Julia Irvine 15 Jul 2019 03:05pm

Second quarter hike in UK company profit warnings

Brexit uncertainty is having a profound effect on the health of UK quoted companies, with nearly one in five of those issuing profits warnings in Q2 pointing to it as a contributory factor

And the situation is likely to get worse, warns Alan Hudson, EY’s head of restructuring for UK & Ireland, if the UK leaves the EU without a deal on 31 October and GDP growth falls to 0.2% next year.

“We expect to see further profit warnings from companies exposed to demand and supply shocks,” he said.

“Warnings would certainly increase in sectors with exposure to import and export disruption, including food producers and food retailers, where profit warnings are currently low.”

EY’s latest Profits Warnings Report reveals that there were 69 profit warnings between April and June this year. This is an increase of 19% year-on-year and is the highest second quarter total since the start of the financial crisis in 2008.

The impact on the affected companies’ share price was severe: the median share price fall on the day the profit warning was issued was 20.9%, which is higher than the level recorded at the peak of the crisis (20.7% in Q4 2008), and well above the 12%+ recorded between the start of 2010 and the end of 2017.

“There is now clear evidence that prolonged Brexit uncertainty has created a hiatus in business activity, with companies struggling to forecast and plan,” Hudson continued. “And the economic impact is spreading, affecting a broad range of sectors.

“Slowing global growth and trade and geopolitical tensions add a further unpredictable dimension to the second half of 2019.”

EY reports that, over the past year, 14 FTSE sectors recorded Brexit-related profit warnings, with five of them added in Q2. While the sector with the most profit warnings (10) was general retail, chemicals – which is an important bellwether for the health of the economy – was second with six. This is the highest level of warnings for the sector in a single quarter since 2001.

Five of the six blamed their profit warning on delayed or discontinued contracts.

Hudson said that the sector was “unique” in the global economy. “Not only does it utilise an exceptionally wide range of raw materials, but almost every manufactured product has a chemical company somewhere in its supply chain. The UK chemicals industry is also heavily tied into global trade routes, appearing in the top 10 UK industry ranking for both imports and exports.”

EY’s ITEM Club has predicted a drop in GDP growth from 1.3% in 2019 to 0.3% in 2020 and even a mild recession if there is a no-deal Brexit. This has a 40% probability rating, it says.

Growth will climb back to around 1.1% in 2021.