Better than expected end to 2016 for profit warnings but Scotland records second highest annual total

Scottish listed businesses issued five profit warnings in Q4 2016, two fewer than the previous quarter and one less than Q4 2015, but the annual total was the second highest on record, according to EY’s latest Profit Warnings report.

There were 19 profit warnings from Scottish head-quartered companies in 2016 which is second only to 2008 when 21 were issued.

Colin Dempster, EY’s head of restructuring for Scotland, said: “The annual total for 2016 was unusually high as a result of a record number of profit warnings in Q1. This can be attributed to the impact of the low oil price on the supply chain while the global economy struggling to build momentum was also a factor.

“Scotland’s performance in the remainder of the year was remarkably strong, generating an average number of profit warnings that was lower than the average of Q2, Q3 and Q4 for the last seven years. This is evidence of Scotland’s resilience as well as the relative stability in both the UK and global economy in the second half of 2016. It is further evidence that the actions many Scottish companies took to future-proof their businesses in the run-up to the independence referendum in 2014 has stood them in good stead for the current uncertainty. A number of sectors which are prevalent in Scotland, such as food and drink, also benefited from strong consumer spending.”

Meanwhile, UK quoted companies issued 73 profit warnings in Q4 2016, five more than the previous quarter, but 27 fewer than Q4 2015, when warnings spiked following the fall of the oil price.

Behind the headlines, however, the report says that there are less positive signals.

A record level of FTSE Support Services warnings in 2016 suggests that businesses are starting to react to uncertainty, as does the 27 per cent of warnings citing contract delays or cancellations in the final quarter. Companies exposed to the weak pound are also reporting increasing pressure on earnings, with 11 per cent of warnings citing adverse exchange rates.

Colin added: “A strong end to 2016, represents the calm before the storm. The headline numbers show the UK economy weathering the initial impact of the Brexit vote remarkably well. But, we expect 2017 to be very different in comparison to the second half of 2016 and for many companies a much tougher one.

“There is a gap between winners and losers, one which in many cases predates the Brexit vote and stems from ongoing structural weaknesses that will leave companies exposed to the significant changes and new challenges that lie ahead. Companies can’t take much for granted in this period of challenge to the political and economic consensus, but neither can they afford to be paralysed in the face of rapid change.”

Rising levels of multiple profit warnings illustrate the diverging fortunes of UK plc. The report shows that in Q4 2016, 49 per cent of companies warned for the second, third or even fourth time in the last year – compared with 37 per cent issuing multiple warnings in the same quarter of 2015.