PublicInvest Research

Author: PublicInvest   |   Latest post: Wed, 21 Aug 2019, 10:13 AM


Shariah-compliant Securities List - One Notable Cut

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Eleventh review. The current edition is nothing short of busy, with an almost equal number of inclusion and exclusions involving a total of 67 names. On a positive note, the one notable exclusion this time round is not as ground-shaking as Digi.Com or IOI Corporation in previous editions. But the current review may affect as many as 8 stocks, by far the most in recent memory. While we had suggested in our previous note that companies may have possibly come to grips with financial-ratio compliance or are at least starting to see the importance of being shariah-compliant, that observation may be flawed going by the number of exclusions (33) in this review as compared to the previous (7).

Eversendai Corporation and Hengyuan Refining Company are the most notable inclusions. Of the 33 included in this current review, 5 were IPOs. The noteworthy exclusion mentioned above is Malaysian Pacific Industries, an institutional investor favorite. Additionally, Yi-Lai which counts Lembaga Tabung Haji as a significant shareholder with 16.5m shares (10.5% stake) held may have a potentially tough rough ride should a disposal need arise.

A total of 689 (May 2018: 693) securities are now classified Shariah-compliant, or 75% of the total 902 (May 2018: 901) securities listed on Bursa Malaysia. As mentioned earlier, this was a “busy” review of sorts with 33 entries and 34 exits, leading to a net exclusion of 1.

Property (7), Technology (6) and Industrial-based (9) stocks featured prominently amongst the inclusions. 10 of the 33 inclusions this are from the ACE Market. On exclusions, Property (7), Consumer (8) and Industrial (9) names were notable. A complete listing of changes is shown in Appendix 1.

Impact on our coverage. Since the last review, we have dropped coverage on 4 stocks (Magnum, Petra Energy, Prestaring and TRC Synergy), 3 of which were shariah-compliant). We also initiated coverage on 4 new stocks (Alliance Bank, D&O Green Technologies, EA Technique and Malayan Banking), but only 2 of which are shariah-compliant. Post this review, Daya Materials and DKSH Holdings have been excluded from the list. As such, the total number of shariah-compliant stocks under coverage has now fallen to 64 of the total 79 stocks under core coverage, or 81.0% (May 2018: 67 of 79, or 84.8%). The compliance status of our coverage list is in Appendix 3.

Market impact. Of the 33 exclusions, a quick look through ownership listings (as per most recent Annual Reports) reveal 8 companies (DKSH Holdings, Hong Leong Industries, Malaysian Pacific Industries, QES Group, SLP Resources, Tasco, Teo Seng Capital and Yi-Lai) as having Islamic/Shariah-based funds as shareholders. While there is still no necessity for anyone to sell should investments be out-of-money, past instances have suggested compliance (ie. immediate disposals) by funds regardless. Appendix 4 highlights share price movements of 2 notable dropouts in the last round.

While this particular review will not have significant impact to the market, the few names mentioned above may face some selling pressure nonetheless. Given heightened volatilities and our less-than-sanguine external outlook, we think markets have a more than even chance of softening in the near to medium term, as the world may struggle under a weight of debt amid heightened interest rates and slowing global growth. Any potential deal reached with regard to the US China trade tiff is just to prevent the situation from worsening even further, not necessarily making it any better. Our end-2018 FBM KLCI closing estimate is unchanged at 1,740 points. We are less optimistic going into 2019, views we will expound on in the coming weeks.

Source: PublicInvest Research - 30 Nov 2018

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