Sparks Set to Fly in December’s FTSE Reshuffle

Written by: Susannah Streeter | Hargreaves Lansdown

The FTSE All Share Index Quarterly Review is based on closing prices on Tuesday 30 November and is due to be announced on Wednesday 1 December, with the changes effective after the close on Friday 17 December.

  • A sparky performance by Electrocomponents pushes it into a prime position to move into the FTSE 100.
  • Dechra pharma, another FTSE 100 contender has clawed opportunity from the soaring popularity for pets.
  • Cyber Security firm DarkTrace set to slip out of the FTSE 100 following a share slide as the lock-in IPO period ended.
  • Johnson Matthey’s position in the FTSE 100 looks shaky after it abandoned its battery plans.
  • Reversal of fortunes for electrical retailer AO World as it looks set to slide from FTSE 250.
  • Petershill Partners eyes up a FTSE 250 position and fresh acquisitions of private equity assets.
  • The Restaurant Group has slimmed down but could still slip out of the FTSE 250.

Electrocomponents – contender to enter the FTSE 100

‘’The sparky performance by Electrocomponents, with adjusted pre-tax profits up 91% for the first half of the year, has led to a surge in its share price, pushing it into a prime position to move into FTSE 100 territory. The vast range of industrial and electronics products held by the distributor is partly behind its success, as well as its smooth online operations fulfilling the lucrative business-to-business segment. It’s not been immune from higher transport and labour costs, and global supply chain issues, but it appears to have deftly managed its inventory and kept margins intact. Although there are likely to be further cost pressures ahead, Electrocomponents appears in a robust position, particularly given that demand for electrical parts shows little sign of waning.’’

Dechra pharma - contender to enter the FTSE 100

‘’Dechra pharma has clawed opportunity from the soaring popularity for pets during the pandemic. Its share price has bounded upwards and it is a prime contender to take a walk into the FTSE 100. With so many more people working from home, it’s been an ideal opportunity to settle in a new furry friend and Dechra is in the business of keeping them healthy throughout their lifetimes. Demand for the pharmaceutical company’s veterinary products has been strong, with full year results showing pre-tax profits almost doubling. There is a risk that with incomes facing a squeeze from rising inflation, spending per head could decline, so there could be headwinds to navigate. But other results from pet orientated companies indicate that demand for pets doesn’t seem to be falling away, which bodes well for future revenues streams.’’

Darktrace – likely to be demoted from the FTSE 100

‘’Cyber security firm Darktrace made a stealthy entry into the top-flight at the last reshuffle, but it’s a leading contender to leave the blue chip index given that shares have fallen by 50% since reaching a record high in September. This appears to be down to the end of the lock-up period following its IPO, with big chunks of new shares flooding the market prompting the falls. Darktrace is not alone in being a former IPO darling, now experiencing the pain of a rapid deceleration in its share price. Its successful launch in the spring was seen as a coup for the London market, and if it exits the top-flight it will leave a big tech gap in the FTSE 100. However, given ongoing growth reported by the company and some pretty upbeat trading updates, it may not stay outside the top-flight for long.  There is growing demand for sophisticated technology to counter the growing armies of cyber criminals and Darktrace uses AI to scan regular business operations and detect tiny irregularities, providing an early warning system of cyber-attacks. The ongoing shift to digital is likely to keep opening up new opportunities and markets for Darktrace as firms scale up their operations to meet demand, whilst trying to ensure their systems stay secure.’’

Johnson Matthey – likely to be demoted from the FTSE 100

‘’Investors are clearly worried about Johnson Matthey’s strategy for the future and amid this uncertainty, the company risks sliding out of the FTSE 100. The engineering company’s decision to abandon plans to become a battery supplier by selling off its eLNO business saw shares slide, because this appeared to be JMAT’s answer to the shift towards electric vehicles and away from combustion engines, for which it makes catalytic converters. Management says it will focus on other potential growth avenues, but ultimately the group will be starting from scratch as it looks for new opportunities alongside the new greener auto industry. Although catalytic converters won’t be rendered obsolete immediately, the clock is ticking and as the transition to electric vehicles speeds up, Johnson Matthey will need to quickly find a new sense of direction.’’ 

Petershill Partners – contender for the FTSE 250

‘’Petershill Partners only started trading on the London Stock Exchange in September but already it’s a leading contender to step into the FTSE 250. Petershill owns minority stakes in a range of alternative asset managers such as venture capital firms and private equity companies, many of which had been managed by Goldman Sachs for a decade or more.  Assets under management at the investment firm increased by 8% in the third quarter, and it has its eye on fresh prizes with new acquisitions being sized up. Petershill has capitalised on the hunger for private equity investments in an era of ultra-low rates, enabling firms to borrow cheaply to finance takeovers.  With an increase in interest rates looming there is a risk that appetite for such assets may wane, and that might partly account for a slight nudging downwards in the share price over the past month.’’

AO World – likely to be demoted from the FTSE 250

‘’Online electrical retailer AO World was well set up to capitalise on the accelerated shift to e-commerce during the first stages of the pandemic, with profits soaring as demand for white goods and IT equipment bounded higher. But the company has come down to earth with a bump, falling to a £10 million half year loss, sending shares plummeting, and this dramatic reversal of fortunes is likely to see it kicked out of the FTSE 250. It’s rapid growth seems to have been part of the problem, given that it hasn’t had as much time to build up deep relationships with suppliers, so when the supply crunch hit for electrical goods, it was lower down on the list of priorities. Higher labour and transport costs exacerbated by the shortage of drivers have also dented margins, given that it’s so reliant on its delivery network to make sales and provide after care. A quick turnaround is unlikely given that the company has warned that the crucial Christmas trading period will be tough, with supply chain issues lingering, so AO World may find it hard to climb back up the ladder into FTSE 250 territory for some time.’’

The Restaurant Group – likely to be demoted from the FTSE 250

‘’Recovery is well underway at The Restaurant Group with the customers showing a much greater appetite for eating out since restrictions eased. However, the company is still struggling to regain its pre-pandemic form. It means it’s a likely contender to slip out of the FTSE 250 despite a big round of cost cutting and slimming down its restaurant footprint. Although its star brand Wagamama is dishing out fast food as fast as it can make it, to crowds queuing outside restaurants or ordering in from home, its airport concessions arm has struggled with a 53% fall in like-for-like sales at the last quarterly reading, as tourism has been slow to recover. Like many other firms in the sector the company is also facing the challenges of higher costs and wage pressures, amid a shortage of staff and those problems look set to linger.’’

Other potential movers and shakers in the FTSE 250 reshuffle

‘’Hochschild Mining could also get the boot from the FTSE 250 after it was left reeling by news of a possible ban on mining activities due to environmental concerns in Peru where the company sources the majority of its gold and silver. Those fears have receded a little, with the shares bouncing back strongly, but they are still more than 20% lower compared to six months ago. Greencore, the convenience foods manufacturers is another contender for demotion from the FTSE 250. Although it released guidance saying profits may come in at the upper end of expectations it’s still struggling with supply issues in the food chain and with labour shortages. Taking their place could be NB Private Equity Partners which has benefited from a strong performance from private and public company assets in its portfolio. Provident Financial the sub-prime firm known as doorstep lender, specialising in home collected credit, could also gain a foothold in the FTSE 250 given that shares have risen by 50% over the past six months.’’

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