FTSE firms hit profit-warning high

Sunday 26 April 2015

Stock market companies have racked up a six-year record for profit warnings after energy firms were hit by the falling price of crude oil.

EY's quarterly report said that 5.4% of all quoted firms issued warnings in the first three months of the year, the highest first quarter percentage since 2009.

These warnings were issued by 77 firms in the period, three more than the same period a year ago, although 16 fewer than the previous quarter.

Oil and gas producers and support services firms issued the most alerts to the City with eight profit warnings each during the period. This was followed by computer services firms with seven and general retailers on six.

Oil prices have fallen by about half to around 65 US dollars (£43) for a barrel of crude from last summer.

But the report also said profit warnings rose due to growing competitive pressure, geopolitical tensions and market volatility triggered by changing monetary policy expectations.

The report said increasing competition and pressure on prices contributed to 22% of profit warnings in the period.

The survey added that a number of firms remain under pressure even though GDP expanded by 2.8% in 2014 and looks set to match this pace in 2015.

Wages have also recently started to consistently run ahead of prices for the first time in six years.

However, Alan Hudson, EY's head of restructuring for UK & Ireland, said: "This is still a tough environment in which to plan and forecast.

"The recovery hasn't increased predictability and companies still have little room for manoeuvre when things go wrong, such as a lost contract, adverse currency movement or a price drop."

The support services sector issued four fewer profit warnings than the same period last year. However, this comes on the back of 18 profit warnings in the final three months of 2014, a year that brought the highest number of warnings since 2009 in a sector that is particularly vulnerable to delayed or cancelled contracts.

Mr Hudson said: "Businesses need to constantly monitor and be vigilant for underperforming contracts. The implications of failure are often significant, from loss of contract to reputational damage."

The report said the retailer sector's six profits warnings in the period were the same as last year, and a long way from tougher periods when the sector reported a figure in the high-teens in the post-Christmas quarter.

It said the change for retailers reflected the improved consumer outlook and real wage increases.

Jessica Clayton, EY transaction advisory services partner and retail specialist, said: "The issue, as ever for retailers, is translating this improving consumer outlook into higher sales, whilst also protecting their margins.

"Many retailers have found themselves in a margin squeeze, caught between the need to price competitively to attract value hungry customers and the rising cost of standing out from the crowd, which is increasingly necessary to capture and maintain dwindling consumer loyalty."

The report said it expected the number of UK profit warnings to fall, but not by as much as in previous recovery cycles. It said companies still have little room for manoeuvre when things go wrong, due to geopolitical uncertainties, the timing of rate hikes in the US and volatile currencies.