Interactive Investor

Profit warnings put these two sectors on edge

14th June 2023 15:20

by Graeme Evans from interactive investor

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Hot on the heels of Croda International, two more companies have sounded the profits alarm. How have investors reacted as the economic storm clouds gather?

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A pair of profit warnings unnerved mid-cap investors today as selling swept through the recruitment sector and knocked one of London’s most valued industrial stocks.

The downgrades by staffing provider Robert Walters (LSE:RWA) and the former ICI polymers business Victrex (LSE:VCT) highlight the impact that higher interest rates look to be having on business confidence, investment decisions and levels of consumer activity.

They come a few days after speciality chemicals firm Croda International (LSE:CRDA) lowered profit guidance due to a combination of lower sales volumes and customer de-stocking.

The warning by Robert Walters, which said 2023 profits will be significantly lower than forecasts, wrong-footed investors given the largely reassuring employment market trends seen in the UK, the US and elsewhere.

While it said fundamentals such as job flow, employee shortages and wage inflation all remain solid, the trends around reduced levels of candidate confidence and the lengthening time to hire seen at the end of 2022 have yet to show a sustained improvement.  

The update comes less than 50 days since Toby Fowlston took the CEO role held by Robert Walters, who started the business on his own in a serviced office in 1985 and went on to create an operation employing 4,400 people in 31 countries.

Fowlston has spent most of his career with the group, having joined as a consultant in London in 1999 and held senior positions leading operations in both the UK and Asia Pacific.

Significant investment in both headcount and infrastructure has been made over the last two years, with the company insisting today it had no plans to reverse that work.

As Robert Walters himself pointed out in his final trading update in April, a return of confidence to the Chinese economy, a stabilisation of the technology sector and a continued decline in inflation should have a positive effect on the global outlook.

However, the All-Share company’s shares today fell 57p to where they stood in mid-April at 409p, compared with more than 550p at the of 2022. Fellow recruitment firms also fell sharply in the FTSE 250 index, with PageGroup (LSE:PAGE) down 32.8p to 409.4p, Hays (LSE:HAS) off 7.2p to 101.8p and SThree (LSE:STEM) 16p lower at 379p.

The economic storm clouds are also building for investors in the industrial chemicals sector after Victrex cut expectations for the September financial year. The company provides high-performance polymers for use in smartphones, aeroplanes, cars, oil and gas operations and medical devices.

Lancashire-based Victrex, which joined the stock market in 1995 following a management buyout from ICI two years earlier, said economic headwinds and customer de-stocking reported alongside May’s interim results had continued.

This has left volumes tracking more than a fifth lower on last year’s record, while full-year revenues are set to be between 6% and 10% lower.

With no step up in demand going into the final quarter currently visible, the company now sees profits of between £80 million and £85 million. The mid-point of this range is about 11% short of City expectations.

The FTSE 250-listed shares fell by more than 10% at one point after the update but later recovered to stand 70p cheaper at 1,467p. In a note published earlier this month, Peel Hunt reiterated its “buy” recommendation and 2,300p target price.

The broker said its optimism reflected good progress in China, the continued development of the company’s portfolio of “mega-programmes” and a healthy balance sheet.

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