Construction firms buck the trend for falling profit warnings, according to report

In its quarterly Profit Warnings report (12-page / 1.3MB PDF), Ernst and Young highlighted the construction sector as one of those with companies "affected by the most substantial economic and structural difficulties" as a result of changing spending patterns and turbulence in the eurozone. 41% of 'construction and materials' companies listed on the FTSE stock exchange have issued profit warnings, indicating that their profit in the coming quarter is likely to noticeably decline compared with the same quarter of the previous year, so far this year.

The report covers companies listed on the main market, as well as on the alternative investment market (AIM). General retailers, media, software and computing firms and support services also issued a proportionately high number of profit warnings over the second quarter.

The figures come shortly after the publication of the monthly Construction Purchasing Managers' Index (PMI) figures for June, by Markit and the Chartered Institute of Purchasing and Supply, recorded the fastest rate of contraction for business activity in the construction sector in two and a half years – as well as falling orders and employment rates in the sector. Ernst and Young's head of restructuring for Europe, the Middle East and Africa, Keith McGregor, said that although the Government had promised increased investment in infrastructure, this would "take some time to take positive effect".

Construction law expert Mark Job of Pinsent Masons, the law firm behind Out-Law.com, said that although the general trend "perhaps adds weight" to a growing industry-wide perception of increased opportunities, difficult trading conditions seemed set to continue for "a while yet".

"Converting opportunities to work for 2012 was always going to be a tall order, and with a number of contractors also admitting that they have been operating at 'zero margins' for the first time in their history as they approached the end of 2011, the significant increase in profit warnings is not that surprising," he said. "Undoubtedly, difficult trading is set to continue for a while yet and there is still much uncertainty - but perhaps this could be the start of a slowly improving outlook."

McGregor said that the figures showed order levels were beginning to rise, however, it was unlikely that the benefit would be felt in the sector until next year at the earliest,

"There is still uncertainty surrounding the timing of public spending, while financing uncertainties limit private sector expansion," he said. The Government announced a review of the controversial private finance initiative (PFI) funding model late last year; however, is yet to report on its proposed alternative.

Overall, profit warnings by UK companies fell 18% in the second quarter of 2012, however the analysts said that this figure was as much to do with "reduced expectations" and falling input prices as it was improving conditions. A total of 60 profit warnings were issued this quarter - 13 fewer than during the first quarter of 2012 and just below the 64 profit warnings issued the same time last year.

"Part of the fall in warnings is undoubtedly due to a slight improvement in trading conditions, alongside hopes for an Olympic boost, and, crucially, falling input prices," Alan Hudson of Ernst and Young said of the report. "However, many companies have also battened down the hatches and cut costs to meet targets, while recent peaks in profit warnings and increased eurozone turbulence have also drastically reduced expectations in many sectors. Even if the UK economy moves back into the black this summer, the recovery still lacks the traction it needs to build sustainable momentum."

However, the analysts concluded that overall profit warnings were unlikely to rise significantly further over the rest of the year without a "further negative jolt" to the economic outlook.

"A slow and difficult recovery is now pretty much 'built in' into current profit forecasts due to an almost continuous flow of bad news and the spike in warnings towards the end of last year and the beginning of this," McGregor said.