turnaround and Restructuring Strategy said: “The pace and shape of recovery for FTSE Travel and Leisure companies will of course depend on their area of focus, but with light at the end of the lockdown tunnel, consumer demand for eating out and booking a UK holiday is likely to help drive a recovery.
“COVID-19 has had a serious impact on the sector, but many companies had underlying issues before March 2020 which, if ignored, could prevent their successful turnaround.
“Travel and Leisure business leaders recognise there has been a permanent shift in consumer preferences, and many have already innovated and adapted remarkably well to accommodate these changes in the short-term. To ensure long-term success, the more agile and forward-thinking a business can be, the better chance they have at remaining resilient and ahead of their competitors.”
Continued uncertainty makes forecasting difficult
Amid the market uncertainty of H1 2020, 42% of FTSE 350 companies withdrew their earnings forecasts; a signal of just how difficult the pandemic has made it to predict performance.
Alan Hudson concludes: “While the persistent market uncertainty makes business decision-making very difficult, the extension of government support measures through to September 2021 provides critical time for firms to reflate balance sheets, review operations and prepare employees for the restart of their business.
“Within six months, the stabilising effect of government support will be removed, and we will very quickly see which companies took best advantage of the time to recalibrate and reposition themselves to secure future growth.”