Provident, Royal Mail in line for FTSE 100 drop as NMC, DS Smith eye promotion

Provident Financial and Royal Mail look likely to be knocked out of the FTSE 100 index in the next quarterly reshuffle, with Babcock International potentially joining them.

Provident's doom is assured, as the non-standard/sub-prime lender issued another profit warning last Tuesday due to continued problems at its Home Credit division, an investigation into Vanquis Bank and the resignation of chief executive Peter Crook, which propelled its shares on a screaming plunge from above 1,740p to below 450p.

Royal Mail has more quietly subsided to the bottom of the blue chip index, with full year results in July beating most expectations for sales and profits but a heavy relyiance on the international parcels business as letter volumes continue to act as a drag on overall performance.

If all three are demoted, they would be replaced by the largest trio on the FTSE 250 NMC Health, the United Arab Emirates-focused healthcare provider; DS Smith, the packaging and paper maker; and housebuilder Berkeley Group, potentially a year to the date after it was relegated from the top flight.

Any changes, which are made based on market capitalisations from Wednesday's closing prices, will be made effective after the close of the respective markets on Friday, 15 September and begin trading on Monday, 18 September.

A company is automatically relegated from the blue chip benchmark to the FTSE 250 if it falls to 111th or below on the list of largest companies by market cap.

Royal Mail, valued at just over £3.9bn by close of play on Friday, is teetering over that edge. Marine and aerospace engineer Babcock, at £4.059bn, is still very slightly ahead of the 111th placed company, which is 250-listed engineer Weir Group's £4.049bn.

At the bottom of the FTSE 250, bombed-out Carillion is the leading candidate for the drop, having lost more than three-quarters of its value this year after a series of profit warnings, taking its market cap to just over £210m, less than half of the next lowest in the index, Petra Diamonds at just under £520m.

Top of the FTSE small cap promotion hopefuls is 4imprint Group as the promotional direct marketing outfit has been on the rise in recent years, firmed up by solid half year results earlier this month where revenues improved 17% to $270.2m and underlying profits grew 18% to $14.3m, with the company on the dividend list too.

Looking at themes behind the performance of the latest reshuffle candidates, analyst Graham Spooner at the Share Centre, said Provident's woes were obvious but Royal Mail's woes seemed to fit into a theme where uncertainty amongst UK businesses in the current Brexit environment means some services are being hit, such as direct marketing in this case.

As for, defence and naval engineer Babcock International, Spooner says the performance has been disappointing over the last year on the back of concerns for support service providers, as highlighted by Carillion.

"Concerns remain over its growth targets for next year and there continues to be pressures on the sector as a result of Brexit and contract delays. Nevertheless, there continues to be solid growth prospects for the group and it has been keen to reiterate recently that it has identified significant opportunities across its core markets and it subsequently remains confident to achieve mid-single digit organic revenue growth this year. Will it be enough? We’ll find out next week."

Spooner also cited retail property developer Hammerson and Legoland and Madame Tussauds owner Merlin Entertainments could also be in the mix for relegation.

Berkeley dropped out of the FTSE 100 last September after its shares subsided 30% after the Brexit vote due to concerns over demand, though while some housing worries still linger, the company's strong cash flow, dividend and some sanguine statements from several housebuilders this month has helped the shares rally.

The analyst suggested others in the FTSE 250 that could figure are support services provider Capita was in contention for promotion back to the blue chip index, along with industrial engineer Melrose Industries, and online food order and delivery company Just Eat, with lots that can happen to these company's prices over the next few days.