Credit crunch continues to bite Cambridge businesses, says Ernst & Young report


17-04-2008

Research released by Ernst & Young today reveals that East Anglia’s plcs saw no respite in the first quarter of 2008, with four profit warnings issued from the region; an increase of three warnings when compared to the last quarter of 2007 and up one warning compared to the same time last year.

Research released by Ernst & Young today reveals that East Anglia’s plcs saw no respite in the first quarter of 2008, with four profit warnings issued from the region; an increase of three warnings when compared to the last quarter of 2007 and up one warning compared to the same time last year.

This gloomy picture of East Anglia’s economy was echoed nationally, where in the first quarter of 2008 profit warnings reached 114; the highest first quarter figure since 2001 and up 11 per cent from Q1 2007.

Profit warnings in the region were attributed to ‘difficult trading conditions’, ‘sales short of forecasts’, ‘R&D and technology costs’ and the ‘credit crunch’.

Tom Lukic, Corporate Restructuring partner at Ernst & Young comments: “Across the UK as a whole, profit warnings remained above the 100 mark for the second quarter in a row, driven by the deepening impact of the credit crunch and a record number of retail warnings. The last time UK plc issued more than 100 profit warnings in consecutive quarters it was 2001, when the end of the technology-led boom meant painful readjustment. The hangover from the credit-boom could be equally severe especially as some sectors are warning on current poor trading but may have failed to factor in the impact of a sustained downturn in demand.”

The highest warning sectors nationally were General Retailers with 18, equalling their record peak of Q1 2007, Support Services with 14, Software & Computer Services with 13 and Media and General Financial with eight.

East Anglia mirrors the UK picture in part, with one warning issued from the Software & Computer Services sector. Warnings were also issued by companies operating in Technology Hardware & Equipment and the Household Goods & Home Construction sector.

The number of profit warnings issued by UK General Retailers this quarter equals the record number recorded in Q1 2007. Retail profit warnings usually peak in the first quarter, when retailers provide Christmas and January sale post-mortems. However, it is clear this year that the sector is in more distress than at the start of 2007. The 12 months to the end of March 2007 saw 26 per cent of the sector issuing a warning. By comparison a remarkable 42 per cent of FTSE General Retailers had issued a warning to the year to date ending March 2008.

Mr Lukic added: “It would be reasonable to expect more of the same, if not worse, for the rest of 2008. Yet, retail sales showed resilience in February and March. However, looking behind the figures it is evident that food and seasonal items drove most of the sales growth. Other sectors such as household goods saw a decline highlighting that consumers are cutting back their spending on big ticket purchases and is evidence that the pressure is beginning to build.

“The credit crunch will become real and personal to East Anglia’s borrowers this year, especially the mortgage holders coming off fixed-rate deals. The period of economic uncertainty may even persuade individuals to increase savings from their historic lows, leaving retailers with even less of the disposable income pie.”

Consumer-facing industries will undoubtedly continue to suffer distress as the UK is weaned, perhaps abruptly, off its credit addiction. Those companies linked to the house building cycle as well as ‘big ticket’ retailers are going to be especially vulnerable in the coming year. Although they have lowered their expectations for growth this quarter, it might not be enough to prevent further profit warnings along the housing chain if the swift withdrawal of mortgages and confidence from the markets prompts a sudden housing downturn. Credit contraction will also have a wider impact on investment and discretionary spend.

Mr Lukic concludes: “Limited or more expensive access to credit will continue throughout 2008 and perhaps into 2009. Lenders’ balance sheets will not return to health overnight. This credit constraint will make the “crunch” personal and painful for consumers and companies and we expect elevated levels of profit warnings in the year ahead.

“Underperforming companies that have warned this quarter are being harshly punished in the current economic climate and evidence of this can be seen in an average 20 per cent drop in share price. This, and the increased volatility in equities, bonds and loan pricing could mean that 2008 represents the start of the next investment cycle for distressed players – and many have built teams and raised funds in anticipation.”

Ends

For further information please contact

 

Adam Holden

Ernst & Young Media Relations

Tel - 0121 535 2128

Mob - 07917 000028

Email - aholden@uk.ey.com

 

Rosanna Lander

Ernst & Young Media Relations

Tel - 0121 535 2398

Mob - 07952 351018

Email - rlander@uk.ey.com

 

 

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