Profit warnings from UK-listed companies fall year-on-year

31st October 2023

The proportion of businesses blaming profit warnings on tighter credit conditions has risen to the highest level since the financial crisis, according to new data from EY-Parthenon.

UK-listed companies issued 76 profit warnings between July and September 2023, marking the first time the quarterly total has fallen year-on-year since 2021.

Prior to Q3 2023, warnings issued by UK-listed companies had risen year-on-year for seven consecutive quarters, the longest run of consecutive quarterly increases since 2008. UK-listed companies issued 86 warnings in Q3 2022 and 51 in Q3 2021. Despite the year-on-year fall, the number of Q3 2023 profit warnings remains 18% higher than the post-credit crisis quarterly average.

The report reveals that persistent inflation and rising interest rates continue to put significant pressure on UK businesses. A third (33%) of the warnings in Q3 2023 cited tougher credit conditions as a factor — the highest level recorded by EY-Parthenon since 2008.

Broader economic uncertainty also played a role across many of this quarter’s warnings, with 21% citing delayed or cancelled contracts and 18% citing weaker consumer confidence. One-in-five (20%) of Q3 warnings cited the slowing housing market as a factor, while the same number (20%) referenced cost pressures.

In the last 12 months, 17.8% of UK-listed companies have issued a profit warning.

The report also revealed a fall in the number of companies issuing multiple warnings during the last quarter. In Q3 2023, 11 companies that issued a profit warning were doing so for at least the third time in 12 months, down from 18 in Q2. However, so far in 2023, 19% of companies have warned for at least the third time, up from 13% in the whole of 2022.

Consequently, the number of companies in the ‘three-warning danger zone’ has risen from 36 at the end of Q2 2023, to 40 at the end of Q3 2023. Of the 40 companies that have issued their third warning in the last 12 months, 18% have delisted or are in the process of delisting, mostly through administration or distressed sales.

EY-Parthenon’s report also found that earnings downgrades were spreading into the mid-market. A third (33%) of Q3 2023 profit warnings came from companies with revenues between £200m-£1bn, up from 29% in Q2 2023 and 16% in Q2 2022. This marks the highest proportion of warnings issued by this mid-market group of companies in almost thirteen years.

Jo Robinson, EY-Parthenon Partner and UK&I Turnaround and Restructuring Strategy Leader, said “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. In fact, we’re seeing economic stresses extend up the value chain, spreading to mid-market companies.”

“It’s clear from this data that the steepest rise in interest rates in 40 years continues to take its toll, with a high proportion of warnings due to an increasingly expensive borrowing environment. This poses a risk for companies that are due to refinance and we’re already seeing this affect sectors where credit is a key activity driver, such as in the housing market.”

“Unlike 2008’s global credit crisis, today’s companies, banks and consumers all have stronger balance sheets and extended debt maturities, which will continue to stagger the effect of base rate rises. This adds a layer of resilience but shouldn’t create overconfidence. Businesses that are at risk should act immediately to reshape operations to withstand future shocks. Delaying action risks damaging business value, particularly in this fast-moving market.”

Six companies within the FTSE Household Goods & Home Construction sector issued profit warnings during Q3 2023 — just over a quarter (27%) of the whole sector. In the last 12 months, 45% of FTSE Household Goods & Home Construction companies have issued profit warnings, representing the sector’s highest level of warnings across a 12-month period since 2008.

Of the 24 profit warnings that cited the slowing housing market in the second and third quarters, seven are from companies in FTSE Household Goods & Home Construction sector, but 17 are from other sectors, including eight from FTSE Construction & Materials, four from FTSE Financial & Credit Services, and three from FTSE Real Estate Investment & Services.

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. However, there isn’t the same level of price or land value shock as we saw during the global financial crisis in 2008 and today’s sector is in a stronger position to weather the storm. The largest housebuilders have relatively low exposure to the slowing market and will have lower operational leverage and stronger balance sheets in comparison to 2008.”

“On the other hand, construction contractors and material suppliers typically operate on higher costs and tighter margins, so may face a tougher period ahead. Earlier this year we saw smaller construction companies feeling the brunt of unprecedented cost, labour and supply chain stresses, and these will be exacerbated by a slowing market. As projects take longer to develop, we’re seeing stress move up the value chain and larger suppliers and sub-contractors are feeling the pressure.”

Economic stresses and wavering business and consumer confidence have particularly increased pressure on sectors exposed to discretionary business and consumer spending. The sectors with the most warnings in Q3 2023 were FTSE Industrial Support Services (seven), FTSE Household Goods & Home Construction (six) and Software & Computer Services (six).

Companies in industrial FTSE sectors issued 24% more profit warnings in the first three quarters of 2023 compared with the same period of 2022.

Warnings from FTSE Software and Computer Services companies are 46% higher than at this point in 2022, while FTSE Media companies have issued twice the number of warnings so far in 2023 than during the same point in 2022.

FTSE Retailers issued five warnings in Q3 2023, taking the sector’s 2023 total to 15, compared to 27 in the same period in 2022. However, as the ‘golden shopping quarter’ for retail approaches in Q4, retailers may find themselves vulnerable if cost-of-living concerns continue to squeeze consumer incomes and spending.