Profit Watch UK Report - Investing Guide - The Share Centre

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Profit Watch UK — May 2016

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Profits plunge to a
9-year low

It’s been a turbulent year for the UK’s top 350 companies, many of which have reported annual results during the first quarter.

Revenues fall by £191bn year on year

UK plc has reported its worst set of financial results since before the financial crash. Revenues fell 15.1% among companies that reported annual results between January and March, representing a drop of £191bn. At £1.07trn, revenues were the lowest since 2007. Taking into account the results of the entire 350 as reported over the last year, at £1.64trn, collective revenues were 10.5% lower year on year. This is the third consecutive year sales have fallen. 

Global headwinds hit UK plc’s largest sectors hardest

Global trends have hit the UK’s biggest companies hard, with the mining, oil and banking sectors seeing the biggest impact. These three sectors, which account for two fifths of all top 350 revenues, collectively saw £202bn wiped off sales in the latest reporting quarter. As concerns over global growth intensified, commodity price declines accelerated, knocking producer revenues. Meanwhile, falling and negative interest rates have made it difficult for banks to generate top line growth.

Domestic-oriented companies have done better

The scale of the falls in the big sectors masked encouraging signs elsewhere. Excluding those three major industries, revenues rose 2.5% as companies exposed to the UK’s improving economy grew sales. Building materials and construction companies, especially the housebuilders, saw booming sales, while retailers (outside the supermarket sector) benefitted from improved consumer spending. Media and support services also traded strongly.

It is not just sales that have disappointed across the 350. Operating profits for this cohort of companies fell by two fifths compared to a year ago (-38.5% like for like), dropping to £55bn as profit margins were squeezed across the majority of sectors. This was the lowest level of operating profit since at least 2007, when Profit Watch UK’s records began.

Oil and mining companies made heavy losses

Most of the decline was due to the oil and mining sectors, whose operating profits collectively fell £37.5bn. Sectors with fixed costs but rising sales bucked the trend, with the travel and leisure industry seeing operating profit margins expand. The construction industry, enjoying higher volumes and higher prices, saw sharply higher operating profits, and among housebuilders, every company increased its margins.

Excluding these three big industries, pre-tax profits rose 14.9%, but only because GlaxoSmithKline made a huge profit on the sale of its oncology business. Indeed, 20 sectors saw pre-tax profits fall while 17 saw them rise, showing that strength was not broadly based.

Pre-tax profits dropped 42.7%

At the pre-tax level, the fall in profits was even more severe for companies reporting their annual results by the end of March, down 42.7% year on year at £50.3bn. Mining and oil companies were heavily loss-making, as asset write-downs were added to already lower operating profits. The banking sector saw profits fall to the lowest level since 2008, when they made huge losses during the financial crisis.

Mid-caps outperformed, with pre-tax profits increasing 3.8%

The greater domestic focus of the UK’s mid-caps meant they again outperformed their global top 100 counterparts. Top 100 revenues fell 16.7% year on year, while mid-250 companies saw theirs dip 1.8% (-2.1% after adjusting for index changes), but only because mining company Evraz saw such a big decline. This trend continued further down the profit and loss account. While mid-caps also saw operating profits drop, with margins compressed, the fall was half as fast as that seen among the top 100. Mid-cap companies actually saw pre-tax profits rise 3.8%, and more importantly +12% after adjusting for index changes, while top 100 companies saw them fall 47.9% (-48.0% like-for-like).

Listen to our founder, Gavin Oldham review this month's Profit Watch UK report.

Our view

Investment Research Analyst, Helal Miah, said: “The weakness in UK plc’s collective performance is disappointing for investors. Lower profits than at any time in the last nine years help explain why share prices have made little progress since before the financial crisis, though they have naturally rebounded from the mid-crisis lows. Investors have, of course, enjoyed healthy dividends, but the lack of growth at the bottom line means capital gains have been harder to come by."

Helal Miah, Investment Research Analyst

The worst is over for most sectors

"It hasn’t helped that the UK stock market’s biggest sectors (oil, mining and banking) have performed the worst, dragging down the top 350's profits for three years running. These multinationals have been at the mercy of global headwinds. Investors should take some comfort that profitability is now likely to begin improving, although the oil sector has another tough year ahead, while the banking industry must continue to grapple with record low interest rates."

Helal Miah, Investment Research Analyst

"That these three sectors can weigh so heavily on the 350’s profits highlights the unequal weighting across the index. For passive investors, this hammers home the fact that tracker funds can leave them with a dangerously skewed portfolio. Clever stock picking or more internationally orientated funds are easy ways to diversify these risks away."

Key learnings

  • Weak UK profitability helps explain range-bound share prices in recent years.
  • The worst is over for most sectors, but oil and banking face another tough year.
  • The UK stock market’s sector concentration means index tracker funds are insufficiently diversified.

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.