FTSE Travel & Leisure companies have issued nine profit warnings in Q2 2020, bringing the total number of warnings issued in H1 2020 to 59, according to EY’s latest Profit Warnings Report.
This half year total is more than four times the number of profit warnings (13) issued in the equivalent period the previous year (H1 2019) and more than double the highest post-financial crisis annual total for this FTSE sector (28 profit warnings in 2018). Nearly all (95%) warnings issued in H1 2020 cited the impact of COVID-19.
There were 46 FTSE Travel & Leisure companies issuing profit warnings in H1, representing more than three-quarters (79%) of the sector.
Christian Mole, EY UK & Ireland Head of Hospitality & Leisure, comments: “While profit warnings have decreased in Q2 compared with Q1, COVID-19 continues to take its toll on the leisure sector, having exposed underlying structural weaknesses and exacerbating existing challenges. Despite the sector reopening after lockdown and a welcome Government stimulus package, social distancing will continue to limit operating capacity and consumer demand. The continuing prevalence of working from home will mean that business travel and work-related hospitality will remain at low levels, severely impacting city centre demand and wider hotel occupancies.”
A pivotal moment for UK plc
According to EY’s report, almost a third (33%) of the UK’s listed companies – compared to 18% in 2019 – issued a profit warning in the first half of 2020 (Q1 & Q2), with 84% citing the impact of the COVID-19 pandemic.
After a record breaking first quarter in 2020, when UK quoted companies issued 301 warnings – almost equivalent to the full year total for 2019 (313) – EY recorded 165 profit warnings in Q2 2020, which was almost 100 more than the same quarter last year and a 139% year-on-year increase.
Notably, 63% of companies warning in the second quarter of 2020 hadn’t issued a profit warning in the previous 12 months, indicating that the impact of COVID-19 is spreading beyond already vulnerable companies.
EY’s profit warnings report also noted that an exceptionally high percentage of all profit warnings came from the FTSE 350 – 35% in H1 2020, which was double the 2019 total.
Lisa Ashe, UK Restructuring Partner at EY comments: “The size of a business appears to offer no protection, with more FTSE 350 companies than ever issuing profit warnings. Boards need to guard against complacency and be ready to take swift and decisive action to reshape their business to face a different future than they imagined just a few months ago. Companies could find that previously healthy parts of their business are no longer profitable. This is a pivotal moment for UK plc.”
Q3 could bring ‘renewed pressure’
As well as having exceptionally high levels of profit warnings, FTSE Travel & Leisure is also one of the sectors with the highest number of companies warning three or more times in a 12-month period. According to EY analysis, this level of profit warnings indicates a 1 in 5 chance of a distress event within the next 12 months. This includes administration, liquidation, debt restructuring, Company Voluntary Arrangement, or distressed sale.
Christian Mole added: “After the peak summer season, when staycation-driven bookings will be high, the financial stability of many businesses will come under renewed pressure. Q3 will see the phasing out of the furlough scheme, which represents a significant period for the sector. It may also be an extended period of lower demand, particularly related to business travel and commuter spending. We expect many businesses will need to reshape their operating models to meet these new challenges, with more distress arising as they struggle to adapt.”