British Gas owner Centrica PLC (LON:CNA) could be among a stream of 15 or 16 companies demoted from the FTSE 100 and FTSE 250 as an index reshuffle shows the dramatic effects of the coronavirus pandemic on the UK's big companies.
Four or five corporations are on the verge of tumbling out of the blue-chip index when the quarterly index review is decided on the basis of closing market valuations at the close of trading today, June 2, with easyJet PLC (LON:EZJ) and Carnival PLC (LON:CCL) definitely up for the chop despite a strong rally in their shares in the past week.
The travel pair's shares are still down almost 50% and 70% respectively so far this year as the holiday industry has been battered by the virus, while both just missed being relegated in March’s moves.
Almost certain to join this duo on the dive down are Centrica and aerospace engineer Meggitt PLC (LON:MGGT), both of which have seen their market capitalisation halved below £2.5bn during since the start of the year.
This means they are ranked well below the 110th place on the London Stock Exchange’s list of largest companies and so are in line for automatic demotion to the mid-cap ranks.
On Tuesday, ITV PLC (LON:ITV) and Whitbread PLC (LON:WTB) were the blue chips flirting most dangerously with relegation, while Pearson PLC (LON:PSON), Intermediate Capital Group (LON:ICP) and M&G PLC (LON:MNG) were all sitting in the relegation zone but with a good chance of avoiding the drop.
There are two companies currently in the FTSE 250 that are big enough to automatically join the blue-chip ranks, led by cybersecurity group Avast PLC (LON:AVST) and Ladbrokes owner GVC Holdings PLC (LON:GVC), both close to the £5bn market cap mark.
But with four FTSE 100 companies outside the automatic drop-zone, it will mean that promotion hopefuls Homeserve PLC (LON:HSV) and Kingfisher PLC (LON:KGF) look odd-on to gain promotion, with ConvaTec Group PLC (LON:CTEC), the maker of colostomy bags and catheters, still in with a shout.
Under the index's rules, a company is automatically relegating from the index if it falls below 111th place among qualifying companies on the London Stock Exchange at the end of each quarter, with automatic promotions for a company on the FTSE 250 if it rises to 90th position or above.
Russ Mould, investment director at AJ Bell, said eight changes are likely, four names in, four names out, but if that goes higher it would be the most dramatic index review for almost two decades.
“Six promotions and relegations (for a total of 12 changes) have not been seen in one single quarterly reshuffle since September 1992 and even four pairs changing places is relatively rare, with the last instance of this being March 2016.”
With only a small percentage change required to several firms’ market capitalisations to trigger further changes, he said investors will be watching these changes closely.
“With so many people’s pensions now invested in tracker, or exchange-traded, funds which are designed to mirror and deliver the performance of the FTSE 100 (minus their running costs), private individuals will end up with exposure to the newly-promoted names, whether they are aware of it or not.”
The likes of discount retailer B&M European Value (LON:BME) and investment company Pershing Square (LON:PSH) are among the largest 100 companies on the market but may have to wait until the next reshuffle to make the move up.
Dropping into the small caps
There are even more relegation candidates from the mid-cap index, led by events organiser Hyve (LON:HYVE), down 81%, and Elementis (LON:ELM), down almost two thirds, together with a group whose shares are still sitting around half the level they started the year: Marston’s (LON:MARS), McCarthy & Stone (LON:MCS), Provident Financial (LON:PFG), Stagecoach Group (LON:SGC) and Senior (LON:SNR).
Not much better in share price performance are Bakkavor Group (LON:BAKK), Bank of Georgia (LON:BGEO), TBC Bank (LON:TBCG) and Forterra (LON:FORT), all still down more than 40%, while JPMorgan Indian Investment Trust (LON:JII) down a third.
Given the fluctuations in the market, several of those names could be saved from the drop if their shares are carried higher over the coming days, with Bakkavor, TBC, Forterra, Provident Financial and Bank of Georgia sitting nearest to safety.
Promotion candidates from the ranks of the FTSE Small Cap index are led by BB Healthcare Trust (LON:BBH), Diversified Gas & Oil PLC (LON:DGOC) and Civitas Social Housing PLC (LON:CSH), JLEN Environmental Assets Group (LON:JLEN), Liontrust Asset Management (LON:LIO) and CMC Markets (LON:CMCX).
Given the scale of recent market moves it’s difficult to make any predictions about promotions and relegations with a high degree of certainty, a lot can change in two weeks, said analyst Nicholas Hyett at Hargreaves Lansdown.
But he said easyJet and Carnival looked likely to drop and promotions look likely for Avast and GVC.
“While it’s perhaps no surprise cybersecurity providers have been able to weather the current storm rather well, after all digital communications have become even more important as companies move to home working, GVC is a less likely beneficiary.
“The cancellation of all major sporting events has wiped out the group’s sportsbook revenue and the shares are actually slightly down since the last reshuffle. However, unlike some other operators GVC has multiple strings to its bow, and its online casino business has seen a modest rise in activity. It’s more evidence of something we’ve observed throughout this crisis – while some sectors have been hit hard, in general coronavirus and the associated lockdowns have turbo-charged trends that were already well underway.”
Helal Miah, investment research analyst at the Share Centre, looked at other promotion candidates, and said Homeserve looked a near guarantee of entry to the top 100.
“Its shares have also made a dramatic recovery since the initial sell-off and another company likely to join even if the crisis hadn’t happened as the shares have steadily climbed in recent years as customer numbers grew,” he said.
“Its latest full year results recently published show revenues and earnings climbing by double digit figures, it intends on paying out the final dividend and the crisis luckily hit during a quieter period for the group who are traditionally busy during the winter months across its developed markets.”
He said Kingfisher is a surprising candidate for re-entry, though 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 is natural for people to look to spruce up their home 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 Covid-19.
As for Convatec, it will also make its return into the top index, having 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," Miah said.
He also said with its routes being some of the first committed to returning services to normal as soon as possible, Wizz 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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