October 13th, 2007
Profit warnings fall back . . . but key industry sectors ’still
COMPANY profit warnings have fallen back in the first quarter of this year but businesses and consumers are being urged to be cautious as key industry sectors remain vulnerable.
According to Big Four accountant Ernst & Young, in quarter one of 2006, 85 profit warnings were issued by quoted companies. This was 11-per cent down on the fourth quarter of 2005, although it was the same figure as quarter one of 2005.
Tom Burton, corporate restructuring partner at Ernst & Young Scotland, said: “Profit warnings in the first quarter of 2006 are at the lowest since first quarter 2005. Yet the outlook still remains uncertain for both corporates and consumers. The picture for the last quarter is very mixed. Confidence is clearly growing and warnings are falling. However, the warning level for the past 12 months is still high and the proportion of companies warning continues to give cause for concern.” Profit warnings for the past 12 months totalled 381 compared with only 307 in the preceding year this means that for the past two reporting periods, the annual total has remained at its highest level since 2001-02, the time of the dotcom bust.
This important measure for the strength of the quoted corporate sector followed the decision by the Bank of England’s Monetary Policy Committee to leave interest rates unchanged on Thursday for the eighth consecutive month.
The worst sectors were software and computer services with 12 warnings, general retailers with 10, and support services with six. Three further areas:
food producers; healthcare equipment and services; and travel and leisure had five warnings each.
Last year proved tough for retail, with 42 profit warnings in total.
Although consumer and business confidence may be improving in 2006, the prospects do not look markedly better, with 10 warnings in the quarter to March 31.
Burton said: “It may simply be that consolidation and the high number of administrations that occurred in 2005 has reduced the number of weaker companies more likely to issue warnings. Just as concerning is the fact that the market is already starting to see some of last year’s IPOs struggling, and that does not bode well for a continued downward trend in warnings.” Food producers is another sector which has struggled, with five warnings issued this quarter compared to one in Q4 of 2005. Burton said: “Supermarket chains are insisting on broader and new product choice, lower prices and rapid response to fast-changing promotions, putting food producers under pressure like never before.” He added that although growth is picking up, interest rate cuts and a shift from consumer to business spending may be necessary to sustain economic momentum.
The new warnings come as the Scottish Chambers prepares to publish its quarterly business survey, which is expected to show that increasing transport and energy costs are threatening Scotland’s economic growth.