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IHS MARKIT LTD.

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IHS Markit : KPMG UK Tech monitor

07/29/2021 | 05:13am EDT

Tech sector activity surges but recovery hampered by critical supply chain issues and rising component costs.

Business activity growth at tech firms hits six-and-a-half year high

Tech sector employment expands at record pace

Recovery accompanied by unprecedented rise in costs amid supply constraints

Above 50 = growth, seasonally adjusted, Above 50 = growth in the next 12 months

KPMG UK Tech Monitor Index

Sources: KPMG, IHS Markit

The latest KPMG UK Tech Monitor Index survey showed a sharp rebound in activity at tech firms during Q2 2021, but recovery is under threat as the sector registered its steepest increase in operating costs on record, due to rising transport, component and staff costs.

Monthly data showed that growth momentum built throughout the quarter as more pandemic restrictions were lifted and business investment picked up. The upturn in output was supported by a substantial rise in new orders that was the quickest for six-and-a-half years. This recovery in sales volumes drove a record increase in employment as tech firms looked to expand capacity and meet rising customer demand.

However, a worldwide shortage of semiconductors escalated during the second quarter of 2021 resulting in the number of manufacturers citing a lack of electrical components reaching a record high since 2004. IHS Markit's Global PMI survey revealed that reports of supply shortages for electrical items were nine times higher than usual in May, which led to particularly severe disruption at automotive plants.

Disruptions to global technology supply chains added to cost pressures faced by UK businesses after the national lockdown. Survey data highlighted that Brexit and COVID-19 were the most commonly cited reasons for higher input prices in the second quarter of the year, although both indices have eased since the start of 2021. Staff shortages have emerged as a driver of cost pressures and constraint on growth, with record falls in candidate availability and an exceptionally strong rise in vacancies putting pressure on businesses.

Bina Mehta, Chair, KPMG in the UK, said:

'With the lifting of COVID-19 restrictions helping to ease business conditions, the tech sector is powering ahead with recovery and growth with new orders and recruitment hitting new highs. This is great news for the UK economy - as the tech sector is a major contributor to economic health and wealth.

'Against this positive outlook, there is continued pressure on margins and costs, partly due to increased supply chain expenses as a result of Brexit and the impact of the pandemic on labour costs. Furthermore, there are some clouds on the horizon; a shortage of electrical components, more widespread than at any other time during the past 17 years, is hampering the ability of tech businesses and their customers to meet their recovery plans. This could have a knock-on impact to other businesses and their long-term growth strategies, impacting the pace of the UK recovery.'

'Whilst these aforementioned challenges will test the resilience of the UK tech sector, if they can be overcome there is a window of opportunity for the industry to accelerate ahead of its European peers and consolidate its position as a global tech leader.'

Business activity expands at quickest rate since Q4 2014

At 59.2 in Q2, the headline Business Activity Index rose from 49.2 in Q1 and was well above the neutral 50.0 level that separates expansion from contraction. Furthermore, the rate of output growth was the quickest seen since Q4 2014.

The rollback of lockdown restrictions, alongside improved business and consumer confidence, helped to lift activity, according to survey respondents.

Similarly, business activity rebounded sharply across the rest of the UK economy during Q2. Overall growth was slightly faster than that seen in the tech sector, largely due to the reopening of consumer-facing areas such as hospitality and leisure.

Fastest increase in new orders for six-and-a-half years

Helping to drive the sharp upturn in business activity at tech companies was a renewed and rapid increase in total new work. At 60.0 in Q2, the index measuring new order volumes rose from 48.9 in Q1 and signalled the steepest rate of growth since Q4 2014.

Improved order books were linked to the restart of delayed projects, greater willingness to spend among clients, and increased export sales.

Steepest rise in tech employment since the survey began in 2003

A rapid rise in sales led to much greater pressure on operating capacity during the second quarter. The latest survey indicated that outstanding business rose to the greatest extent since the start of the index in Q1 2003.

Consequently, tech companies added to their payrolls for a third consecutive quarter. This index rose from 52.3 in Q1 to 58.1 in Q2, which marked a survey-record rate of job creation. Staff hiring among tech companies was also faster than seen across the UK private sector as a whole (index at 57.0).

Rapid increase in costs as wages rise and supply chains come under strain

Latest data illustrated intense cost pressures at tech firms. The sector registered its steepest increase in operating expenses on record during Q2. The most commonly cited reasons for input cost pressures were Brexit and pandemic-related disruption. Survey respondents frequently cited higher staff costs, rising prices for critical components, and greater transport bills.

Higher costs were generally passed on to clients, with prices charged also rising at the fastest rate since the index began in Q1 2003.

Business confidence highest for over 14 years

The easing of COVID-19 restrictions and successful vaccine rollout lifted business confidence across the UK tech sector in the second quarter. Optimism reached its highest since Q1 2007.

Around 67 percent of the survey panel forecast output growth in the year ahead, while only 6 percent expect a decline. Business investment in digital infrastructure, sustainable technologies, and AI innovation are all forecast to boost tech sector activity in the months ahead.

ENDS

For more information please contact:

KPMG UK

Lizzy Chesters

Media Relations Manager

+44 (0)20 3078 3732 or +44 (0)7732 400269

lizzy.chesters@kpmg.co.uk

IHS Markit

Joanna Vickers

Corporate Communications

T: +44 207 260 2234

joanna.vickers@ihsmarkit.com

Notes to editors

UK Tech Sector Purchasing Managers Index (PMI) data

UK Tech Monitor Index data is derived from a representative sub-category of approximately 150 tech companies within IHS Markit's regular PMI surveys of UK manufacturers and service providers. Tech is defined in this report as technology software, technology services and manufacturing of technology equipment. All figures are seasonally adjusted and smoothed using a three-month moving average, to better highlight underlying trends in the data.

Technology sector industry groups

Software publishing (SIC 582), Computer programming, consultancy and related activities (SIC 620), Data processing, hosting and related activities; web portals (SIC 631), manufacture of computer, electronic and optical products (SIC 26), manufacture of electrical equipment (SIC 27).

About KPMG

KPMG LLP, a UK limited liability partnership, operates from 21 offices across the UK with approximately 16,000 partners and staff. The UK firm recorded a revenue of GBP2.3 billion in the year ended 30 September 2020.

KPMG is a global organisation of independent professional services firms providing Audit, Legal, Tax and Advisory services. It operates in 147 countries and territories and has more than 219,000 people working in member firms around the world. Each KPMG firm is a legally distinct and separate entity and describes itself as such. KPMG International Limited is a private English company limited by guarantee. KPMG International Limited and its related entities do not provide services to clients.

About IHS Markit

IHS Markit (NYSE: INFO) is a world leader in critical information, analytics and solutions for the major industries and markets that drive economies worldwide. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. IHS Markit has more than 50,000 business and government customers, including 80 percent of the Fortune Global 500 and the world's leading financial institutions.

IHS Markit is a registered trademark of IHS Markit Ltd. and/or its affiliates. All other company and product names may be trademarks of their respective owners 2021 IHS Markit Ltd. All rights reserved.

Disclaimer

The intellectual property rights to these data are owned by or licensed to IHS Markit and/or its affiliates. Any unauthorised use, including but not limited to copying, distributing, transmitting or otherwise of any data appearing is not permitted without IHS Markit's prior consent. IHS Markit shall not have any liability, duty or obligation for or relating to the content or information ('data') contained herein, any errors, inaccuracies, omissions or delays in the data, or for any actions taken in reliance thereon. In no event shall IHS Markit be liable for any special, incidental, or consequential damages, arising out of the use of the data. IHS Markit is a registered trademark of IHS Markit Ltd and/or its affiliates.

(C) 2021 Electronic News Publishing, source ENP Newswire

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