British profit warnings linked to price of oil

According to a new report from professional services firm EY, there were 77 profit warnings from UK-quoted companies in the first quarter, three more than the same period last year, despite the economic recovery.

The worst hit businesses were in the oil and gas sector, support services, software and computer services and retailers.

EY said one of the main triggers was the rapid fall in oil prices at the end of last year, which contributed to 16 profit warnings.

Growing competitive pressure – alongside uncertainty and volatility, triggered by changing monetary policy expectations and geopolitical tensions – also added to the increase.

More intense competition and pressure on prices contributed to 22 per cent of the warnings.

Overall, 5.4 per cent of UK-quoted companies issued profit warnings in Q1 2015 – the highest first quarter percentage since 2009.

Alan Hudson, EY’s head of restructuring for UK & Ireland, said: “This is still a tough environment in which to plan and forecast. The recovery hasn’t increased predictability and companies still have little room for manoeuvre when things go wrong, such as a lost contract, adverse currency movement or price drop. Disruptive new entrants and technologies add to the competitive tension – as does the accumulated pressure to invest, but also cut prices.”

He said companies will need to work hard to create a “distinctive and adaptable business that can translate an improving outlook into stronger earnings growth”.

He added: “There are clear advantages for businesses that can take the initiative and demonstrate that they have market understanding and the business resilience necessary to match this unpredictable recovery.”

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Hudson expects the number of UK profit warnings to fall but not by as much as seen in previous cycles.

“The recovery hasn’t increased predictability and companies still have little room for manoeuvre when things go wrong. Even in the absence of a major shock, there is still significant geopolitical uncertainty. Speculation over the timing of US tightening and diverging policies elsewhere will keep currencies volatile,” he said.

“In this maelstrom of change and volatility, it’s imperative that companies take a fresh look at their strategies, business models and portfolios. There are significant benefits for companies who can build a business that has the capital, market, operational and stakeholder resilience to meet the challenges of this recovery and implement more effective planning and decision-making. Not least because companies can now expect a greater interest in how they perceive the future from more activist stakeholders and regulators.”

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