“Profit Warning”: a playlet in four acts

Act I: Spring

Chief executive: So what do I say about next year?

Finance director: Well, you could say we’re confident . . .

CE: Yes, but of what, exactly?

FD: Er, of carrying on in pretty much the same vein — you know, something about “balanced profitable growth”.

CE: What about a forecast?

FD: Ah. I wouldn’t, if I were you.

Act II: Summer

CE: All on track?

FD: Oh, yes. Sort of. Notwithstanding the challenging backdrop. And a few teensy short-term issues that impacted on revenue and, um, operating . . .

CE: Profit? Are you telling me that, just four months in, we’re putting out a profit warning?

FD: Well, you could point out that second-half profit will be “directionally consistent” with last year’s. By which we mean the good direction!

Act III: Autumn

CE: Please tell me it’s looking better.

FD: Absolutely. Performance levels have improved. OK, so they might not have improved quite as much as we’d hoped. But, get this: the decline is no worse than in the first half! Single digits!

CE: It’s another flipping profit warning isn’t it? I’ll get my coat.

Act IV: Winter

New chief executive: Happy new year. Change and renewal starts here.

FD: Indeed, and while we’re on that, there are still a few issues to iron out. So you might want to trim the last profit guidance we gave.

NCE: But I only started a few days ago!

FD: I know — and already you’re into the swing of things.

NCE: What can we do longer term? Could we change our business mix? Or even change our name?

FD: We kind of did that in 2013 . . .

This is not quite what happened at Essentra, the packaging and cigarette filter group formerly known as Filtrona. But its trading update on Monday — like those from Cobham, Mitie and Pearson of late — appeared to stem from a similar train of events. And all four companies’ woes suggest profit warnings are coming thicker and faster these days.

Essentra’s was its third since June, Cobham its fourth in 14 months, Mitie its third in four months, and Pearson its fifth since 2012.

Had they been attributed to two of the three reasons cited by consultancy EY for serial warnings, shareholders might have been more forgiving. But none looks like the product of a macroeconomic shift, such as Brexit-inspired sterling weakness, nor a “perpetual spiral” of less profit/less capital.

They appear to derive from the third reason EY identifies: a failure to get to the bottom of why contracts turn bad, due to poor management information, internal controls or IT. Some of the companies have now recast their senior roles. But they will need to act quickly to avoid a repeat performance.

Bovis: the urge to merge

News that Bovis shareholder Schroders invited Berkeley Group to merge with its rival, first reported by the Sunday Times, shows there are two ways to make money from housebuilding.

First, if you have backed a housebuilder that has problems with delayed completions and quality control — hastening the departure of its chief executive — mooting a merger with a larger competitor via the press can deliver an uplift. Shares in Bovis rose as much as 5.6 per cent on Monday, even though no talks with Berkeley have taken place.

Second, if you have backed a less problematic housebuilder, ignoring a proposed merger with a smaller competitor — even one that has lost 20 per cent of its value in seven months — can ensure you remain focused on your real source of profit: land.

As analysts have been quick to point out, the returns Berkeley could make on a cash bid for Bovis would be lower then the returns achievable from simply buying new land, and gaining planning permission for it.

With land prices easing, paying a merger premium for Bovis’s land bank and the dubious skills of its contractors makes little sense. As one industry watcher noted sagely at the beginning of the year: “It’s not the building that adds value particularly.”

Thinking outside the box

As business models go, selling fresh air is one of the more inspired. Last year, a website tried selling jars of the stuff — “farmed” in the UK — to wealthy Chinese seeking respite from pollution. For £80 a jar. No one could really get away with charging for air, could they?

Well, that is what the logistics industry has been doing, say ecommerce vendors: charging for the size of boxes even if they are full of Bubble Wrap. Until now. DS Smith’s new bespoke “box on demand” technology promises to eradicate packaging “voids”. Ideal for sending glass jars to China.


● The author owns shares in Pearson, former owner of the Financial Times