Private equity hunts for FTSE bargains as corporate distress mounts

Profit warnings from UK-listed companies are soaring as inflation and a shortage of workers take their toll.

The number of profit warnings issued by UK-listed companies in the first six months of 2022 jumped 66% compared to the same period in 2021, with a record number of companies citing rising costs as the reason behind their warning, according to EY-Parthenon’s latest Profit Warnings report.

The report reveals that 136 profit warnings were issued in H1 2022, up from 82 in the first six months of 2021.

The findings come as private equity houses continue to hunt for bargains on London’s listed markets.

“UK companies are back in the crosshairs of private equity, and we are seeing a repeat of H1 last year when a number of high quality cash generative companies were acquired at knockdown prices,” noted an analyst from investment bank Canaccord Genuity late last month.

According to broker Peel Hunt, there were 27 UK publicly listed companies under offer at the end of May, marking the highest amount since August 2021, when there were 32 under offer.

During the second quarter of 2022, 64 warnings were issued, down slightly from the 72 issued in Q1 but still 10% above the pre-pandemic average and double the 32 issued in Q2 2021.

Of the warnings issued in Q2 2022, a record 58% of companies cited rising costs as one of the main reasons behind the warning, up from 43% in Q1, while 19% noted labor market issues.

In total, of the 1,222 UK-listed companies, 70 have issued at least two consecutive warnings in the last twelve months. On average, one in five companies delist within a year of their third warning, most due to insolvency.

The FTSE sectors with the highest number of warnings in Q2 2022 were travel and leisure (eight), retailers (seven), and personal care, drug and grocery stores (seven) – all of which have been significantly affected by rising costs, supply chain issues and staff shortages.

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Despite also contending with an increase in cost, labor, and supply chain stresses, FTSE construction and material companies issued only three profit warnings in H1 2022, with many larger companies able to absorb or pass on price increases and leverage their buying power to avoid material shortages.

“Over the first half of this year, we have seen profit warnings prompted primarily by cost and supply chain issues, but as we start to see a fall in consumer demand and confidence, it is likely that other underlying stresses will become exposed,” said Alan Hudson, EY-Parthenon’s UK and Ireland turnaround and restructuring strategy leader.

“Businesses will need to prepare for lower growth, tighter capital and significant market volatility in the coming months. As profit warnings and stress levels rise, we’re starting to see more companies issue multiple profit warnings and a return of companies approaching the ‘three warning rule’.”

Half of all the profit warnings issued in H1 2022 by UK-listed companies came from consumer-facing sectors, compared with a third in H1 2021. At a sector level, nearly half of all FTSE personal care, drug and grocery stores (47% ) and 15% of FTSE retailers issued a profit warning in Q2.

Three-quarters of the FTSE retailers that issued a warning in the first half of 2022 came from companies that operate exclusively or mostly online.

These companies have been particularly affected by the shift in sales back to ‘bricks and mortar’ stores and were disproportionately affected by increasing delivery costs and product returns, EY-Parthenon said.

This article was published by Financial News’ sister title Private Equity News

To contact the author of this story with feedback or news, email Sebastian McCarthy


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