Profit Watch UK Report - Investing Guide - The Share Centre

Please remember: Our website can help you make informed decisions, not provide personalised advice. If your investments fall in value, you could lose money.
Tax allowances and the benefits of tax-efficient accounts could change.

Profit Watch UK — February 2017


Revenues climb to new record, despite turbulent times

A record-breaking quarter for revenue

UK-listed companies that reported annual results between October and December posted a record-breaking performance in the final quarter of last year, in spite of political and economic turbulence. Total revenues climbed 5.5% on like-for-like basis to £116.0bn, a record high for this reporting group. Growth in revenues was broad-based, across a variety of quarters, and from large and mid-sized companies alike. Overall, almost three quarters of companies saw higher sales.

5 key companies driving revenue

Five companies accounted for £5.3bn of the £5.8bn like-for-like increase in UK plc revenues. Contract caterer, Compass, is the largest by sales to report in the quarter. It benefitted from the soaring dollar boosting an already strong performance, as did Wolseley and airport and railway station food group SSP. Tobacco giant, Imperial Brands, saw revenues rise by £1.4bn after shifting its focus to its higher value brands. It too enjoyed the fruits of sterling’s weakness. Even Associated British Foods, which has struggled to grow its top line in recent years, saw sales rise 4.7%.

Not all companies saw such positive results. While property-related companies such as Zoopla, Bellway, Paragon and Grainger Trust were boosted by the strong performance of the housing market, travel businesses reporting saw revenues under pressure. TUI and Thomas Cook both saw sales fall, with the latter pointing to the negative impact of the terrorist attacks in Turkey.

Operating profits growing fast

Encouragingly, operating profits grew at their fastest rate in three years, up 5.6% for the companies reporting in the quarter. In fact, at £10.5bn, operating profit even reached a new record. This increase was broadly spread, with two-thirds of companies increasing their operating profit year-on-year. While Compass, Imperial Brands, and Bellway collectively accounted for three quarters of the overall rise, Easyjet saw a sharp decline, ending six consecutive years of growth. Its operating profit fell 27%, the worst result of all those reporting. The airline was unable to reduce costs in the face of lower revenues. Where some companies benefit from the weak pound, it is biting deeply into EasyJet’s margins.

Pre-tax profits less encouraging

Pre-tax profits look less encouraging, but only on the surface. They fell 2.6% on a like-for-like basis to £8.0bn. However, a closer inspection suggests a stronger performance from UK plc. Imperial Brands weighed on the overall figures. Its pre-tax profits almost halved, falling by £849m, as a result of higher finance costs. Meanwhile, Shaftesbury also posted much lower pre-tax profits, down £357m, and EasyJet saw profits decline by £191m. The good news is that two-fifths of companies grew their pre-tax profits, and half widened their pre-tax profit margin to boot.

Profits rising fastest among mid-caps

Overall, companies in the top 100 saw sales rise 5.6% on a like-for-like basis, slightly faster than mid-caps (5.2%), buoyed by their greater exposure to overseas markets and favourable exchange-rate factors. However, mid-caps outperformed their large cap peers at the bottom line. The top 100 saw pre-tax profits fall 4.7%, reflecting mainly the Imperial and Easyjet figures, while they rose 1.7% for the mid-caps.

 

Helal Miah, investment research analyst at The Share Centre said: “Companies have had to contend with severe turbulence in 2016. Concerns over global growth and market volatility were followed by the Brexit vote, which injected uncertainty into the economy, and brought with it a devaluation of the pound. Meanwhile we have seen the election of a new US president, who is likely to unleash significant fiscal stimulus, and a broader recovery in commodities. Against this backdrop of change, company results are improving."

Helal Miah, Investment Research Analyst

Rises in sales and profits in the year ahead

"A weaker pound is supporting internationally exposed large-caps, and those with overseas, or dollar-based earnings will see dramatic rises in sales and profits in the year ahead. These will also benefit from an improving outlook for global economic growth. With steadily rising oil and commodity prices, and the giant pharmaceuticals see more rewards from R&D investments, we expect the top 100’s largest sectors to perform well this year. "

Helal Miah, Investment Research Analyst

“The UK economy itself is still unaffected by the coming divorce from the EU, and continues to enjoy policy support from the Bank of England. But costs are rising fast, reflected in sharply higher inflation, which could impact on margins for domestically orientated companies. Uncertainty over the UK’s future trading relationship with the EU could depress corporate investment too, acting as a longer-term drag on growth.”

Key learnings

  • UK plc sees revenues climb by 5.5% to £116bn, a record for companies reporting in Q4
  • Three quarters of companies see sales rise as weak pound begins to boost results
  • Operating profits climb at fastest rate for three years, rising 5.6% to £10.5bn
  • Broad based growth as two thirds of companies increase operating profits
  • Pre-tax profit fall of 2.6% seems disappointing, but due to just three companies
  • An improving global outlook in 2017 and a weaker pound will be good for many UK companies
  • However, rising inflation will squeeze margins, and uncertainty will hit business investment

Listen to Chairman Gavin Oldham discuss this report on Share Radio.

Weak pound helps UK profitability climb by 5.5% to £116 billion

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.