10 October 11
Six profit warnings have been reported in Yorkshire in Q3 compared to five in the same period last year.
The region comes third after London (41% of UK profit warnings) and the South East (20% of UK profit warnings) for Q3 with a total of 21 issued during 2011 to date.
The sectors issuing warnings were electronics and electrical equipment (1); media (1); software & computer services (1); support services (1); mining (1) and food producers (1).
The UK picture
Profit warnings from UK quoted companies dropped significantly in the third quarter of 2011; but diminished expectations, rather than economic improvement is behind much of the fall, according to Ernst & Young’s latest Profit Warnings data.
Hunter Kelly, restructuring partner at Ernst & Young in Leeds, commented: “The overall UK drop is due to lower profit expectations based on the economic back cloth of double dip fears which have combined with operational efficiencies and cost savings that companies have been making.”
UK quoted companies - Main Market and AIM listed - issued 51 profit warnings in Q3 2011, 11% more than the same quarter of 2010 (46 warnings) and 28% fewer than were issued in Q2 2011 (64 warnings).
Retailers share their pain with construction
The FTSE sectors with the highest number of profit warnings this quarter were General Retailers and Media with six each, and Software & Computer Services and Construction & Materials with five each.
UK retailers face their biggest test since 2008. Quoted Retailers have already issued more profit warnings in the first nine months of 2011, than in the whole of 2010 and 2009 combined, and will be approaching Christmas with more than the usual mixture of hope and trepidation. Being price competitive and with attractive products will not be enough and keeping a tight rein on stock and cash levels will also be vital in the lead up to Christmas and the December quarter rent day.
Hunter comments, “Some are clearly running on empty and desperately need tills to start ringing quickly and while Retail insolvency usually peaks in January, there is danger that we might see more retailers fail in the final months of 2011 as they run out of cash.”
Construction & Materials was the FTSE sector with the highest proportion of companies warning this quarter, with 15% of companies warning in Q3 and 24% in the year-to-date.
“The construction pipeline has delayed the impact of the slowdown and austerity measures, but cracks are now starting to show. The pain is focused mainly at the small to medium end, where there is less of a buffer against contract loss,” Kelly adds.
US recovery and eurozone crisis adds uncertainty
There is clear potential for the UK’s economic situation to turn ugly again. Weakening domestic growth, a waning US recovery and the escalating eurozone debt crisis have been well chronicled and one can only hope they might have been exaggerated.
Hunter Kelly, restructuring partner at Ernst & Young in Leeds, comments: “With the largest domestic GDP contributors ex-growth and its biggest trading partners spluttering, the UK economy needs the private sector to invest the cash it has kept on the sidelines for the past three years. But in the face of such uncertainty, there is a danger that businesses continue to hold back and, unless confidence returns, the UK economy could stall for some time to come.”
Volatility turns forecasting into a guessing game
There is still some debate as to whether analyst profit downgrades have gone far enough in some sectors. Commodity pricing pressures appear to have levelled off, but the impact of currency movements still make for an extremely volatile and unpredictable environment.
But the biggest risk in terms of demand and currency volatility comes from the eurozone where the endgame is still impossible to predict.
Kelly concludes, “Given the increasing economic worries at home and abroad, many UK quoted companies have been exceptionally cautious in their recent outlook statements. This means a tough 2011 and a scrooge like Christmas is probably in the estimates of most quoted UK companies profits."
“However, events could easily overtake forecasts, especially for those heavily exposed to the beleaguered peripheral economies of the eurozone and those serving the consumer, where confidence rests on a knife-edge.”