Colin Dempster

EY recorded 16 profit warnings in the region in the first half of this year, marking a higher amount than any previous first half in the last twenty years. (11: 2019).

After a record-breaking first quarter in 2020, when quoted companies in Scotland issued ten warnings, six were recorded in the second quarter of this year. 

Profit warnings were spread across a wide range of sectors in Scotland in the first half of 2020, with businesses operating in the Travel & Leisure (three) sector most affected.

While the increase of profit warnings for Scottish businesses (45%) has reached a record high for the first half of the year, it is the smallest increase across all UK locations. Year-on-year the biggest increases in profit warnings were seen in the North East, which was 5.5 times more than last year, followed by London with 4.6 times as many profit warnings than H1 2019, while East Anglia recorded four times as many.

Colin Dempster, head of turnaround and restructuring strategy at EY in Scotland, commented: “Scotland’s performance compared with other UK locations in terms of profit warnings, reflects the types of listed companies based here. A large proportion of the Scottish economy has been able to adapt to lockdown conditions for example, the services industry has been able to shift to virtual ways of working easier than other sectors where social distancing poses much more challenging conditions for operations.

“However, the oil and gas sector is also a key component of Scotland’s economy and has experienced a particularly challenging time across the supply chain due to a significant fall in both demand and the oil price. This is likely to have a subsequent impact on the wider business landscape.

“It’s vital that businesses in Scotland don’t underestimate the depth and extent of both the immediate and long-term challenges ahead.

“It is still a highly uncertain time for businesses, who are adjusting to new ways of working and changing levels of demand, with potential cliff-edges to come in government support and further twists and turns likely in Brexit negotiations. The economy is opening up, but it’s early days.”

The ripple effect

Across the UK, almost a third (33%) of listed companies - compared to 18% in 2019 - issued a profit warning in the first half of 2020. EY recorded 466 profit warnings in H1 2020 – more than the total number issued last year (313).

In the second quarter of this year, the impact of COVID-19 rippled across the UK economy and along supply chains, shifting the epicentre of profit warnings. The immediate impact of the virus was felt in Q1 by sectors most impacted by lockdown – travel, leisure, hospitality, and retail – but this has since spread to industries most exposed to the knock-on effects of changing corporate and consumer behaviour.

Fiona Taylor, turnaround and restructuring strategy associate partner at EY in Scotland, added: “We expect supply chain vulnerability to be one of the biggest areas of risk for companies in the next six months. Supply chain resilience will no doubt feature highly on corporate agendas, not least because of the additional challenges associated with Brexit. There are already large-scale restructurings in the UK market that could have considerable impact along supply and value chains.”

Profit warnings from consumer-facing companies were less prominent in Q2 2020, however this is only after an exceptionally high level of warnings and forecast adjustments in March.

The FTSE Retailers and FTSE Travel & Leisure sector still has the highest number of companies warning three or more times in a 12-month period, which EY found gave a company a one in five chance of a distress event – such as an administration, CVA, debt restructuring or distressed sale - occurring in the year ahead.

Ms Taylor concluded: “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 Scotland and UK plc.”