Centrica Back in FTSE Reshuffle

British Gas owner has been boosted by soaring energy bills, but a windfall tax is looming

James Gard 1 June, 2022 | 12:02PM
Facebook Twitter LinkedIn

playing cards in a casino

It’s FTSE reshuffle time again, and a handful of well-known companies are due to be promoted and demoted. British Gas owner Centrica (CNA) and student property firm Unite (UTG) are set to enter the FTSE 100, while broadcaster ITV (ITV) and Royal Mail (RMG) are set to be pushed down to the FTSE 250.

Centrica has benefited from soaring energy prices, and shares are up 44% since June 2021, after many years of being in the doldrums. Utilities escaped the chancellor’s windfall tax last week but it was made clear it’s only a matter of time. “The Treasury will urgently evaluate the scale of these extraordinary profits and the appropriate steps to take,” Rishi Sunak said. All UK households will receive a £400 discount to their energy bills this year.

Still, Morningstar analyst Tancrede Fulop thinks that Centrica is the most exposed of the utilities we cover, which includes SSE, Orsted, RWE, Iberdrola, and EDF. Fulop says that while it’s the first time that the UK has mulled a windfall tax on power producers, Spain has already set the terms of its “gas clawback”, and that’s likely to provide the benchmark in terms of pricing (€67 per megawatt/hour).

Centrica is the only European utility with an oil and gas production business, so is potentially doubly exposed to a tax grab from the UK government. Still, if the UK follows the Spanish example, could knock 5p off Centrica’s fair value of 120p – which is significantly above the current level of 80 per share. This means Centrica is a 5-star star stock, a rarity in the FTSE 100 (the others are Prudential, Ocado and Just Eat Takeaway). The company flagged in annual results that may restart dividends in the near future, having skipped payouts in 2020 and 2021.

Former AIM darling ASOS (ASC) is set to enter the FTSE 250 with a move to the London Stock Exchange Main Market. The fast fashion firm is also a 5-star stock, according to Morningstar analyst Jelena Sokolova. Its fair value is £44.10, according to our metrics, but is currently trading at £15.88. Shares have been volatile in the last 10 years. ASOS’s most recent peak was in 2021 when shares got to nearly £60, but they are down nearly 70% since June 2021.

A real estate investment trust Supermarket Income REIT (SUPR) is also due to join the FTSE 250 after a 6% increase in its share price so far in 2022.

How it Works

The changes are based on the closing values at May 31 and will be confirmed after the market close on June 1. Changes take effect on June 20. It’s a quarterly event and the last reshuffle reflected the fallout from the Russian invasion and sanctions on London listed companieses.

Why does the three-monthly reshuffle matter for investors?

Such changes give an insight into which sectors are in and out of favour, and which companies are on the up or struggling in the big league.

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 to be promoted. Likewise, to be demoted, the firm has to be below the 110th biggest company by size.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

James Gard  is senior editor for Morningstar.co.uk