Engineering and manufacturing can expect a rough ride in the first two quarters of 2009, with a possibly unprecedented level of profits downgrades for the full year. However, there are some grounds for optimism because whether by luck, or design, the majority of UK engineering companies are entering the recession with largely clean balance sheets, and which could put emphasis on companies with plenty of spare cash.
The reason why the first half of the year will be the worst is that last year saw an almost unprecedented demand for capital equipment as a result of the mining boom. Capital expenditure fuelled growth for companies like Weir and early indications are that resources companies will cut back cap-ex spending by at least 40 per cent next year as projects are moth-balled.
Harry Phillips, analyst at Evolution said: "The comparatives are going to be tough in the first two quarters. Although there'll be pressure on underlying trading, a lot of engineering companies with a world presence will benefit from a lot of exchange rate effects."
He said the current downturn for engineering companies is different from the last period of distress in 2003. Companies had loaded up with debt to fund an acquisition spree in the early 2000s and there had been a savage de-rating of engineering stocks - companies like Charter were almost ruined by debt. The experience - rescue rights issues and forced mergers - has left engineering firms with balance sheets in better shape going into the recession.
Debt re-financing will not play a huge role next year and most company debt does not come up for refinancing until around April 2010, but under such strained market conditions, companies will have to start planning any financing at least a year in advance to have a hope of achieving reasonable terms. In response to this, expect to see cash hoarded to bolster the balance sheet in preparation for meeting the bank manager.
Analysts predict that the April/May IMS season will be the next "pressure point" for sector and could be the trigger for a new round of downgrades. This would then follow the pattern of previous recessions and result in more sell-offs, although not at the same levels as this year. Evolution predicts that this will precede a period of recovery.
