Why the outlook is bleak for UK firms despite first drop in profit warnings since mid-2021
Profit warnings among UK companies fell year-on-year for the first time since 2021 in the third quarter, but access to credit is fast becoming a major concern for firms, a new report has warned.
Listed companies issued 76 profit warnings between July and September, according to figures from EY-Parthenon. This was a 12 per cent fall on the same period last year and breaks a run of seven consecutive quarters in which profit warnings increased.
But despite the fall in warnings, the environment was still bleak with profit warnings 18 per cent higher than the post-financial crisis quarterly average.
The figures showed that firms were becoming increasingly concerned with credit conditions. A third of the warnings in the third quarter cited tougher credit conditions as a factor — the highest level recorded by EY since 2008.
“While it’s encouraging to see UK profit warnings fall for the first time in two years, the growth of credit-related warnings indicates that pressure on businesses is unlikely to ease for the foreseeable future,” Jo Robinson, EY-Parthenon Partner and UK&I Turnaround and Restructuring Strategy Leader said.
“In fact, we’re seeing economic stresses extend up the value chain, spreading to mid-market companies,” she said.
A third of profit warnings came from companies with revenue between £200m and £1bn, up from 29 per cent last quarter and 16 per cent in the second quarter of last year. This was the highest level of mid-market distress in almost thirteen years, the report found.
The figures reveal that the pressure from the Bank of England’s rapid interest rate hikes is filtering through the market. As rates rise, banks demand more interest from borrowers, putting up costs.
Sectors most exposed to higher rates, such as housebuilding, saw the most warnings with over a quarter of the entire sector issuing profit warnings in the third quarter. In the last year, nearly half of all FTSE household goods and home construction firms have issued profit warnings.
Across all sectors, 24 profit warnings referenced the slowing housing market, with construction companies and lenders among the firms suffering from the downturn.
Amanda Blackhall O’Sullivan, EY-Parthenon partner and special situations advisory leader, said: “Small and medium-sized housebuilders are feeling the effect of mortgage rate disruption and rising interest rates on demand and prices, which is resulting in tighter margins.”
But she pointed out that the largest housebuilders have relatively low exposure to the market, and have much stronger balance sheets compared to 2008. “Today’s sector is in a stronger position to weather the storm,” she said.