Ahead of the next FTSE Russell index reshuffle calculation on 3 June, we look into the most likely candidates for relegation and promotion.
EasyJet and Carnival set to fall out of FTSE 100
- Most likely constituents to face relegation are Carnival, EasyJet, Centrica and Meggitt as the coronavirus crisis shakes up FTSE 100
- Also teetering on the edge is ITV and education group Pearson who are both struggling to keep up with the transition to going online
- A surprising candidate for re-entry is long-suffering Kingfisher which has benefitted from the spike in DIY as the nation stays at home; Homeserve, GVC and Avast also look likely to promote
At the last FTSE reshuffle three months ago, we were just beginning to see the impact of coronavirus on economies and the stock market, and that reshuffle did partly reflect the chaos to come. Travel group TUI was being heavily sold off amid restrictions on travel while investors saw the looming crisis in retail, and troubled groups such as Kingfisher saw shares slide and subsequently were booted out along with scandal-hit NMC Health. Among those rising up were Pennon and Fresnillo, a defensive utility group and a miner benefitting from the rise in safe haven precious metals prices.
Three months on and the reshuffle again will be heavily influenced by this crisis. We’re likely to see at least four companies leaving the top index based on market capitalisations just after the open on 28 May.
|Near Certain||Carnival, EasyJet, Centrica||Meggitt Avast, GVC, Homeserve,|
|Possible||ITV, Pearson||Kingfisher, Convatec, WizzAir|
The clearest candidate to fall out is Carnival whose shares plunged more than most, down nearly 60% since the crisis first hit Europe as travellers were left stranded on quarantined ships for weeks. With further cruises and bookings coming to a halt and the perception that cruises could be the area most hit within the travel sector, further equity capital raising hasn’t been enough to prevent its market capitalisation falling, now standing at 143rd place and therefore to be inevitably ejected.
Of all this month’s relegation candidates, Centrica is probably the one least affected by the current crisis. Centrica has been in the relegation zone for some time now down to many other factors, the biggest being the tough trading environment in the UK as new rival utility providers sweep away its customer base through offering lower bills. Energy price caps from the regulator limits its profits while its upstream business has felt the direct impact of lower oil and gas prices. The global crisis has helped mask many of the troubles, helped greatly by being the owner of British Gas. Many felt a dividend cut was already on the cards even before the current crisis, making it easier for them to cancel the final dividend at the time of the publication of the full year results.
Meggitt, the aerospace engineering group which only recently made a return to the top index, will shortly be out again. Its business was already feeling the impact of the grounding of Boeing’s 737 Max planes following two accidents and now with airlines having grounded planes, fewer parts and components are needed while on the ground. The medium term outlook also looks highly uncertain as the likes of Boeing and Airbus will build fewer planes.
Despite a recent recovery, easyJet’s share price is still roughly half of what it was back in February, leaving it as the fourth near-certain candidate for relegation. A strong liquidity position and its apparent ability to survive grounded flights for months isn’t enough for investors as it simply cannot win when people aren’t travelling. Like many others, dividend cuts and job losses have been announced to save on cash flows. However, EasyJet is one of the better-run airlines and we’re confident it can make a better recovery than some of its peers when lockdowns and travel restrictions are lifted.
Other companies at risk of removal include ITV, which already faced a challenging number of years due to the transition of viewers to streaming services and advertising spending going online rather than on traditional broadcasting. This crisis will likely see these trends accelerate. Pearson is the other at risk as it has been struggling to adjust to providing education materials from books to online resources. With schools and universities shut down, its situation hasn’t been helped by the crisis.
Among those to come into the top index, the software security group Avast ranks the highest at 80th place. The shares did experience a significant selloff at the onset of the crisis but has nearly clawed back all of those losses as more people working from home need tighter security and antivirus software on their devices. This is expected to more than mitigate the loss from some business sectors hit by the pandemic. The group was on course to be in the top index before the crisis hit anyway, as organic growth for the last financial year hit 6.5%. Management has maintained its guidance for the current year and this confidence led them to keep their final dividend.
GVC has been in and out of the top index lately, another company that has made a good recovery since the initial stock market hit from the crisis. The shares plunged as sporting events were cancelled worldwide, leaving punters with not much to bet on. However, the group’s diversification through other sources such as online casinos, poker and slot games is expected to bring in new customers who are at home with not much else to do.
Homeserve is the third company with a near guarantee of entry to the top 100. Whilst its shares have also made a dramatic recovery since the initial sell-off, they were likely to join even if the crisis hadn’t happened as the shares have been steadily climbing in recent years with growing customer numbers. Its latest full year results recently published show revenues and earnings climbing by double digit figures, and it intends on paying out the final dividend. The crisis luckily hit during a quieter period for the group who are traditionally busy during the winter months across its developed markets.
A surprising candidate for re-entry is Kingfisher. Its shares have made a strong recovery as DIY stores remained open in some places, albeit through click and collect services only. With people stuck at home, it’s natural for people to look to spruce up their homes when they now have so much time on their hands. However, we fear this will be another yo-yo stock as the retail sector still grapples with its pre-existing challenges, as well as the impact from coronavirus.
Depending on how stocks move in the next few days we could also see medical supplies group Convatec make its return into the top index. It had trouble several years ago in shifting operations from the US to the Dominican Republic but, with these issues resolved, the current environment doesn’t do much harm for the group’s prospects. With Eastern European airline WizzAir being one of the first airlines committed to returning services to normal as soon as possible, it may be another candidate for promotion.
This reshuffles looks set to be one of the biggest in many years. We expect a minimum of four in, four out, but depending on market moves we could see more.
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