Merlin Entertainments and Babcock International are most likely victims of next FTSE reshuffle

Helal Miah, investment research analyst at The Share Centre, makes his predictions on possible movers in next week’s FTSE reshuffle.

Article updated: 24 November 2017 11:00am Author: Helal Miah

  • Possible candidates to drop out of the FTSE 100 include an engineering support group as well as the owner of Alton Towers and Legoland
  • Current prices indicate that companies in prime promotion positions are plastic packaging provider DS Smith and online food ordering company Just Eat
  • Disappointing future guidance is a key theme for those in relegation positions

Who could go down?

In prime position to be relegated from the FTSE 100 next week is a company that has been visible in the drop zone for the last few quarters and comes in the shape of engineering support services company Babcock International. The performance of the group over the last year has been disappointing on the back of concerns for support service providers, which was notably highlighted by the problems at Carillion. The group tried to reassure investors in a trading update this week by reporting increases in revenues and pre-tax profit in the first half. However, it appears as though it was a failed bid as the shares retreated as a result indicating that concerns remain over its growth targets for next year and continued pressure on the sector as a result of Brexit and contract delays.

Merlin Entertainments' shares have taken a big dip recently, signalling that investors are concerned by the heightened threat of terrorism taking its toll on visitors, along with unfavourable weather conditions. The group have also recently ‘complained’ of the cost pressures brought about by employment legislation, particularly in the UK. Investors are likely to have also reacted negatively to disappointing forward looking guidance the group provided in October, as the expectation is now that like for like growth is likely to be in the low single digits. Merlin was hovering above the relegation places last quarter so it’s unsurprising to see it feature more prominently this time round.

Others in the mix for relegation next week include global private hospital group Mediclinic International whose forward looking guidance disappointed the market. They sit just above international medical products and technologies company Convatec and the group is likely to find themselves here because of recent operational difficulties as well as security services company G4S. 

Although unlikely to feature in this reshuffle, not far behind these companies are big retailers Marks & Spencer and Direct Line. Investors may therefore want to note that continued underperformance will make these prime relegation candidates in the not too distant future

Whose on their way up?

Leading the way at the top of the FSTE 250 at the time of writing is plastic packaging company DS Smith. Founded in 1940 in the East End of London, the group is now a leading provider of corrugated and plastic packaging in 25 countries. The group has experienced excellent sales and earnings growth in recent years, especially due to the strong trend towards online retailing where cardboard packaging is widely used to transport products. Its prominence is likely to have been boosted as we enter the busy Christmas shopping period. Recent updates also pointed to the fact that acquired businesses have made solid progress and the group therefore expects to deliver on all five of its medium term financial targets.

Also sitting pretty in the promotion places is online food ordering company Just Eat. Since floating in 2014, the group’s share price has doubled and investors are likely to have acknowledged that only good things are to come, particularly given its takeover of rival Hungryhouse was last week officially given the green light by the competition watchdog. The deal, which is worth over £200m will, according to interim chairman Andrew Griffith, enable the company to benefit more independent restaurants, while improving the breadth of choice offered to consumers. With increasing numbers of people shopping and ordering online, it really is only a matter of time until a company like this reaches the top index.

Also in promotion contention is hazard detection and life protection products producer Halma whose business has likely benefitted from the recent focus on safety regulations in the UK. Not far behind them are two energy services companies (John) Wood Group and Weir Group, both have likely benefitted in a modest recovery in oil prices.

It will definitely be worth keeping an eye on the noted company prices over the next few days.

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All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.

Helal Miah portrait photo
Helal Miah

Investment Research Analyst

Helal has spent time as an independent proprietary trader, trading the US equity futures market. He has also helped manage private client, institutional, retail and hedge funds. His qualifications include the Securities Institute Diploma and the Investment Management Certificate.