Profits at FTSE 350 companies have ‘turned a corner’ but while there may be more to come, investors should stay clear of businesses relying on the squeezed UK consumer, according to The Share Centre.
The online stockbroker's latest Profit Watch UK report, which analyses the profits of the UK’s largest 350 businesses, shows they benefited from stronger global growth and a weak pound with nine out of 10 companies reporting rising sales and profits.
Although annual profits for the FTSE 350 remain well below their 2012 peak, The Share Centre analyst Helal Miah said ‘UK plc has turned a corner’.
In the final quarter of 2017 revenues increased 12.6% to £126.6 billion on a like-for-like basis, hitting a new record for the last quarter of the year, once Debenhams (DEB) fell out of the rankings and Standard Life acquired Aberdeen.
The increase in profits marked the second year of growth after five years of failing to expand.
Growth in the US, eurozone and China lifted the performance of UK companies with operations overseas or that rely heavily on export markets, offsetting a lag in the UK economy and creating a difficult environment for domestic companies.
The world’s largest contract caterer Compass (CPG), which derives 90% of its sales overseas, increased its revenues 15.1%, thanks in part to the pound's fall. Excluding the impact of currency moves, the growth was a more modest 4.1%.
Miah said strong growth was also recorded at building materials supplier Ferguson (FERG), previously known as Wolseley, travel company TUI (TT), food producer and Primark owner Associated British Foods (ABF), airport cafe operator SSP (SSPG), and engineering business Smiths Group (SMIN).
Those companies that are reliant on the British consumer only managed single-digit sales growth in the period, which was ‘markedly slower’ in context.
The bright spots for UK domestic companies were house builders and other property-related companies like search engine Zoopla (ZPG).
Out of the 10 sectors analysed by Miah, nine saw their profits rise, with only banking declining ‘owing to a small dip in gross interest income at Clydesdale Bank’.
Revenues have now risen steadily for four consecutive quarters, which Miah described as ‘the best picture in years’.
‘With the wider global economy also in great shape, multinationals will profit from strong trading conditions in their overseas businesses, and exporters will enjoy rising demand for their goods,’ said Miah.
However, Miah warned the pound's fightback from post-Brexit vote lows would temper that buoyancy.
‘The pound is still very competitive against the US dollar, but the greenback has weakened markedly over the last six months... as we move further into 2018, the pound’s recent rise will increasingly provide a headwind for UK plc,’ he said.