Royal Mail looking to send Renishaw back to FTSE 250 in latest quarterly index reshuffle

“The latest FTSE 100 reshuffle, the results of which are due to be announced after the close on Wednesday 2 June, could be relatively quiet this time around, with just one demotion and one promotion. Royal Mail and Renishaw are the two firms that look most likely to swap places, although cybersecurity specialist Avast, engineer Weir and even Real Estate Investment Trust British Land are currently within 5% to 8% of the market cap cut-off for relegation to the FTSE 250,” says Russ Mould, AJ Bell Investment Director. “In the seemingly unlikely event that any of that trio slips through the trapdoor, the most likely beneficiaries based on their current market valuations are ITV, Dr Martens and Electrocomponents. 

“There is still a week to go before the final calculations by index compiler FTSE Russell, so a lot could still change, especially if markets become more volatile. Renishaw made it into the FTSE 100 on the very last day before the cut-off last time around (2 March), thanks to an announcement from senior management that they were putting the firm up for sale.”

Source: Sharepad, Refinitiv data, as of 0900 on Tuesday 25 May 2021

Possible demotion candidates

•    At the moment, only Renishaw looks set for the drop into the FTSE 250. Its £3.7 billion market cap leaves the water utility ranked 118th within the FTSE 350, below the safety mark of 110th. The precision instruments specialist vaulted into the FTSE 100 for the first time ever in March, thanks to the announcement on the very day of the last review that Executive Chairman Sir David McMurtry and non-executive Deputy Chairman John Deer planned to sell their combined 53% stake in the firm. The Board therefore decided to put the whole company up for sale. However, the shares have since slipped back for two reasons. The first is the lack of any fresh news on the sale process. The second is the ongoing shift in equities away from companies that trade on high multiples of earnings as they are perceived to meet the ‘quality’ and ‘growth’ tags and toward cheaper, more cyclical firms which could offer more rapid profit growth in the near-term as the glove emergences from the pandemic and lockdowns (‘value’ stocks, for want of a better turn of phrase). 

Possible promotion candidates

•    There are no FTSE 250 firms with a market cap sufficient to merit a ranking of 90th or higher and thus automatic promotion. 

•    If Renishaw is demoted, that would open the way for a return to the FTSE 100 for Royal Mail, whose market cap ranks it 93rd. This would be Royal Mail’s third stint in the UK’s premier index, after those of 2013-17 (which came almost immediately after its initially very successful flotation) and then March to December 2018. Stake-building by Czech billionaire Daniel Kretinsky, soaring parcel volumes, a good performance from its overseas GLS operations and a return to the dividend list have all underpinned a surge in Royal Mail’s shares, which has also reflected investors’ switch from toward downtrodden, recovery (or ‘value’) plays over the past few months, and since Pfizer Monday last November in particular.

•    Avast, Weir and British Land are all on the fringes of relegation, as their current market caps rank them 106th, 103rd and 102nd respectively so if any of them suffers a sudden lurch downward as the wider market holds firm that could open up promotion to ITV, Dr Martens or Electrocomponents, who rank 98th, 101st and 105th. ITV is the current leader of that pack and an unexpected promotion would represent a return to the main stage for the first time since September 2020’s demotion. At that time, the firm’s income from advertising was taking a hammering amid a deep recession but hopes for a recovery there, strong online viewing numbers and a fresh round of merger and acquisitions in the media industry have all prompted a revival in the shares. Those takeovers in the USA represent the latest landgrab for both subscribers and prime content and it could be argued that ITV has a strong library of programming that could tempt a bidder at some stage – even if John Malone’s Liberty Global group still seems content to do no more than sit on its 9.9% stake in the broadcaster.

Appendix: How promotion and relegation are assessed

•    All of the major FTSE indices are reviewed on a quarterly basis. They are set according to share prices from the close of business on the Tuesday before the first Friday of the review month (in this case Tuesday 1 June). The changes will be announced after the close on Wednesday 2 June and come into effect as of the market opening on Monday 21 June.

•    In general, a stock will be promoted into the FTSE100 at the quarterly review if it rises to 90th position, or above (by market capitalisation) and a stock will be demoted if it falls to 111th (by market value), providing it fulfils the other criteria, such as free float and a presence on the Main Market.