FTSE reshuffle: ITV looks certain to fall as B&M rises

Analysing the latest FTSE Russell index reshuffle data

Article updated: 1 September 2020 8:00am Author: Helal Miah

  • ITV looks set to drop out of FTSE 100 as reduced advertising spend and competitor’s streaming services hits operating profits
  • Reshuffle reflects current crisis, with discount retailer B&M rising up the ranks as consumers seek bargains in tougher times
  • Others with a chance of relegation includes British Land Securities and DS Smith while Directline, Convatec, Pershing Square Holdings, Wizz Air or Unite Group look set to replace them

The June FTSE reshuffled was one of the busiest in recent times and was characterised by those that have felt the tragic consequences of economic lockdowns versus those that have benefitted from the increased pace of the shift to online services. The September reshuffle looks to be less dramatic with only one certainty for relegation from the large cap index.

Relegations

ITV was already under pressure before the crisis hit, despite a studios business that was pumping out popular dramas and reality TV programmes. Traditional TV viewership has been on a steady decline as consumers have been switching towards streaming services such as Netflix, Amazon Prime and now Disney Plus too. A more modest global economic growth also led big corporates to steadily reduce advertising spending while the loss of Champions League football didn’t help its cause. Since 2016, operating profits have steadily declined on reduced advertising spend by big corporates and more recently increased investment spending on such things as Britbox.

The pandemic has accelerated these trends as even more sign up to online streaming services and advertising spending nosedives, leaving ITV with a serious challenge to retain audience share. The Britbox offering should help, but in some investors’ eyes this may be too late as audiences have already moved on to rivals with a vast content library. The shares have fallen 60% year to date taking it to 143rd in market cap rankings among UK companies, making it a near certainty for an exit after roughly nine years in the large cap index.

Promotions

Ranked at 84th, B&M is the leading contender to replace ITV. In the current environment, it is a rare thing to see a physical retailer doing well but B&M has been a significant beneficiary of the crisis. As a discount retailer, it has already been doing well in recent years from the increased economic uncertainties but Covid-19 has led to sales jumping and it now expects to significantly beat the prior consensus H1 earnings. Analysts have now upgraded their estimates and expect full year sales growth of around 12%. As a general merchandise retailer that also sells food, it managed to keep most of its stores open during the lockdown period and shoppers have continued shopping there for bargains as many see tougher times ahead.

Others

50-50 chance of British Land also being relegated. Companies get promoted or relegated automatically if they are 90th or above and 111th or below in market cap rankings. At the time of this calculation British Land Company sits at 111th so there is a roughly 50-50 chance that it too will be booted out. Real estate groups have been feeling the knock-on pressure of struggling retailers, while the pandemic has seen shifts toward more people working from home. This is likely to be a permanent model for some businesses, bringing forth the question of how much office capacity is needed going forward. Also sitting in the danger zone is packaging group DS Smith.

Should either British Land or DS Smith be relegated, there’s a host of companies standing ready to replace them including: Directline, Convatec, Pershing Square Holdings, Wizz Air and Unite Group.

The market cap cut-off is on the close of the markets on Tuesday 1 September and the rebalancing will take effect at the open on Monday 21 September.


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.

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Helal Miah

Investment Research Analyst

After graduating with an economics degree from University College London, Helal started his career within private banking at Smith & Williamson Investment Management and later held analyst and fund manager roles with the Industrial Bank of Japan, Schroders and Mitsubishi Corporation. He is a chartered fellow of the Chartered Institute for Securities & Investment.