Profit alerts from Scottish firms hit highest in 20 years
A total of ten profit warnings were issued by Scottish-listed businesses in the first quarter of 2020, a 43 per cent jump on the same period last year.However, EY’s latest Profit Warnings report showed that the UK-wide increase was even worse with a 238 per cent rise.
Over a fifth of the UK’s quoted companies issued a profit warning in Q1 2020, more than the percentage of companies warning in the whole of 2008 (17 per cent).
Although the impact of Covid-19 is a major factor in the rise, EY said that significant parts of UK plc were struggling before the pandemic. In January, warnings across the UK had increased by 43 per cent year-on-year.
Colin Dempster, EY’s head of restructuring in Scotland, said Covid-19 has intensified the pressures businesses were already experiencing as a result of political uncertainties and rapid structural changes.
However, he said Scottish businesses have proved to be “relatively resilient” so far.
“While profit warnings are at an all-time high in Scotland, compared to other UK locations and the UK as a whole, the increase in Scotland’s figures has been more subdued. All other UK locations have at least doubled their figures year-on-year in the quarter.
“This will be partly due to the fact there are fewer listed businesses based in Scotland from sectors which have been more adversely affected by Covid-19, such as travel and leisure and hospitality.”
In Q1 2020, the sectors issuing the highest number of profit warnings were those most exposed to the impact of national lockdowns, and in many cases were already showing signs of stress before the crisis.
The travel & leisure was the most dramatically affected, with 70 per cent of the sector issuing a warning, followed by industrial materials (63 per cent) and retailers (61 per cent).
The economic forecasting group, EY Item Club, estimates that UK gross domestic product (GDP) will fall by 6.8 per cent in 2020, if the UK lockdown begins to lift at the end of May, and the UK experiences a slow ‘U’ shaped recovery without any major relapses.
Although EY expects the number of profit warnings to fall, distress levels are likely to rise with a significant increase in insolvencies when the lockdown lifts.
“Companies face a unique set of additional challenges as they work to safeguard business continuity and the health of employees and customers,” said Dempster.
“The true test may be yet to come, when the life support of government packages comes to an end and they resume full financial responsibility for wages as well as the payment of VAT and rent, both of which are likely to have accrued for months,” he added.
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