UK profits hit record high, but possible Brexit impact looms large

UK-listed companies that reported their annual results in the third quarter saw sales and profits hit record highs, according to the latest Profit Watch report from The Share Centre.

Multi-nationals reported the strongest performance. Contract caterer Compass was the largest company to report, seeing revenues climb by 15.1 per cent, benefiting from exchange rate gains and improving demand in overseas markets.

These two factors were also behind positive results from Ferguson, TUI and Associated British Foods. Domestically-focused companies such as JD Wetherspoon, Mitchells & Butlers and WH Smith achieved sales growth too, but at a slower rate.

EasyJet was an outlier, according to the report. Despite higher passenger numbers and higher revenues, its pre-tax profits fell year-on-year. Higher fuel costs and the pound’s weakness following the Brexit vote were major factors.

Helal Miah, investment research analyst at The Share Centre, says: ‘Whichever way you look at it, UK plc has performed well. Even without the added sheen of exchange-rate gains, we would have seen record-breaking results. Sales are climbing across the board, earnings are looking healthier still, and there is more to come.

‘Fading exchange-rate gains in 2018 won’t hold back the UK’s largest companies. With the wider global economy in great shape, multinationals will profit from strong trading conditions in their overseas businesses, and manufacturers and exporters will enjoy rising demand for their goods.’

He argues that domestically sensitive sectors, such as construction, are on shakier ground. That is because they depend more on investment into the UK and confidence in its economy. The high-profile collapse of Carillion, which had a large construction division, testifies to these pressures.

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Companies that depend on consumer demand are also likely to see their profits underperform, as real incomes continue to fall while inflation is rising.

There have been conflicting reports about the state of the UK economy. Last week, the Bank of England signalled that an interest rate hike could happen as soon as in May, as the economy keeps expanding due to global growth.

But, according to a government document leaked in January, the impact of Brexit would mean the UK is going to be worse off outside the European Union under every of the three most likely scenarios.

Under a comprehensive free trade agreement with the EU, UK growth would be 5 per cent lower over the next 15 years, according to the analysis.

A ‘no deal’ scenario would see the UK revert to World Trade Organization (WTO) rules, and that would reduce growth by 8 per cent over that period.

The softest Brexit option of continued single-market access through membership of the European Economic Area would still lower growth by 2 per cent.

The report found that every UK region would be affected negatively, with the North East and West Midlands facing the biggest economic hits.

Therefore, it remains to be seen whether UK-listed companies will continue to report healthy profits while the UK proceeds further into negotiating its terms upon exiting the EU.

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