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Energy security is likely to be a prominent feature in the FTSE 100 reshuffle next Wednesday amid Russia’s war on Ukraine and soaring energy prices.
Analysts predict British Gas owner Centrica PLC (LSE:CNA) (Centrica PLC (LSE:CNA)) will get upgraded into the top bracket as demand for energy rises and the market gains clarity around taxation on oil and gas profits from the so-called ‘windfall tax’ announced by Chancellor Rishi Sunak yesterday.
The Quarterly Review will be determined based on Tuesday’s (May 31) closing share prices and Centrica’s star has been rising.
Today it was trading at 75.8p, valuing ther group at around £4.6bn even with some turbulence after yesterday’s announcements with the market torn over what Sunak’s announcement meant for the power companies.
UBS said that “assuming a 10% tax on a windfall of £100/MWh, we could see earnings impacts of 5% or above for the most exposed names (SSE, EDF and Centrica)”.
However, if the windfall tax “were structured as a levy and was in place for three years or less,” the investment bank said the valuation impact on companies such as Centrica would be “much lower” at about 1-4%.
In a trading update this month, Centrica said it expects its annual earnings per share for this year to be at the top end of analysts’ estimates.
Brokers were also impressed by Centrica’s uptick in nuclear and gas revenues, recent cost savings and effective disposals of assets to shore up its balance sheet.
The supplier’s main subsidiary British Gas remains the dominant gas and electricity supplier in the UK market, so the lift in the energy price cap in the autumn is expected to put it on a firmer footing.
Power prices have increased by about £125 per megawatt-hour compared to the forward price a year ago, said UBS. This is on the one hand a boon for supply-end sales, but a drag on wholesale costs.
While Centrica faces higher wholesale costs, Hargreaves Lansdown said its hedge positions have been a “protective haven” against surges.
UK chemical company Johnson Matthey is another company dipping its toes in the energy space that analysts expect to be bumped up into the FTSE 100 next week.
Its shares are trading at 2,194p against 2,133p six months ago.
The company this week invested €20m in hydrogen electrolysers in a tie-up with Enapter, that has pledged to reduce the cost of hydrogen to a level where it’s on par with fossil fuels.
Its electrolysers for energy storage, power-to-gas and hydrogen refuelling operations will be developed alongside Johnson Matthey’s catalysts.
“Investors are giving Johnson Matthey the benefit of the doubt even though it hasn’t as yet carved out its future in the electric world,” said Hargreaves’ Susannah Streeter.
“Its share price has been recovering with full-year operating profit still in line with expectations, which makes it a contender to accelerate back into the FTSE 100,” she said.
“Its core business is highly profitable and catalytic converters, where it makes money, isn’t going to dry up immediately.”
At risk
Royal Mail and ITV are the main contenders to be booted out of the FTSE 100 next week.
ITV’s value has plummeted by more than a quarter in the last six months.
The channel is expected to face significant competition for its new ITVX venture, after being slow to enter the streaming space, with the prospect of a recession and rising living costs also now making such a package potentially less attractive to customers.
As people migrate back to city offices, e-commerce sales are falling and streaming services are on the brink of decline.
ITV warned in its quarterly results of a drop in advertising revenue but said it hoped its new streaming brand will generate £750m in digital ad income per year by 2026.
“ITV is at risk of changing channels from the FTSE 100 big league to the FTSE 250 mid cap as worries rise about the risks in the streaming space,” Hargreaves’ Streeter said.
“Competition is fierce in the sector, as the recent subscriber losses for Netflix have shown. There are concerns that consumers will be less willing to shell out for the upcoming ITVX venture particularly given the cost of living crisis, and worries have risen about advertising revenue as a recession looms.”
Royal Mail, another contender to slide out of the FTSE 100 next week, is having to cope with rising wage inflation just at the time the lockdown parcel boom fizzles out.
Deutsche Bank analyst Andy Chu said this week that the investment bank remained “sellers of Royal Mail Group”.
FTSE 250 hopefuls
Contenders to enter the FTSE 250 next week include JLEN Environmental Assets Group and the Foresight Solar Fund, two firms that sit firmly in the sustainable energy space.
“In the FTSE 250 there is some evidence that the appetite for responsible investing remains resilient with JLEN Environmental Assets Group and Foresight Solar Fund set to enter the FTSE 250,” said Streeter.
PureTech Health (LSE:PRTC, NASDAQ:PRTC, OTC:PTCHF) and Baillie Gifford US Growth Trust also “appear to be among the casualties of the flight away from risky assets” and are contenders to leave the FTSE 250 during next week’s reshuffle.
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