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Record profit warnings suggest difficulties ahead for whole supply chain

28 Oct 20 Profit warnings from stock market listed construction companies have reached a record high.

What's ahead?
What's ahead?

The FTSE Construction & Materials sector has issued 28 profit warnings in the first nine months of 2020 – up from 18 in the whole of 2019.

The previous worst years were 2008 and 2012 when there were 19 profit warnings during those years.

Almost 60% of the Construction & Materials sector has issued at least one warning between January and September this year, with 16% issuing more than one, according to figures collated by accountants EY.

Most of these warnings (60%) have come from the building materials subsector, as the impact of Covid-19 travelled through the supply chain, rather than from contractors and engineers as found in previous years. By comparison, over the whole of 2019, FTSE Construction & Materials companies issued 18 profit warnings, with 28% coming from building materials firms.

House-builders, who are classed separately under the Home Construction subsector of FTSE Household Goods & Home Construction, issued 15 warnings in the first nine months of 2020, compared with three in the whole of 2019.

Ian Marson, construction leader at EY UK & Ireland, said: “There isn’t just one Covid-19 story, with the impact of the pandemic varying across the industry. Most major contractors have benefited from being able to work in a modified way in most locations throughout 2020. The top tier was also in good health, having previously undergone restructuring and adopted greater contract risk management and pricing discipline.

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“But increasing operational costs and lower levels of activity has pushed pressure down the supply chain. Building materials firms had an exceptionally tough start to 2020, with the almost total closure of the house-building sector leaving suppliers facing the challenge and expense of modifying their operations – just as their most significant market dried up. While activity has since picked up, suppliers continue to face uncertain demand, their own rising costs, pressure on pricing, and the potential for disruption from Brexit.”

According to EY’s report, the total number of profit warnings issued by UK quoted companies at the end of Q3 2020 was 524, setting a new record for the annual total after only nine months. The previous record was 506 profit warnings in 2001.

Outlook for recovery

While there were just five profit warnings from the FTSE Construction & Materials sector in Q3 2020, the third quarter is typically the quietest period for corporate reporting. The sector still found itself in the top three for highest number of profit warnings, joining Industrial Support Services (six) and Investment Banking & Brokerage (five). The number of construction sector profit warnings recorded is the highest on record for a third quarter since the financial crisis, matched only in 2011.

Ian Marson added: “Pipelines look healthy now, but the outlook is less certain. While, the UK government has publicly prioritised infrastructure spending, competition for this work may also intensify given the likely drop in commercial activity in retail, travel and office space. There will be more restructuring, especially in the lower tiers of the supply chain, while contractors must retain their contract discipline and support their supplier ecosystem if they are to maintain resilience.

“We also expect to see Covid-19 provide the incentive for increased investment in technology, particularly in worksite monitoring and management. Ultimately, this could be the catalyst for solving the industry’s long-standing productivity challenge.”

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