September 29, 2020

Nearly half of the construction sector issued profit warnings in first six months of 2020

FTSE construction & materials companies issued nine profit warnings in Q2 2020, bringing the total number of warnings issued in H1 2020 to 23, according to EY’s latest Profit Warnings Report.

This represents profit warnings from nearly half (46%) of the sector and is nearly twice the number (12) issued in the equivalent period last year (H1 2019). Nearly all (91%) warnings issued in H1 2020 have cited the impact of Covid-19.

Ian Marson, EY UK & Ireland construction leader, comments: “While profit warnings have decreased in Q2 compared with Q1, construction is still a sector under stress. We are seeing ripple effects pass through supply chains, including construction. Three-quarters of the warnings issued in H1 2020 came from the Building Materials sub-sector.

“There is evidence of significant supply chain stress with an increased risk of vulnerability, not least because of the potentially conflicting challenges posed by Brexit. Companies that have chosen to keep inventory levels low may need to rethink their strategy this autumn.”

A pivotal moment for UK plc

According to EY’s report, almost a third (33%) of the UK’s listed companies – compared to 18% in 2019 – issued a profit warning in the first half of 2020 (Q1 & Q2), with 84% citing the impact of the Covid-19 pandemic.

After a record breaking first quarter in 2020, when UK quoted companies issued 301 warnings – almost equivalent to the full year total for 2019 (313) – EY recorded 165 profit warnings in Q2 2020, which was almost 100 more than the same quarter last year and a 139% year-on-year increase.

Notably, 63% of companies warning in the second quarter of 2020 hadn’t issued a profit warning in the previous 12 months, indicating that the impact of Covid-19 is spreading beyond already vulnerable companies.

Lisa Ashe, UK Restructuring Partner at EY, comments: “The size of a business appears to offer no protection, with more FTSE 350 companies than ever issuing profit warnings. 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.”

An uneven recovery

Ian Marson added: “We know from previous crises that companies face one of their biggest tests when trying to reflate balance sheets, while depending on supply chains that are in the same predicament. This time, they face a unique set of additional challenges in safeguarding both business continuity and the health of employees and customers. Anticipated further government action to secure jobs, ‘level-up’ the economy, build new infrastructure and support the green agenda may provide some help for the sector. It would be wise for businesses to take a slow and steady approach to their operations that allows for flexibility, so they can react to continued uncertainty for some time to come.”