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

• For the upcoming list, the Shariah status for companies with fiscal year ending in Dec 2023 and earlier will be reviewed. Based on previous practice by Shariah Advisory Council (SAC) of SC, the cut-off date for audited accounts that are made available on Bursa website and being reviewed by SAC is end of March 2024.

• We think it is unlikely that the previous exclusion from our stock universe will make a comeback this time around, based on our assessment on the latest audited account and communication made with the respective company.

The Securities Commission (SC) is expected to unveil the updated list of Shariah-compliant securities in late May 2024, following the release of the previous list in November 2023. In the November 2023 list, a total of 31 new securities were classified as Shariah-compliant, marking an increase from 27 companies added in May 2023. Conversely, the number of securities failing to attain Shariah compliance or placed in the 'exclusion' list rose to 26 in November list from 9 in May 2023. Drawing from historical data analysis, we anticipate minimal deviations in the upcoming list. It is expected that large-capitalization stocks including in our universe will maintain their Shariah-compliant status in the forthcoming May update. Based on our calculations, which pertain to companies within our coverage and are based on the latest audited accounts, compliance with both business activity benchmarks and financial ratios criteria is maintained.

In the outcome of the May 2023 announcement, Supermax (Non-Rated) underwent reclassification as Shariah non-compliant securities. Nevertheless, our analysis suggests that its resurgence in the forthcoming announcement is unlikely, as our findings indicate the continued exceedance of the 33% threshold limit by its C/TA ratio of 40.9% in FYE June 2023 Annual Report. The earliest potential for its reinstatement is projected to be in next year's May announcement, in our view. Recall that the breach of the 33% C/TA ratio stemmed from bumper profit generated during the COVID-19. Based on our channel check, it is anticipated to normalize, naturally reverting back within the threshold level in this financial year.

As for Amway (TP: RM6.40), its C/TA ratio exceeds the 33% limit at 55.4%, as we included the entire cash holdings in our calculation. It's important to note that the company does not disclose the breakdown of cash held in conventional and Islamic accounts, making it hard for us to determine a definitive ratio. Based on its historical performance, Amway's C/TA ratio has ranged from 33% to 48% over the past 10 years. Amway has a history of being removed from the Shariah list three times i.e., in Nov 2013, May 2014 and Nov 2015. However, it was reinstated in Nov 2016 and has maintained its position on the Shariah list since then, demonstrating management's commitment to Shariah-compliance.

Similarly, Padini (TP: RM3.80) does not disclose the percentage of funds held in Islamic accounts. Over the past five years, Padini's C/TA ratio has fluctuated between 41% and 52% and has consistently remained on the Shariah list.

Conversely, there is a risk for Apex Healthcare (TP: RM2.41) as its C/TA ratio of 33.9% exceeds the 33% threshold. The increase in cash position, mainly driven by a one-off dividends received from SAG (as part of a divestment exercise from the associate company, Straits Apex Group Sdn Bhd), amounted to RM214.4mn. Assuming all cash is in a conventional account, we think Apex is at risk of being reclassified as Shariah noncompliant security. However, we think this will occur in Nov 2024 rather than in May 2024 as its FYE Dec 2023 audited accounts were only made available on Bursa in mid-April 2024 which is after the cut-off date for SAC review in March 2024.

Additionally, our analysis identified several stocks under our coverage that surpassed the financial benchmark set by SC's SAC, as summarized below (Table 1 and 2).

Table 1 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 quarter result):

Considering that many companies hesitate to disclose their breakdown of deposits in conventional or Islamic financial instruments, we will engage with these companies before drawing any premature conclusions. Nevertheless, given their consistent track record of maintaining Shariahcompliant status over the years, we anticipate these companies will continue to adhere to the established benchmarks, especially considering that these companies have a significant number of Islamic asset management firms as their major shareholders.

As for debt over total asset ratio, our findings are as below (Table 2):

Based on the latest audited accounts, T7's Debt-to-Total-Assets (D/TA) ratios exceeded the SC's permissible threshold of 33%. Our findings indicate that the company surpasses the 33% D/TA limit, standing at 61.8%, due to the non-disclosure between debts issued under conventional and Islamic instruments. Note that this was the case since the end of FY22. Given that there has been no changes to its shariah compliant status since then, we would expect the stock to maintain its status quo in upcoming update list.

In summary, our findings indicate that within our coverage, our screening process did not identify any potential dropouts or additions from or to the SAC's list for the upcoming review.

Source: BIMB Securities Research - 8 May 2024