The following commentary was first published on Friday as part of the IN THE KNOW market insight series, exclusive to Alliance News Professional.
Published 02 Jun 2014 12:30
LONDON (Alliance News) – Bookmaker William Hill PLC is one of two companies set to be relegated from the UK’s leading index at next week’s FTSE review, while changes in the mid-cap index are set to be entirely driven by the resurgence in initial public offerings seen earlier in the year.
William Hill is set to be joined by investment group Melrose Industries PLC in dropping down to the FTSE 250, as investors place their bets on private equity company 3i Group PLC and real estate investment trust Intu Properties PLC instead.
The quarterly FTSE index review is based on changing market capitalisation, and sees those FTSE 250-listed stocks that are the 90th biggest or larger in the main market move up, and FTSE 100 companies that are 111th biggest or smaller move down, keeping the indices balanced. Similarly, the main market companies that are the 325th biggest or larger move up to the FTSE 250, and those that are 376th or smaller move down to the FTSE SmallCap.
The latest review is based on the closing prices of Tuesday June 3, with the movers announced by FTSE after market close on Wednesday June 4, and the changes taking effect from the start of trading on Monday June 23.
Re-indexing can lead to increased trading activity as, for example, fund managers with FTSE 100 tracker portfolios will need to offload stocks that no longer sit in the index and may want to buy the stocks that move in.
Here’s a run down of the likely moves ahead of the official announcement:
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FTSE 100 Adds:
3i Group: Market capitalisation GBP4.21 billion. The private equity company has been among the biggest companies in the FTSE 250 for some time, but has been beaten to the finishing post at recent re-shuffles by the likes of recently listed Royal Mail and resurgent housebuilder Barratt Developments. 3i looks like a safe bet for FTSE 100 inclusion this time, given its strong performance over the last couple of weeks. It has gained nearly 13% since publishing its full-year results on May 14, compared to the index which has remained almost perfectly flat over the same period. Current share price 432.5p.
Intu Properties: Market capitalisation GBP4.0 billion. Shares of the real estate investment trust, which focuses on UK-based shopping centres, came under pressure a couple of months ago when the group announced a rights issue priced at heavy discount to the group’s net asset value to pay for the latest shopping centres in its portfolio. Since the share dilution took place at the end of March the stock has been on an almost unstoppable rise, outperforming the FTSE 250 by almost 13% and putting it in line for re-inclusion to the FTSE 100 after being demoted last year. REIT’s are very sensitive to interest rate movements, and the message that rates are staying low for longer, from the central banks of both the US and the UK, has hit home for investors over the last couple of months, says Jefferies analyst Robert Duncan. Moreover, economic data has been improving rapidly, particularly in the UK where real wage growth has just about returned and consumer spending looks set to rise. “Intu is more-or-less a pure play on UK consumer spending,” says Duncan. Current share price 315.6p.
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FTSE 100 Deletes:
Melrose Industries: Market Capitalisation GBP3.02 billion. The engineering investment group suffered a number of ratings downgrades after publishing its full-year results back in March, when it reported higher profit that was driven by its acquisition of Elster Group. Other businesses struggled. The stock has failed to make any meaningful ground since, underperforming the FTSE 100 by more than 12%, and is now set for demotion into the FTSE 250. Current share price 282.6p.
William Hill: Market Capitalisation GBP3.09 billion. The bookmakers have fallen out of favour with both regulators and investors alike in recent months. Since the last index review, the sector has been hit by a tax hike that was announced by Chancellor of the Exchequer George Osborne in his 2014 budget. The government increased duty on gambling machines to 25% from the previous 20%, which analysts estimate will cost both William Hill and its FTSE 250 listed rival Ladbrokes in the region of GBP20 million. In an environment of increasing regulation and consumer protection, there is concern that further regulation could be announced at any time, hurting the bookies’ bottom line and leading investors to place their bets elsewhere. Current share price 355.2p
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FTSE 250 Adds:
Just Eat: Market Capitalisation GBP1.35 billion. The online food delivery service joined the London Stock Exchange’s “high growth segment” on April 3 with a market cap of GBP1.47 billion, making it the second-largest London IPO of the year so far. Saga, the largest, isn’t eligible for inclusion this time round because its IPO came too late for it to be considered. Just Eat has since moved to a regular listing to attract more investment, which also makes it eligible for inclusion to the FTSE 250. Even though the stock has lost 12% since it’s IPO, its size makes it comfortably large enough for entry to the FTSE 250 next week. Current share price 238.68p.
AO World: Market Capitalisation GBP1.15 billion. Shares in the online domestic appliances retailer have been on a gentle slide since its late February IPO at 285 pence. The group recently launched a new range of television products and audio-video accessories on its website, ahead of the upcoming football World Cup, in hope of customers upgrading their TV packages for larger screens in high-definition to watch the games. It remains to be seen how much of a boost the World Cup will actually provide for AO World. Investors will get a good idea when the company publishes its full-year results on Thursday next week. However, by that time it it likely to have already been selected for inclusion into the FTSE 250. Current share price 272.75p.
Pets at Home: Market Capitalisation GBP1.04 billion. The pet supplies retailer joined the main market just after the last index review, on March 12, with a market cap of 1.23 billion. In a similar fashion to Just Eat, Pets at Home has underperformed the FTSE All-Share by about 17% since then. Even so, its size makes it extremely likely to be added to the FTSE 250 next week. Current share price 208.938p.
Kennedy Wilson Europe Real Estate: Market Capitalisation GBP1.03 billion. Since its IPO at 1,000 pence on February 28 the closed-ended investment fund’s shares have been relatively stable compared to some of the other recently-listed names. Last week, the group revealed a deal to acquire a UK loan portfolio from Lloyds Banking Group unit Bank of Scotland for up to GBP93.5 million in cash. Current share price 1,024p.
Brit: Market Capitalisation GBP969 million. The speciality insurance group joined the main market on March 28. Its shares started at 240 pence and have been relatively stable since then. Earlier this month, Brit reported a small increase in its first-quarter gross written premium, while also saying it had inked a deal to acquire the renewal rights to Lloyd’s of London managing agent QBE Underwriting Ltd’s London-based dedicated Lloyd’s aviation business. Current share price 242.298p.
Poundland: Market Capitalisation GBP881 million. Poundland is a good example of the changed landscape for UK consumer’s over the last few years. While the major supermarkets struggle for market share, the discount retailers have been booming. Poundland floated at a price of 300 pence on March 12 and jumped as much as 30% on it’s first day of trading due to huge investor demand. Since then the shares have come off the high, but continue to trade well above the IPO price and Poundland looks set to join the FTSE 250. Current price 352.35p.
Exova Group: Market Capitalisation GBP625 million. The company provides testing and calibration services across a range of sectors. The company joined the main market on April 11, starting at 220 pence. There’s been a good appetite for the shares since then, but it currently looks like the group will just miss out on FTSE 250 inclusion as it doesn’t quite meet the minimum market cap, although a spurt of about 3% in the coming days could put it in contention. Current share price 250p.
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FTSE 250 Deletes:
While none of the companies listed below have a market capitalisation small enough to automatically put them in line for deletion from the FTSE 250, the six smallest in the index will be forced out by the newly listed names detailed above. Currently, this means that the following companies will move down to the FTSE SmallCap.
BH Global Limited: Market Capitalisation GBP346 million. Current share price 1,200p.
888 Holdings: Market Capitalisation GBP444 million. Current share price 126.5p.
KCOM Group: Market Capitalisation GBP473 million. Current share price 92.474p.
Partnership Assurance: Market Capitalisation GBP520 million. Current share price 131p.
Herald Investment Trust: Market Capitalisation GBP523 million. Current share price 677.5p.
Merchants Trust: Market Capitalisation GBP540 million. Current share price 513.5p.
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By Jon Darby; jondarby@alliancenews.com; @jondarby100
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