The latest companies promoted and demoted from the FTSE have been confirmed, with high-profile 2021 float Darktrace (DARK) one of the companies making an exit from the FTSE 100 after a recent share price slide.
Index provider FTSE Russell said that cybersecurity firm Darktrace and chemicals company Johnson Matthey (JMAT) will be leaving the FTSE 100, to be replaced by Dechra Pharmaceuticals (DPH) and Electrocomponents (ECM), which distributes industrial and electronics products.
After a successful float that propelled it into the FTSE 100 (and very strong run up in the share price initially), Darktrace lost momentum in November. The Cambridge-based company priced its shares at 250p, at the bottom end of the range, and they surged 40% on their first day of trading.
Darktrace shares then went on a storming run, approaching nearly £10 at one point in the autumn, before halving to around 450p now. Several factors have combined to curb investor’s enthusiasm, including the sale of shares by large investors and more sober broker price forecasts. In essence, the market price is now suggesting that initial investors may have got carried away with this tech unicorn, which appeared to have defied the curse of Deliveroo by getting off to a good start as public company.
This week we had a key member of The Hut Group’s float explained the challenges a company faces in the aftermath of a public listing. Darktrace is not yet covered by Morningstar analysts.
Strategic Failure?
Johnson Matthey shares have suffered a similar reversal to Darktrace this year. The shares bounced sharply from lows of around £16 in March 2020, and had effectively doubled by April 2021, before going into reverse.
The company, which makes emission control technology for vehicles and the chemicals that go into EV vehicle batteries, had been buoyed by the strong demand for ESG stocks in recent years. But this year it appeared to abandon plans to become a cathode battery materials supplier by selling off its “eLNO” division. At the same time the chief executive announced his retirement for 2022. The decision, alongside a weak trading update, triggered a near 20% fall in the share price on the day and a downgrade to the fair value estimate by Morningstar analysts.
“Besides the strategic failure, the real issue now is that Johnson Matthey has lost its primary source of long-term growth to offset the emissions catalysts business, which is facing secular decline,” analyst Rob Hales says.
“Focus will now shift to the potential hydrogen and fuel cell business. We like that this business is capital-light, but we have not yet incorporated it into our model, given uncertainty surrounding the nascent stage of the market.” Johnson Matthey retains its narrow moat and has a fair value estimate of £26.50, with the current price around £20 per share after this year’s sell-off.
Dechra and Electrocomponents, whose shares are up 41% and 30% respectively in the year to date, are not under Morningstar coverage. But Hargreaves Lansdown equity analyst Susannah Streeter has opined on both promoted companies.
She says that Electrocomponents has benefited from its wide range of products and “smooth online operations”. It has also managed its inventory tightly during a period or rising transport and labour costs. Dechra has benefited from the pet pandemic boom, she adds. Demand for the pharmaceutical company’s veterinary products has been strong, with full year results showing pre-tax profits almost doubling.”
Why Reshuffle?
Why does the three-monthly reshuffle matter for investors? It gives an insight into what sectors are in and out of favour and which companies are on the up or struggling in the big league.
A change in the makeup of the FTSE 100 and FTSE 250 also has a big impact on index investing, as tracker funds have to buy the shares of the newly promoted companies – increasing flows to these stocks, boosting liquidity and--in the short term at least-- supporting share prices.
In the mid-cap FTSE 250 index, white goods retailer AO World (AO) and Restaurant Group (RTN) are relegated and sub-prime lender Provident Financial (PFG) and Goldman Sachs spin-off Petershill Partners (PHLL).
In the last quarterly reshuffle in September, Meggitt and Morrisons were promoted to the FTSE 100. The promotion of supermarket Morrisons was a last hurrah as a public company. The share price rise behind the promotion was directly linked to the private equity interest in the company, which took it private after 54 years on the FTSE. After a bidding war, Morrisons was taken private at a 60% premium to the pre-bidding war price. Defence company Meggitt is also the subject of a takeover bid from a US rival.
Index provider FTSE Russell changes the constituents of its indices every quarter to reflect changes to Britain’s biggest companies. 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. 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.
The changes were based on the closing values on December 1 and take effect at the start of the trading day on December 20, the last business week before the Christmas break.
