More than 40% of the FTSE Construction and Materials sector issued a profit warning in the 12 months to the end of Q1 2021, according to the latest EY-Parthenon Profit Warnings Report.
Between April 2020 and March 2021, 16 FTSE Construction and Materials companies issued at least one profit warning, representing 44% of the sector.
Ian Marson, EY-Parthenon UK&I Construction leader, comments: “With most construction sites remaining open since the initial lockdown, the sector had a better year than expected, avoiding the repeated shutdowns experienced by other sectors such as retail and leisure. While listed construction companies continued to issue profit warnings since the beginning of March, they have been on a downward trend since the second quarter last year. The additional costs of adapting to COVID-19, alongside delayed project starts and approvals, has affected profitability. Many warnings also cited contract problems that pre-date the pandemic, such as discipline over contract selection and execution.
“We are now seeing a sector with two types of firms – one group appears to be recovering well, while the other is facing significant challenges. With the outlook for commercial and retail work still uncertain, companies with exposure to these sectors remain at risk.”
Insolvency danger zone
Eleven per cent of the FTSE Construction and Materials sector has issued at least three profit warnings in a 12-month period since the start of April 2020, and half of these companies used the Government’s jobs furlough scheme in January. None of these companies have entered administration, in contrast to the 15-20% figure EY-Parthenon says it would normally expect to see doing so within a year of their third warning.
EY-Parthenon analysis demonstrates that government support, combined with a moratorium on winding-up petitions, has significantly reduced corporate insolvencies over the course of the pandemic: more than 6,000 extra companies would have entered an insolvency procedure by this point if insolvency levels had continued on the same trajectory as pre-March 2020.
Lisa Ashe, EY-Parthenon, Turnaround and Restructuring Strategy Partner, said: “A significant increase in insolvencies could have a wide-ranging impact on the wider business network. Stress is likely to spread up and down supply chains if businesses struggle to pay suppliers, or if vital parts of the chain stop working. Consequently, one business that introduces changes to become more resilient, has the potential to strengthen the wider business ecosystem.”
In the coming months, a variety of factors will affect financial planning for businesses. The furlough scheme is due to end in September 2021; deferred VAT and loan repayments have already begun; and, at the end of June, the suspension on creditors issuing winding-up petitions is set to expire.
Ian Marson added: “The Government’s ‘Build back better’ initiative will help underpin recovery in the sector, but the end of other support measures could put extra pressure on some suppliers’ working capital. The recently introduced domestic reverse VAT charge for construction services, IR35 tax changes for employing contract workers, and the tightening of supply chain credit financing could also add further strain. Large contractors will need to maintain visibility over key parts of their supply chain.
“Companies cannot simply trust in the wider economic recovery to ensure the health of their business. They must seriously consider where and how they should reshape their businesses to gain a firm financial footing for the future. It’s also crucial to keep sight of the long-term picture. The need to innovate, improve productivity, and support the net-zero agenda remain critical for continued resilience and growth.”
