Homeserve could find itself out in the cold after latest FTSE 100 reshuffle

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The latest FTSE 100 reshuffle, the results of which are due to be announced after the close on Wednesday 2 December, could be relatively quiet this time around, with just one demotion and one promotion. Homeserve and Wizz Air are the two firms that look most likely to swap places. It is still possible that we see no changes at all, depending how the markets perform between now and the cut-off point for the review on 1 December. That last happened in September 2018 and before that in March 2006, so it is rare for the headline index to remain entirely unchanged.

Plumbing, drainage and emergency repairs specialist Homeserve is teetering on the brink of automatic demotion, as currently ranks 115th in the FTSE 350 by market capitalisation, just below the safety threshold at 110th, with a total price tag of £3.6 billion.

The company only joined the FTSE 100 after June’s reshuffle and the shares have done relatively poorly since then, falling 12% since their index debut on 22 June, compared to a 3% gain in the FTSE 100 itself over the same time frame.

This seems perplexing at first glance, because it has been very much business as usual for Homeserve during the pandemic and subsequent recession. The company raised its final dividend for 2019 by 10% in May, when many firms were slashing or cancelling their pay-outs, and this month’s interims for fiscal 2020-21 featured a 7% increase to the dividend, as overall customer memberships came in flat at 8.2 million and underlying sales and profits rose strongly.

The reason for the weak share price performance may therefore lie not with Homeserve’s strategy, management, operational performance or finances, but the valuation of its stock. The shares trade on 25 times forward earnings – a big premium to the FTSE 100 – and offer a 2.2% prospective yield (a big discount to the index).

Investors have been rotating out of secular growth stocks that have done well and command big multiples thanks to their perceived stability and into cyclical companies, which are seen as potentially offering faster earnings and dividend growth in 2021, should the vaccines work and the global economy click back into gear.

The very facets which propelled Homeserve into the FTSE 100 in summer – financial solidity and a business model where demand is pretty steady whatever the economic conditions – may now be responsible for its demotion, as investors look for greater potential from turnaround and recovery plays, at least in the near term.

Source: Refinitiv data

Demotion for Homeserve would open the door for promotion to another company and the most likely beneficiary at the moment is Wizz Air. Its £4.8 billion market cap means it is the highest-ranked FTSE 250 firm by value, ranking 95th within the FTSE 350 and some £300 million above its nearest pursuer, Weir Group.

The fact that Wizz Air is even in with a chance of soaring into the FTSE 100 after a 34% share price surge in the last month tells you all you need to know about how sentiment has changed across the whole stock market in the past month or so.

Wizz Air’s first-half results were understandably ugly, as passenger numbers fell 71% year-on-year, revenues fell 72% and the company made a loss.

But hopes for the vaccines developed by Pfizer-BioNTech, Moderna and Astra Zeneca and the University of Oxford are sparking a resurgence of interest in cyclical companies whose fortunes would improve markedly for the better if economic activity picks up in 2021 – and few industries are as sensitive to even small changes in pricing or volumes and capacity utilisation as airlines.

Wizz Air offers a slightly different dynamic to British Airways’ parent IAG, Ryanair or easyJet in that its focus lies in Eastern Europe. The £4.8 billion cap company continues to grow its network of airport hubs and routes and its long-term flight path still looks very robust, despite this year’s turbulence. The company first listed in February 2015 at £11.50 and the shares now trade hands for almost four times as much.

Source: Refinitiv data

A number of other stocks are jockeying behind Wizz Air for possible future elevation to the FTSE 100 – and the proposed acquisition of RSA by Tryg and Intact may give them their chance when that deal closes and the non-life insurer’s shares cease to trade.

They include former FTSE 100 members Direct Line, ConvaTec, Weir and Foreign & Colonial Investment Trust, who were last relegated in September 2019, December 2017, September 2015 and September 2009 respectively.

Potential debutants include student housing provider UNITE and the Bill Ackman-led investment vehicle Pershing Square.

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 December). The changes will be announced after the close on Wednesday 2 December and come into effect as of the market opening on Monday 21 December.
  • 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.

These articles are for information purposes only and are not a personal recommendation or advice


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.