“We have already had two changes to the FTSE 100’s make-up in 2019 and further changes look likely at the June reshuffle which will be based on closing share prices on Tuesday 4 June. JD Sports Fashion and AVEVA look certain to enter the FTSE 100 and the issue now is which firms will make way for the latest members of the UK’s elite corporate index,” says Russ Mould, AJ Bell investment director.
“At the moment, easyJet and Marks & Spencer are the most likely candidates for relegation to the FTSE 250. Demotion for M&S would be the first time the company has dropped out of the FTSE 100 since the launch of the index in 1984.
“However, it will only take a share price movement of a few percentage points to leave Just Eat, Hikma Pharmaceuticals, Sainsbury, Direct Line or DS Smith hovering over the trapdoor.
Likely entrants in Q2 2019
• JD Sports Fashion has defied the wider UK high street doom and gloom as it has continued to benefit from the athleisure boom and knocked Sports Direct off its perch.
Management is also supplementing strong organic growth with acquisitions. Analysts tend to become nervous when British firms buy American ones as the track record of such deals is pretty poor but JD’s £400 million swoop for Finish Line seems to be going to plan and over here the company is buying Foot Asylum to further cement its competitive position.
JD’s shares have done very well over the past year and if there is a knock on the stock it is that the valuation is getting lofty at around 18 times earnings this year, and 16 times earnings for next year and the prospective yield is less than 1%. However, earnings forecast momentum remains strong and that underpins the shares’ ongoing rise.
• Cambridge-headquartered AVEVA is a specialist in computer-aided design software and its tools are used by engineers when they plan and build huge capital projects in industries such as shipbuilding, oil and gas and power plants. The company further developed its market position with a complex merger with France’s Schneider that effectively doubled the company’s size and also enabled it to return nearly £10 a share, or £650 million, in surplus cash to shareholders in 2018. Chief executive Craig Hayman did well to close out the deal, as it had fallen through previously under different management.
Potential departures in Q2 2019
• easyJet currently has the smallest market cap of any firm in the FTSE 100 at around £3.6 billion, so it could be the first to go once JD Sports and AVEVA are elevated to the top flight.
It has been a tough year for the company and indeed the airline industry as a whole, thanks to excess capacity in the short-haul market, price pressure, rising fuel costs, start-up costs associated with an acquisition at Berlin airport and the uncertainty caused by the UK’s fractious relationship with the EU. This has potentially persuaded consumers to stay at home rather than fly abroad for their holidays and raised questions over whether, under EU law, UK-based airlines could lose their licence to operate and access to Europe’s open skies agreement if their shares are more than 50% owned by non-EU residents. easyJet just about reaches this threshold.
If easyJet is relegated, that would end a stint in the FTSE 100 that dates back to March 2013, when Dame Carolyn McCall was CEO. She stepped down in December 2017 to take the top job at ITV and Johan Lundgren took over.
• Marks & Spencer is still trying to persuade investors as to the merit of its plan to buy into Ocado’s food delivery business and be patient as they wait for results from the turnaround programme outlined by chair Archie Norman and CEO Steve Rowe. Another year of falling sales and profits, along with a dividend cut, has not helped in this regard. M&S has been ever-present in the FTSE since the launch of the index in 1984 but a 5% fall in its share price today is not helping its cause for survival in the blue chip index.
• Hikma Pharmaceuticals has never quite managed to cling on to FTSE 100 status and the drug manufacturer is teetering on the brink once more after the company’s failure to meet analysts’ forecasts with its full-year results in March. The shortfall came from the injectables operation, which represents around 40% of the company’s sales, compared to 30% from each of branded drugs and generic treatments. Hikma had been driving injectables sales through new product launches and increased production of opioid painkillers as the US suffered a shortage of such products. Guidance for 2019’s sales of generic drugs also disappointed.
Hikma last achieved promotion to the FTSE 100 in December so this stay could be brief. It previously suffered relegations in June 2017 (after a one-year stay), March 2016 (also after a one-year stay).
• Online food order and delivery service Just Eat is facing its second demotion from the FTSE 100. It previously fell out of the index in December 2018 only to bounce back at the first opportunity in March and all this within five years of its April 2014 flotation.
Investors are still wondering quite what to make of the £4.2 billion company’s prospects. It returned to profit in 2018 as sales rose 43% and revenues grew 28% year-on-year in the first quarter of 2019.
However, the company is still investing heavily in delivery services, having previously positioned itself as an online platform for takeaway outlets that then took care of delivery themselves. This move is designed to combat other online platform rivals but Amazon’s move to take a stake in Deliveroo, which has already raised its game with the launch of its Marketplace+ platform, and Uber’s massive fund raising means the competition is only getting hotter.
In addition, CEO Peter Plumb unexpectedly resigned after barely 18 months in the job in January. Chief customer officer Peter Duffy stepped up on an interim basis but the company is still looking for a full-time boss at a time when it faces pressure from disgruntled shareholder Cat Rock Capital. The US activist investor is calling for a further overhaul of management and a merger with a rival platform to bolster its competitive position.
• Sainsbury is another retail struggler which faces strategic questions following the collapse of its proposed merger with Asda. Like M&S, Sainsbury was a founder member of the FTSE 100 in 1984.
• Direct Line has been dogged by fears over price competition in the car insurance market and those concerns grew after results from leading industry players for 2018 and early 2019 revealed record levels of claims inflation. Direct Line has acknowledged that premiums have not kept up with claims inflation, which has been running at the upper end of its long-term expectation of 3% to 5%. Rising labour and parts costs have increased repair bills, too and analysts have started to wonder whether Direct Line’s 8%-plus dividend yield is entirely safe. Direct Line entered the FTSE 100 for the first time in September 2014.
• At DS Smith investors seem unmoved by a lowly valuation and attractive yield, focusing instead on fears of packaging oversupply coming out of China and the debt accumulated by the firm in the wake of its €1.7 billion acquisition of Spain’s Europac in summer 2017.
DS Smith entered the FTSE 100 for the first time in December 2017, alongside Just Eat and Halma, upon the relegation of ConvaTec, Merlin Entertainment and Babcock.
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 4 June). The changes come into effect in mid-to-late 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.