The FTSE Construction and Materials sector issued just three profit warnings between January and June 2021, according to the latest EY-Parthenon Profit Warnings Report.
This was the lowest first-half total in five years. However, supply chain pressures could increase stresses in the second half of 2021, the accountants warn.
The findings reflect the current high demand for construction, with house-building leading the increase in activity. However, the growth in demand has outstripped the supply of raw material, haulage, shipping and labour. A supply chain and labour shortage – combined with a fall in activity in pandemic-hit industries – could impact both activity and margins, and increase stresses in the second half of 2021, the report says.
Ian Marson, EY-Parthenon UK&I Construction leader, said: “While the historic low level of profit warnings and growth in demand give reasons for the construction sector to celebrate, a number of factors have come together to pose increased challenges for the rest of 2021. Brexit exacerbated an ongoing shortage of skilled labour. Essential raw materials are also in short supply, including timber and long steel products in particular. High demand in maritime shipping – which is still recovering from the impact of the Suez Canal blockage – has further impacted the supply chain.
“Existing projects are continuing but cost inflation may put new projects at risk. Companies with inflation clauses in their contracts should be able to weather short-term price increases but if prices remain high and shortages continue, project delays may become inevitable. Meanwhile, working capital pressures are increasing in the material supply chain, with credit insurance under pressure as prices rise.”
The EY-Parthenon report reveals a record low of just 32 profit warnings from across all UK-listed companies in Q2 2021, the lowest quarterly total EY has recorded in over 22 years of profit warning analysis. The second quarter’s record low comes in stark contrast to the record high of 301 in Q1 2020 and the second highest ever total of 165 in Q2 2020.
EY recorded similar dips in 2002/3 and 2009 after 9/11 and the global financial crash, respectively. Analysis suggests that markets tend to over-correct and last year’s drastic expectations reset, combined with a better-than-expected recovery and government support, meant that all but a handful of companies beat depressed forecasts.