Shares of Royal Mail (LSE: RMG) have been on a tear in recent months and the company is set for promotion to the FTSE 100 in the first index reshuffle of 2018. Property group Hammerson will drop out of the top tier.
Meanwhile, a whole host of firms — including some notable names — are set to be booted out of the FTSE 250 index, with some fast-growing small-caps you may not have heard of moving up to mid-cap status. More on these shortly, but first the reshuffle at the top table.
Hammered
I wrote about Hammerson’s troubles earlier this week. In brief, the company’s looking to acquire heavily indebted FTSE 250 firm Intu Properties in a £3.4bn all-share deal. Hammerson’s shares have fallen over 15% since the announcement, taking its market capitalisation below the threshold for automatic ejection from the FTSE 100.
Red letter day
Royal Mail, which suffered the same fate in last September’s reshuffle, began to bounce back strongly later in the year. Its shares have soared by more than 50% — from 370p at the start of November to 564p at yesterday’s market close. Its £5.6bn market-cap puts it comfortably above the threshold for automatic promotion to the FTSE 100.
The strong rise in Royal Mail’s shares has come on the back of healthy trading updates and the reaching of an agreement with the Communication Workers Union. City analysts expect the company to post earnings per share (EPS) of 41.8p for its financial year to 31 March and a dividend of 24p. This gives a price-to-earnings (P/E) ratio of 13.5 and a dividend yield of 4.3%. Not unattractive, but the trade-off is forecasts of only anaemic earnings and dividend growth. That’s because letters are in structural decline and while parcels are a growing, they’re in a highly competitive market.
Breakdowns and funerals
According to my sums, as many as seven companies are set to be kicked out of the FTSE 250. These include roadside recovery group AA and funerals firm Dignity.
Neil Woodford isn’t the only investor who will be ruing the day he backed AA’s stock market flotation in 2014 at 250p a share. The debt-laden firm, which recently slashed its dividend, is currently trading at 79p. Dignity’s shares have more than halved in value since it issued a massive profits warning in January. It was obliged to reset its funeral prices, having discovered that regularly hiking them in a competitive market was unsustainable.
The sun has got his hat on…
One of the most interesting small-caps set for promotion to the FTSE 250 is On the Beach (LSE: OTB). This online specialist in short-haul holidays was floated at 184p a share in 2015. The shares are currently trading at 579p, valuing the business at over £750m.
Despite the stunning rise in the price, the company — which issued a trading update full of encouraging news earlier this month — still looks good value to my eye. City analysts are forecasting a 25% increase in EPS to 22p for its current financial year (ending 30 September), giving a P/E of a bit above 26. High annual EPS growth is forecast to continue in subsequent years, rapidly reducing the P/E and making the stock very buyable in my book.
All the changes to the indexes, which the FTSE committee will announce later today, will take effect from the start of trading on Monday 19 March.
