Index reshuffle looks set to deliver Ocado to the FTSE 100

“The latest quarterly reshuffle of the FTSE 100 index is due to be calculated on the basis of closing market valuations on Tuesday 29 May and at the moment Ocado is poised to break into the UK’s corporate elite at the expense of support services firm G4S,” says Russ Mould, AJ Bell Investment Director.
24 May 2018

“However, it is Marks & Spencer which will be trying to avoid the headlines here. A strong rally in the stock after its full-year results should help Steve Rowe’s charge avoid the drop, although only Mediclinic International, Severn Trent and G4S currently have a lower market value.

“M&S would have to drop to 111th in the UK’s eligible market capitalisation rankings to be automatically ejected from the index and that would need a drop in the company’s valuation to around £4 billion, or 250p a share.

“A greater threat would be other companies moving into an automatic promotion slot, by becoming at least the 90th most valuable firm.

“Ocado’s £5.8 billion price tag is just enough, at the moment, with gambling services operator GVC not far away at £5.6 billion and Weir at £5.1 billion.

“Ocado and GVC would be making their debut in the FTSE 100, while Weir last fell out of the index in September 2015 after a five-year spell in the top flight.”

Possible promotions

Ocado

A meteoric run from barely 240p six months ago to 870p may just be enough to carry Ocado into the FTSE 100 for the first time, even though the £5.8 billion company is not expected to make a profit until 2020 at the earliest.

Partnership deals with Sweden’s ICA, France’s Groupe Casino, Canada’s Sobeys and now America’s Kroger have all helped to validate the bull thesis on the stock – and boss Tim Steiner’s strategy – by suggesting Ocado is more of a technology company than a (loss-making) online grocery delivery firm. 

All four partnerships involve start-up costs and have yet to become operational, so in many ways the hard work is just beginning for Mr Steiner and his team, as they need to prove that these deals will ultimately generate consistent profits and cash flow.

GVC

Corals, Ladbrokes, Mecca and William Hill used to dominate the betting markets in the UK, thanks for the huge High Street presence but those days of dominance are gone, even if they still own large shop estates. The new Big Four so far as British gamblers are concerned are Paddy Power Betfair, Bet 365, Stars Group and GVC.

All have adapted to the new, online world much more effectively and with the exception of Stoke-based Bet 365 all have supplemented rapid organic growth with strategic acquisitions.

Paddy Power merged with online exchange Betfair in 2016, Stars has just acquired SkyBet and having previously snapped up Sportingbet in 2012 and bwin.Party in 2016 GVC has vaulted itself into the big time with this year’s £4 billion purchase of LadbrokesCoral.

Promotion to the FTSE 100 would be a stunning achievement for boss Kenny Alexander and a firm whose shares only began trading on AIM in 2004. It offers sports betting and gaming, via brands such as partypoker and Foxy Casino and, unlike Ocado is already very profitable and very cash generative.

Analysts expect the firm to generate €4 billion in sales and operating profit of nearly €600 million in 2018. Around two-thirds of sales come from the UK and GVC is therefore exposed to the Government crackdown on Fixed Odds Betting Terminals, although Mr Alexander has already played this down, saying this risk was factored into the price paid and will be partly covered by cost cuts. In addition, GVC will doubtless be eyeing up the potential opportunity presented by the US Supreme Court’s decision to legalise sports wagering across any state which wishes to authorise it.

Possible demotions

G4S

Demotion would end a brief stint back in the FTSE 100 for G4S, which rejoined the index in June 2017. G4S had previously been demoted in December 2015 after eight years in the index, a tenure that was ended by the collapse in earnings which followed the outsourcing specialist’s role in a 2013 scandal relating to UK public contracts, whereby the company was found to have overcharged the Government.

A pick-up in new contract wins and improved cash flow under a turnaround plan led by boss Ashley Almanza had returned the shares to investors’ favour.

However, the shares topped out at around 340p last summer and promptly fell by a third to around 240p, despite increased profits and reduced debt in 2017, as the fall-out from Carillion’s collapse has weighed on sentiment toward the support services sector.

Demotion would claim yet another scalp in the support services sector. Capita and Babcock have already dropped out of the index, while FTSE 250 firms Serco and Mitie have continued to struggle to win favour for their turnaround plans, even if their fortunes have not deteriorated anywhere near as badly as those of sector peer Carillion.

Marks & Spencer

Another ugly set of full-year results from Marks & Spencer, pock-marked as they are by another half-a-billion pounds worth of (supposedly) exceptional costs, may not be quite enough to get the High Street bellwether demoted from the FTSE 100 for the first time ever, but it could be a close run thing.

M&S will need to start delivering on its promises if it is to avoid the trap door at some stage, although boss Steve Rowe’s target to deliver sustainable, profitable growth ‘within three to five years’ means investors will need to be patient.

The irony of Ocado being promoted as M&S battles to stay in the index will be lost on no-one, especially as Just Eat entered the FTSE 100 in December and another online specialist, albeit in a different sphere, GVC, is also jockeying for position.

If M&S does drop out of the index, that will mark the departure of yet another FTSE 100 founding member.

Two have already disappeared this year as GKN was acquired by Melrose (although that firm is now in the index) and Ladbrokes (via a merger with Coral) by GVC (which is pushing for inclusion).

Any demotion for M&S would mean just 27 of the original FTSE 100 remain in the index, 15 under the same name as then and 12 more under a different guise. Another 13 are now part of a company that is still in the FTSE 100, via a break-up, merger or takeover.

1984 founding FTSE 100 members still in the index

Same name

Different name (former name in brackets)

 

 

Associated British Foods

Aviva (Commercial Union)

Barclays

BAE Systems (British Aerospace)

Barratt Development

BP (British Petroleum)

Johnson Matthey

British American Tobacco (BAT Industries)

Land Securities

GlaxoSmithKline (Glaxo)

Legal & General

Imperial Brands (Imperial)

Lloyds Bank

Prudential (Prudential Assurance)

Marks & Spencer

Reckitt Benckiser (Reckitt & Colman)

Pearson

RELX (Reed International)

Royal Bank of Scotland

Rio Tinto (Rio Tinto Zinc, or RTZ)

Sainsbury

Royal Dutch Shell (Shell Transport & Trading)

Smith & Nephew

RSA (Royal Insurance)

Standard Chartered

 

Tesco

 

Unilever

 

Whitbread

 

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. The changes come into effect in the middle of the following month.

  • 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.

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