Profit Watch UK Report - The Share Centre

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Profit Watch UK report - November 2016

Outlook brightens
for UK’s largest companies

Revenues dampened by BHP Billiton

Companies that reported annual results between July and September saw total revenues fall 0.8% to £96.4bn, down £7.4bn in sterling terms. This fall was largely driven by global resources giant BHP Billiton, which suffered badly as commodity prices were sharply down during the year. Excluding BHP Billiton, revenues actually rose 9.1% among companies reporting - the fastest growth in two years. 

The cohort of companies reporting in the third quarter comes from a broad mix of sectors and are generally domestically-orientated. These have broadly seen strong performances, with two-thirds of companies reporting rising sales. Housebuilders in particular have seen revenues increase on the back of a strengthened property market. Multinational, Diageo, was in the minority of companies seeing shrinking sales, with a decrease of 3.0% due to adverse exchange rate effects and disposals of some business lines.


Operating profits on the rise 

Operating profits improved too, once adjusted for BHP Billiton’s performance; its profits halved as its relatively fixed cost base was unable to adapt quickly to falling sales. Without BHP, UK plc profits rose 6.8%, with more than half of companies reporting increases. Even though a comfortable majority of companies grew their operating profits, three-fifths did so at a lower margin, with profits rising more slowly than sales. 

Pre-tax profits fell drastically at a headline level, down by 76.9% to £3.2bn, dragged down by the mining sector as BHP reported a £4.9bn loss. Over the last 12 months, miners have posted total losses of £17.1bn, a world away from the £49bn profit they posted in 2011. We may now be at a turning point for the mining sector, however, as strengthening commodity prices this year will start to feed through in the coming months. Excluding BHP, pre-tax profits were still down 5.6% as both Sky and Diageo booked lower exceptional income. Overall, there was an even split between companies growing their pre-tax profits and those seeing them in decline, and encouragingly, signs that asset write-downs are diminishing in frequency.

pre-tax profit

Asset write-downs have been a feature of many companies' accounts in the last few years, as finance directors have assessed they will be less productive than they hoped. The slowing pace of write-downs suggests 2016 should provide a low base from which UK plc profits can once again grow.

Mid-caps shine as top 100 drags down figures

The more domestically-focused 250 continued to outperform the top 100. Mid-cap sales rose 11.2% on an adjusted basis, compared to a 6.7% fall among the top 100 companies.  This trend continues right the way through into pre-tax profits, with 250 firms seeing growth of 2.5%, compared to a 9.5% decline in the 100 (excluding BHP Billiton). Not only have these mid-cap companies been more insulated from global trends, but they have less exposure to sectors that have particularly suffered in recent years, such as oil and gas, banking, and mining. 

Helal Miah, investment research analyst at The Share Centre commented: “Multinationals have suffered from a variety of sector specific global headwinds, while companies with greater exposure to the UK have outperformed in sales and profits in recent years, buoyed by the UK’s relatively strong economy. This trend should now reverse on the back of changing economic and current conditions. Since the multinationals make up a huge portion of sales and profits amongst UK listed companies, it means UK plc profits may have finally bottomed out and should begin to rise.

UK multinationals will now see their global profits translate at more favourable exchange rates to the pound, while exporters may benefit from sterling’s devaluation, although gains will depend on their reliance on international supply chains. Commodity prices have strengthened too, providing a dual boost to large-cap miners and oil companies if maintained, while there should be more limited scope for asset write-downs in the sector. On the flipside, retailers will need to consider whether to pass on increases in the cost of food and clothing, or see margins squeezed. Meanwhile, higher inflation will allow many firms to grow their top lines, but it will restrain British households. This means that companies more exposed to British consumers will be relative losers compared to those with international earnings streams.”

Helal Miah, Investment Research Analyst

Sector outlook

"Strong sales growth amongst housebuilders has contributed to the outperformance of UK focused companies. The fundamental shortage of housing should support the sector, but we expect the sales growth to moderate. Meanwhile, we expect financials to struggle. The potential loss of EU passporting rights remains a real danger, and net interest margins are set to stay lower for longer for the banks while they also still grapple with balance sheet adjustments, compensations and fines. Pharmaceuticals will continue to face the impact from generic competition although the worry over price controls has now disappeared following the US Presidential election result."

Helal Miah, Investment Research Analyst

Key learnings

  • UK plc sees revenues fall 0.8%, pulled lower by BHP Billiton, but two-thirds of companies reporting rising sales, up 9.1% excluding BHP.
  • House builders see rising revenues on back of robust property market.
  • UK plc operating profit climbs 7.4%, but margins are squeezed for three-fifths of companies.
  • Even without BHP Billiton, pre-tax profits fall 5.6% as Sky and Diageo both book lower exceptional income than 2015.
  • With lower exposure to global headwinds and troubled sectors, mid-caps yet again outperform large cap peers with stronger revenue and profit growth.
  • Positive impact of devalued pound for multinationals means profits have likely now bottomed out for UK plc.
  • Devalued pound may finally see profits increase for multinationals, although increased inflation will hit companies dependent on UK consumers.

about profit watch

about profit watch

Investment Research Analyst, Helal Miah, analyses the profitability of the UK's top 350 companies every quarter. The report won 'Best Financial Campaign' at the 2016 PRCA Awards.