This undervalued stock could surge onto the FTSE 100… but there’s a catch

Jet2 (LSE:JET2) is currently listed on the AIM (Alternative Investment Market). It is also a constituent of the FTSE AIM 100, FTSE AIM UK 50, and FTSE AIM All-Share indexes. As such, it does not qualify for inclusion in the FTSE 100 or FTSE 250. These require a Main Market listing.

Why isn’t Jet2 listed on the Main Market?

Jet2’s management likely elected for a listing on the AIM market because of lighter regulatory requirements, greater flexibility, and easier access to capital.

However, there has been ongoing discussion among market commentators and investors about the possibility of Jet2 moving from AIM to the FTSE Main Market. In fact, Jet2 is frequently cited as the most obvious AIM-listed company to make the transition to the Main Market. That’s purely because of its substantial size.

As I write, the company is valued around £3.8bn. Than would put it on the cusp of FTSE 100 eligibility if it were to list on the main exchange. It has also grown significantly over the past decade, outperforming many peers on the stock market. In the process, it has earned a strong reputation for customer service and reliability.

Moving to the Main Market?

A move to the Main Market could bring several advantages for Jet2. These include increased visibility and credibility with investors. There are a large number of institutional investors whose mandates restrict them from investing in AIM-listed stocks. Inclusion in the FTSE 100 or FTSE 250 indexes would enhance the stock’s visibility.

Moreover, the UK listing rules were updated in 2024, making the Main Market more attractive and reducing some of the previous advantages of AIM for acquisitive companies. For example, FTSE 100 companies can now make acquisitions without holding a shareholder vote. Previously, this was something only AIM companies could do.

No announcement

Despite the speculation and the apparent suitability of Jet2 for a Main Market listing, there has been no official announcements. And it’s worth noting that the company’s relatively meagre valuation relative to its net cash position and earnings may suit management. After all, the valuation allows Jet2 to undertake more share buybacks at a lower price. It also has enough capital for its fleet transformation and expansion programme.

The bottom line

I invest in Jet2 but not because it may move to the Main Market. However, I do believe the stock could surge if it did transfer and achieve FTSE 100 inclusion at some stage. After all, it’s currently trading around two times enterprise value-to-EBITDA — a discount to industry peers. Nonetheless, I do accept that with finer margins than some of its competitors, the stock could come under pressure if we see a sustained fall in travel demand, an increase in fuel prices, or additional employment costs.

Despite these concerns, I can say that Jet2 has become the largest stock in my portfolio, surging around 40% from its bottom in April. While I’m tempted to buy more, it’s not healthy to have too much of one stock.

The post This undervalued stock could surge onto the FTSE 100… but there’s a catch appeared first on The Motley Fool UK.

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James Fox has positions in Jet2 plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.