• Securities Commission of Malaysia (SC) is expected to announce its new list of shariah compliant securities by the 3rd week of November

• Based on our assessment, there will be one exclusion from our stock coverage which warrants the attention of fund managers.

• It is unlikely that the previous exclusion from our portfolio will make a comeback this time around, based on the assessment (latest annual report) and checking with the respective company

SC is set to make an announcement on the new list of shariah compliant securities in late November (note: by convention in 3rd week), following the recent list that was released in May 2023. To recap, a total of 27 new securities have been classified as shariah compliant in the May’s list, a marked dropped against 57 in November 2022. Those that did not make the mark as a shariah compliant stock or in the ‘exclusion’ list also slipped to 9 from 16 in November 2022. Among the notable names in the May’s exclusion list include KNM Group, Malaysia Airport Berhad (MAHB) and Supermax Corporation Berhad. Excluding KNM, both MAHB and Supermax share price took a beating after the announcement by SC though not immediately but one week after. On this score, we find it pertinent for us to advice our clients on the potential exclusion from our portfolio of stock coverage. Note that the assessment of shariah requirement (note: two tier including business activity benchmark, financial ratio) was made using the latest annual report or the latest audited financial statement. Note that the percentage of shariah securities in Bursa Malaysia in May’s announcement improved slightly to 82% against 81% previously (November 2022).

Having said that we expect this number to improve further in this coming announcement (November 2023) thanks to the full year impact of economic re-opening in 2022 (April). The reacceleration of economic activity and the backlog listing of new stocks (note: IPO) could push the list of shariah compliant securities higher. Having said that, based on our assessment, only Ann Joo Resources Berhad (Sell; TP: RM0.84) could slip into the ‘exclusion list’ given the deterioration of their debt over total asset ratio (annual report 2022: 44.6%; 1H23: 47.8%). Note that Ann Joo counts Lembaga Tabung Haji as one if its 30 largest shareholders (@ 0.53%). No other notable GLICs made it in the list of Ann Joo top shareholders except for non GLICs like Manulife and RHB Asset Management though very marginal. We have a Sell call on Ann Joo in line with 2 other research houses call.

Supermax (Non Rated) which was reclassified as non shariah securities in May’s announcement is not likely to make a comeback in this coming announcement as our findings show that the company is not in hurry to address the gap in the financial ratio benchmark specifically its cash over total asset ratio amid the company that sees the need to place cash in conventional account due to their overseas operation. We flag several stocks under coverage which exceeded the financial benchmark set by SC’s SAC.

Below is the list of securities (under our coverage) that exceeded the benchmark set on cash over total asset (based on the latest annual report or latest audited FS):

1. Hup Seng Industries (@ 33.7%)

2. Wellcall (@ 33.9%)

3. Globetronics (@ 61.7%)

4. MPI (@ 35%)

5. Amway (@ 45%)

6. Padini (@ 36.3%)

7. Apex Healthcare (33.9%)

8. Star Media (47.1%)

Though most companies are reluctant to disclose their percentage of deposits in conventional or Islamic accounts and instruments but we will reach out to these companies before making any pre-mature conclusion. Nonetheless, given their steady shariah compliant status over the years, we believe these companies will continue to adhere to the benchmark set particularly with a large number of Islamic asset management companies as their key shareholders.

As for debt over total asset ratio, our findings are as below:

1. TNB (@ 40.8%)

2. Sapura Energy (@ 83.5%)

3. T7 Global (63.8%)

Based our findings, some if not sizeable of Sapura Energy and T7 Global debts are under Islamic instruments, potentially averting them from the SC’s exclusion list. TNB, which has maintained a steady full shariah compliant status over the years, will most likely place their debts under Islamic instruments and therefore, not unduly risking their shariah compliant status, more over with EPF, PNB and KWAP count as their top shareholders. On the same beat, MAHB is unlikely to make it into the shariah compliant list amid full economic re-openings that could boost their non shariah contribution. To recap, MAHB retained its non shariah status during the pre-COVID years and this is expected to continue well into the future.

Moving forward, we expect the list of shariah complaint securities to expand in line with upbeat number of shariah compliant IPO listing recently. The expected recovery and therefore, a rebound in FBMKLCI well into next year could be a precursor of bigger numbers of IPO in the pipeline as companies may want to tap on investors better risk appetite. This will be further supported by sanguine economic outlook amid economic activity that is expected to rebound to 4.0%-5.0% in 2024 against a sub- 4.0% this year. Undervalued Ringgit and attractive FBMKLCI valuation to emerge as the biggest impetus for foreign investors to return. Having said that, we are cautiously optimistic that FBMKLCI could remain in upward trajectory to reach our year end 2023 target of 1,550-points.

Source: BIMB Securities Research - 9 Nov 2023