Profit warnings from small UK companies rise

October 20, 2013 2:25 pm

Profit warnings from small UK companies rise

By Alison Smith, Chief Corporate Correspondent

The proportion of the UK’s largest companies issuing profit warnings over a three-month period fell to its lowest level for four years, while warnings from smaller companies were on the rise, according to a report from EY. Analysis by the professional services firm, formerly known as Ernst & Young, also showed that this was only the second quarter since 1999 in which no general retailer issued a warning.EY found that 3.4 per cent of companies quoted on the main market warned on profits in the three months from July to the end of September, compared with 5 per cent in the previous quarter and 6 per cent in the same period last year.

But there was a sharp increase in the proportion of Aim-listed companies that had to give the market bad news. It rose from 3 per cent in April-June to 4.4 per cent.

One of the most spectacular warnings was issued byAlbemarle & Bond, the Aim pawnbroker. Its share price fell 40 per cent on September 30 as it revealed how badly it had been hit by the falling price of gold and announced plans for a rescue rights issue.

Larger companies with warnings included building materials group CRH, Ryanair and Ladbrokes.

Keith McGregor, restructuring partner at EY, said the rise in warnings from smaller companies might come in part from market volatility. He said SMEs could be more vulnerable in those conditions “because a single contract deferral or cancellation may represent a greater proportion of their earnings than it would do for a group with larger turnover”.

Since warnings reflect not necessarily just poor performance in itself but a mismatch between analysts’ forecasts and how the company is actually trading,
he suggested that the increase could also be partly attributable to how the companies interact with the market.

“They may be less experienced or sophisticated than their larger counterparts at dealing with analysts and investors and setting market expectations. Also, if there is limited analyst coverage, or if analysts look at them only from time to time, then they will find it harder to manage expectations in a way that is easier when coverage is more consistent.”

The lack of warnings from general retailers during the quarter last occurred at the end of 2009. On that occasion it followed a huge spike in warnings over the previous three months, suggesting that the absence of bad news owed more to heavily downgraded expectations than to particularly robust trading.

Mr McGregor said that, while lower trading forecasts were one cause for the absence of bad news this time, there was also a more positive aspect.

“There is some good economic news and so there is expectation that at some point this will find its way into customers’ pockets.”