BY Fraser Tennant
A high proportion of UK quoted companies have issued profit warnings during Q1 2016, despite a substantial downgrade in profit expectations made at the end of Q4 2015, according to a new EY report published this week.
The 76 profit warning issued by companies during the first quarter of this year, although down from 77 in the same quarter of 2015, are largely being attributed to falling oil prices, although volatility, competition and sector disruption are also serving to dent expectations.
Drilling down, in the 12 months to the end of Q1 2016, the EY Profit Warnings report reveals that 17.2 percent of UK quoted companies issued profit warnings compared with 16.5 percent at the same point in 2015. Furthermore, the FTSE sectors with the highest percentage of companies warning in Q1 2016 are: oil equipment, services & distribution, mobile telecommunications and electronic & electrical equipment, all at 50 percent.
These warnings, says the EY report, are the result of the volatile start to 2016, which has created uncertain and difficult conditions for companies reliant on the contract cycle. The report also confirms that although action has been taken by central banks to tackle market concerns, the global economy is still struggling to build momentum.
“Resilience and flexibility remain vital in these markets and we expect to see companies maintain their focus on operational improvement, and on capital and portfolio management,” said Alan Hudson, EY’s head of restructuring for UK & Ireland. “Outside a major shock, a further dive in expectations makes a further profit warning peak unlikely. However, the level of profit warnings is unlikely to dip too low while there is still so much uncertainty in the outlook and significant potential for misreads.”
Overall, Mr Hudson suggests that volatile, uncertain, complex and ambiguous are apt descriptions of the current outlook, especially in view of the current economic environment. He said: “The year began with volatility in spades, until central bank action and rising oil prices inspired a late quarter rally. The ambiguous outlook gives potential for misreads and we’re unlikely to see a significant drop in the number of UK profit warnings, despite the drop in expectations and sustained growth.”
However, despite the gloom, Mr Hudson suggests that there is the potential for significant upside – “if the clouds clear in 2016".