The number of profit warnings issued by South West businesses in the first half of 2020 increased by 73% year-on-year, a new report says.
The latest Profit Warnings report from Ernst and Young (EY) revealed that 85% of the firms issuing warnings cited the impact of the Covid-19 pandemic as a reason.
EY recorded 26 profit warnings in the region in H1 2020 (Q1 & Q2) – the highest in 20 years - compared to 15 in the same period last year (H1 2019).
After a record-breaking first quarter in 2020, when quoted companies in the South West issued 19 warnings, the region saw a welcome dip to seven in Q2 2020.
Profit warnings were spread across a wide range of sectors in the region in H1 2020, with businesses operating in the travel and leisure sector most affected.
Lucy Winterborne, head of turnaround and restructuring strategy at EY in the South West, said: “Unsurprisingly, the most immediate and significant impact of Covid-19 has been acutely felt by companies whose existing structural challenges have been exacerbated by the pandemic.
“Many businesses that were essentially sound before the virus struck, have been forced to reassess their expectations and business plans too.
“It’s vital that businesses in the South West don’t underestimate the depth and extent of both the immediate and long-term challenges ahead.
“It is still a highly uncertain time for businesses, which are adjusting to new ways of working and changing levels of demand, with potential cliff-edges to come in Government support and further twists and turns likely in Brexit negotiations. The UK economy is opening up, but it’s early days.”
Across the UK, almost a third (33%) of listed companies - compared to 18% in 2019 - issued a profit warning in the first half of 2020.
EY recorded 466 profit warnings in H1 2020 – more than the total number issued last year (313).
In Q2 2020, the impact of Covid-19 rippled across the UK economy and along supply chains, shifting the epicentre of profit warnings.
The immediate impact of the virus was felt in Q1 by sectors most impacted by lockdown – travel, leisure, hospitality, and retail – but this has since spread to industries most exposed to the knock-on effects of changing corporate and consumer behaviour.
Ms Winterborne said: “We expect supply chain vulnerability to be one of the biggest areas of risk for companies in the next six months.
“Supply chain resilience will no doubt feature highly on corporate agendas, not least because of the additional challenges associated with Brexit.
“There are already large-scale restructurings in the UK market that could have considerable impact along supply and value chains.”
Profit warnings from consumer-facing companies were less prominent in Q2 2020, however this is only after an exceptionally high level of warnings and forecast adjustments in March.
The FTSE Retailers and FTSE Travel & Leisure sector still has the highest number of companies warning three or more times in a 12-month period, which EY found gave a company a one in five chance of a distress event – such as an administration, CVA, debt restructuring or distressed sale - occurring in the year ahead.
Ms Winterborne said: “Boards need to guard against complacency and be ready to take swift and decisive action to reshape their business to face a different future than they imagined just a few months ago.
“Companies could find that previously healthy parts of their business are no longer profitable. This is a pivotal moment for UK Plc.”
