Payments processor Worldpay (LSE: WPG), sub-prime lender Provident Financial (LSE: PFG) and business support services group DCC (LSE: DCC) are set for promotion to the FTSE 100 when the FTSE committee announces the results of its quarterly index review on Wednesday. The changes will take effect from the start of trading on Monday 21 December.
Worldpay joined the stock market as recently as 16 October in the UK’s biggest IPO of the year. The shares were offered at 240p, and have since risen 22%, closing on Friday at 293.5p. A market capitalisation of £5.9bn puts Worldpay in the company of such familiar names as housebuilder Barratt and fashion house Burberry.
Worldpay — one of the world’s top five payment processors — trades on a sky-high price-to-earnings (P/E) ratio of 43, based on 2015 forecasts. And, even with earnings growth in excess of 50% pencilled in for 2016, the P/E remains lofty at 27.
There’s no denying Worldpay is in a fast-growing industry — and provides services to thousands of SMEs, as well as a roll call of blue-chip clients — but investors may want to bear in mind that newly floated companies often see their shares fall back after the initial burst of enthusiasm.
Provident Financial and DCC have gained 25% and 21%, respectively, since the FTSE committee’s last quarterly review, swelling their market capitalisations to a size that earns them promotion to the FTSE 100 from the second-tier FTSE 250.
Provident Financial is long established (since 1880) in the “non-standard lending market”. The company, which counts ace fund manager Neil Woodford among its major shareholders, has been knocking out annual double-digit earnings growth for a good few years. Last year’s growth was 18%, and analysts are expecting 21% this year, putting the company on a P/E of 22.5. The City experts reckon earnings growth will moderate to around 10% for 2016, which would bring the P/E to 20.5. The rating looks about fair, if earnings growth is indeed set to moderate as the analysts suggest.
Dublin-headquartered international support services group DCC operates in the energy, technology, healthcare and environmental sectors. The company has a slightly higher earnings-growth profile and slightly higher valuation than Provident Financial. A 23% earnings rise for DCC is forecast for this year, followed by 12% in 2016, giving P/Es of 23.9 and 21.4, respectively, at a share price of 5,930p. As with Provident Financial, the rating looks about right to me.
Who will make way for the three newcomers to the FTSE 100? Well, Meggitt saw its shares crash with a profit warning towards the end of October, and the aerospace and defence firm looks a dead cert for the boot. As things currently stand, security group G4S and supermarket Morrisons are also set for demotion to the FTSE 250. Morrisons came close to ejection earlier this year, and to pull off another great escape its shares would need to outperform those of Randgold Resources by about 3% over today’s and tomorrow’s trading — in which case, the gold miner would get the heave-ho from the top index.