December 2, 2019

FTSE 100 Q4 Preview: Who will be joining the index?

by Tajinder Dhillon.

FTSE Russell will announce its December 2019 quarterly review this week, which will see both new constituents added to and removed from the FTSE 100 index. Rules for inclusion and exclusion are based on market cap size, relative positioning among other criteria.

Looking at market cap information from both the FTSE 100 and FTSE 250, Exhibit 1 predicts the constituents who are likely to join and leave the FTSE 100 index. Based solely on market cap, possible additions to the index include easyJet, Just Eat, and GVC Holdings, while Hiscox, Fresnillo, and Kingfisher are likely to exit.

Exhibit 1: Market Cap for FTSE Constituents as of Nov. 30, 2019

Quarter-to-date, easyJet, GVC Holdings, and Just Eat have seen share price increases of 16.3%, 14.6%, and 14.4% respectively, while Kingfisher, Fresnillo, and Hiscox have seen price moves of 3.3%, -15.5%, and -17.9% respectively. Shares of Just Eat jumped 24.2% on Oct. 22 after it received a takeover offer from Prosus, which was rejected. Just Eat intends to merge with rival Takeaway.com.

Let’s analyze the new possible joiners, looking at the StarMine Analyst Revisions Model (ARM). ARM is a stock ranking model based on changes in analysts’ estimates (typically EPS, EBITDA and revenue) and changes in recommendations for the current period, full year and next year. Future revisions are positively correlated with price changes — valuable insight for active investors.

ARM ranks companies on a percentile basis from 1 (worst) – 100 (best) vs. its peers on a regional basis (developed Europe in this example). Sentiment appears to be neutral for both easyJet (61) and Just Eat (39). GVC Holdings has positive sentiment among analysts with a model score of 80.

According to analysts polled by I/B/E/S data from Refinitiv, earnings per share (EPS) and revenue estimates for easyJet (FY21) have declined substantially by 22.6% and 6.4% respectively. Just Eat (FY20) EPS estimates have declined by 45.1%.

‘Brexit’ impacting consumer sentiment

EasyJet has been a long-standing member of the FTSE 100, appearing in the index from March 2013 to June 2019. Earlier this year, CEO Johan Lundgren highlighted challenges due to Brexit and higher competition. “Moving on to the outlook for the summer trading, we are seeing changes across the network. Macroeconomic uncertainty and many unanswered questions surrounding Brexit are together driving weaker customer demand in the market such as we are seeing softness in the ticket yields in the U.K. and across Europe … There is a slowdown and the uncertainty around Brexit is affecting the consumer confidence in Q3 and also going into Q4.”

Home improvement company Kingfisher, owner of the retail brands Screwfix and B&Q, also highlighted a similar outlook in its latest earnings call. Chairman Andrew Cosslett commented, “in terms of guidance, the outlook for our main markets remains mixed, with the U.K. in particular facing continued uncertainty that is affecting the consumer and the housing market.”

Exhibit 2 highlights U.K. consumer sentiment moving in a secular decline since the original 2016 referendum.

Exhibit 2: U.K. Consumer Sentiment and Brexit

A focus on ESG

EasyJet is looking to diversify its revenue streams with the introduction of easyJet holidays, allowing customers to book airfare and hotel in a seamless experience. According to company filings, 20 million customers travelled with easyJet for leisure and booked accommodation elsewhere.

EasyJet is also looking to be a first mover in the industry with regards to adopting a net zero carbon policy. EasyJet claims it is the first major international airline to completely offset carbon emissions. At a cost of £25 million, it will invest the proceeds into forestry, energy efficiency, and clean energy projects. According to Eikon by Refinitiv, easyJet produced the lowest amount of total CO2 equivalent emissions out of the largest U.K. and Irish airlines. easyJet emitted 7,600,000 tonnes of total carbon dioxide and CO2 equivalents in 2018, in comparison to 10,765,881 tonnes produced by Ryanair Holdings and 30,076,250 tonnes by owner of British Airways, International Consolidated Airlines Group.

Although easyJet has the lowest CO2 emissions out of this peer group, it continues to see increases in CO2 emissions year-over-year. Exhibit 3 highlights CO2 increasing for all three airlines over the last five years. The median figure, as represented by a basket of 36 airlines globally, has declined since 2015.

Exhibit 3: CO2 Equivalent Emissions – Three Airlines


Source: Eikon by Refinitiv

Revenue relative to emissions

To provide a more comparative picture, we look at CO2 emissions relative to total revenue. In 2018, easyJet had the lowest carbon intensity of the three airlines, being able to generate the highest amount of revenue relative to total CO2 emissions. EasyJet was able to generate $1,011 of revenue for every tonne of CO2 emitted, in comparison to $930 for International Consolidated Airlines Group and $818 for Ryanair Holdings.

A net zero carbon policy will improve the environmental, social and governance (ESG) score for easyJet as calculated by Eikon by Refinitiv. EasyJet has a score of 60, compared to Ryanair (48) and International Consolidated Airlines Group (76). Refinitiv ESG Scores measure companies’ ESG performance based on reported data in the public domain across three pillars and 10 ESG topics. Refinitiv captures and calculates over 400 company-level ESG measures.

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