First FTSE Reshuffle Since Sell-Off Ousts Travel Stocks
Four companies, including cruise giant Carnival and airline easyJet, have been ejected from the FTSE 100 as the Covid-19 crisis changes the make-up of UK plc
(Mornignstar) Cruise giant Carnival (CCL) and budget airline easyJet (EZJ) have been ejected from the FTSE 100 in the latest quarterly index reshuffle, as the effects of the Covid-19 crisis continue to weigh heavily on the travel sector.
British Gas-owner Centrica (CNA) and engineering firm Meggitt (MGGT) have dropped from the FTSE 100 into the FTSE 250. Companies set for promotion, meanwhile, are ones that have benefited from the recent economic disruption and changes to consumer behaviour. Online security firm Avast (AVST), has earned promotion into the top flight along with home repairs company Homeserve (HSV), B&Q owner Kingfisher (KGF) and gambling firm GVC (GVC).
The FTSE is reshuffled every three months and this is the first shake-up since the coronavirus sell-off. Which companies move in and out of the FTSE 100 is based on their total market capitalisation at the end of the specified trading day - in this instance, June 3. The changes take effect of the start of the trading day on June 22.
To avoid the same borderline companies dropping out and back in every reshuffle, a company must be in the top 90 by market cap in order to be promoted. Likewise, to be demoted, the firm has to be below the 110th biggest company by size.
Travel Stocks Set for Relegation
Shares in Carnival have slumped 67% this year to £11.77 as cruises were suspended when countries went into lockdown. Doubts remain about the viability of the industry even as lockdown restrictions are eased, especially after the outbreak of coronavirus on a number of cruise ships. Morningstar analysts say Carnival’s shares are still trading below their fair value of £16.30, but the company no longer has an economic moat and its uncertainty rating is very high. Even when cruise ships start sailing again, reluctant travellers and the cost of upgrading ship hygiene mean lower profits for the industry in the long term, points out analyst Jaime Katz.
EasyJet is one of a number of airlines that have grounded flights in the pandemic and the company’s shares have halved this year to 725p. While many airlines such as easyJet, Ryanair and British Airways are now starting to re-open European routes, demand for flights is expected to be sharply below pre-coronavirus levels. Still, Helal Miah, investment research analyst at The Share Centre, thinks there are some grounds for optimism: “EasyJet is one of the better-run airlines and we’re confident it can make a better recovery than some of its peers when lockdowns and travel restrictions are lifted.”
Meggitt’s woes are also related to the airline industry – as a supplier of parts to companies like Boeing and Airbus, the company was already on the back foot before Covid-19 after Boeing grounded the 737 Max aircraft after two accidents.
Energy provider Centrica, meanwhile, is not affected as much as the other likely FTSE 100 rejects by the coronavirus crisis, notes Miah. But cheaper rivals and energy price caps mean that Centrica – which has just axed its final dividend – has been in the relegation zone for some time. The company’s shares have fallen from 90p to just below 40p this year, a drop of 55%.
Who's Gained Promotion?
With home working and learning the new norm, Avast has been one of the strongest candidates to break into the FTSE 100. The stock, which we profiled as a disruptor earlier this year, would be the 80th largest company in the index based on recent calculations.
While the firm's shares fell sharply during the March sell-off, they have since recovered amid strong demand for anti-virus software as more people work from home. Avast’s shares are up from 474p at the start of 2020 to 522p in early June, a strong recovery from the 270p lows seen in March.
They say you can’t beat the bookies and that seems to be the case with Ladbrokes owner GVC. The company was hit hard by the suspension of sporting events worldwide. Still, “with more people at home with not much else to do”, Miah says online casinos and poker games have picked up the slack from lost betting slips.
Homeserve has also benefited from the stay-at-home trend, wth more people using (and breaking) appliances such as washing machines that its engineers are called out to fix. Miah argues that even without the coronavirus crisis, the company’s growing customer base meant a promotion to the FTSE 100 was inevitable at some point. The stock has the added allure that the company has committed to paying its final dividend too.
B&Q owner Kingfisher has also joined the FTSE 100 – just three months after it left the index. Home DIY has boomed as people in lockdown have tackled those long-neglected house jobs – plus, DIY stores were among the first retailers to be allowed to re-open in May. Morningstar analysts think the company is undervalued at just over 200p, assigning its shares a fair value of 256p.
Index provider FTSE Russell changes the constituents of its indices every quarter to reflect changes to Britain’s biggest companies. Size isn't the only factor in the reshuffle as other factors are also at work: some companies are taken private in a takeover (such as Arm Holdings in 2016), others are merged (such as Paddy Power and Betfair) and some are delisted, such as NMC Healthcare, which went into administration in April. In the last quarterly reshuffle in March, miner Fresnillo (FRES), water company Pennon (PNN) and finance firm Intermediate Capital (ICP) joined the FTSE 100.