Updated shariah-compliant securities list. Securities Commission (SC) announced an updated list of Shariah-compliant securities which will take effect from 29 Nov 2013. The updated list includes a total of 653 Shariah-compliant securities or 71% of 914 listed securities on Bursa (addition of 16 securities and exclusion of 158 securities from the previous list issued in May 2013). There were significantly more changes in Nov 2013 list than the changes (5 additions and 4 exclusions) in May 2013 list due to a revised screening methodology. The changes are shown in Appendix 1.

Revised screening methodology. The revised screening methodology announced in Jun 2012 adopts a two-tier quantitative approach which applies: (i) business activity benchmarks; and (ii) financial ratio benchmarks. The business activity benchmarks assess the contribution of Shariah non-compliant activities to the overall revenue and profit before taxation of the company. The financial ratio benchmarks take into account of cash over total assets and debt over total assets. The revised screening methodology was implemented to harmonise the local standards to global practices/expectation and to encourage capital inflows, especially from Middle East investors. More details on the screening methodology are in Appendix 2.

Impact on our coverage. Within our stock coverage, only three counters were affected by the updated list. DRB-Hicom was added but Parkson Holdings and SP Setia were taken out. We understand from Parkson’s management that the company will be shariah-compliant based on the latest audited FY13 (June) annual accounts. 43 out of 55 stocks (78%) under our coverage are Shariah compliant under the updated list. The Shariah-compliant status of our coverage list is in Appendix 3.

Implication and timing of disposal relating to Shariah non-compliant securities. We believe there will be some selling pressure from investors who invest based on Shariah principles on stocks that were previously Shariah compliant but reclassified as Shariah non-compliant in the Nov 2013 list. The impact of the reclassification will be partly mitigated by: (i) investors are given six months from 29 Nov 2013 to dispose the Shariah non-compliant securities; (ii) investors are allowed to hold their investment in the Shariah non-compliant securities if the market price of the securities is below investment cost, even beyond the six-month period; and (iii) investors are allowed to keep dividends received and capital gains within the six-month grace period. On one hand, rebalancing effect from local Shariah-compliant funds as well as potential demand from Middle East investors will likely to benefit the smaller pool of Shariah-compliant stocks. On the other, selling pressure on securities reclassified as non-shariah compliant may open up buying opportunities for conventional investors to accumulate good quality stocks at relatively undemanding valuations.

Notable companies excluded from Nov 2013 list. Notable companies excluded from the Nov 2013 list include AirAsia, Amway Holdings, Bumi Armada, Dutch Lady Milk Industries, Keck Seng (M), MRCB, Oriental Holdings, Parkson, Panasonic Manufacturing (M), SP Setia, and YTL Power.

Source: PublicInvest Research - 2 Dec 2013