The Shariah Advisory Council of the SC is tentatively scheduled to release its review list of Shariah compliant stocks on 24 Nov (after market close), and this will take effect the following day. For the upcoming review, we gather that the benchmarks will be calculated using the latest audited financials up to 30 Sep 2022. Within our coverage, our screener did not pick up any potential dropouts/move-ins from/to the Shariah compliant list for the upcoming review.

Nov 2022 Shariah review. The Shariah Advisory Council (SAC) of the Securities Commission Malaysia (SC) is tentatively scheduled to release its upcoming review list of Shariah compliant stocks on 24 Nov (after market close), which will take effect the following day. In determining the Shariah status of stocks, the SAC adopts a two-tier quantitative approach, which applies benchmarks on (i) business activity, whereby non-Shariah compliant activities cannot exceed 5% or 20% (depending on type of activity) of revenue or PBT and (ii) financial ratios, whereby conventional debt/assets and conventional cash/assets must be below 33%. From our understanding, for the Nov 2022 review, these benchmarks will be calculated based on the latest audited financial statements that is released on Bursa’s website up to 30 Sep 2022. As of the last review period (i.e. May-22), there were 751 Shariah compliant stocks listed on Bursa, accounting for 78.8% of the total listed stocks.

Identification methodology. To identify stocks that may dropout or move-in the Shariah compliant list for the upcoming review, we combed thru our coverage universe and focused mainly on their financial ratios. Banks, brewers, gaming, tobacco as well as selected media and REITs were removed as their business nature precludes them from being Shariah compliant – with this exclusion, a total of 95 stocks under our coverage were screened. Their debt/assets and cash/assets ratios were computed at the headline level, and if there were any breaches found (i.e. >33%), we contacted management to obtain a breakdown between the conventional and Shariah portions. The ratios would then be recalculated on a conventional basis (i.e. Shariah portion excluded) to see if the threshold is breached.

No potential dropouts detected. Stocks that were Shariah compliant in the previous review that have breaches in their latest headline cash and/or debt ratio are:

• Headline cash ratio breach: BAuto, Frontken, Hartalega, Kossan, SLP, Star and Uchi.
• Headline debt ratio breach: Pharmaniaga, TSH, Wah Seong and WCT.

However, after checking with the respective management of these companies, all clarified that a sufficient potion of their headline cash/debt sum is Shariah-based to ensure Shariah compliance.

No potential move-ins detected. Screener did not pick up any possible move-ins within our coverage to the Shariah compliant list for the upcoming review based on the financial ratio benchmarks.

KLCI target at 1,540. We maintain our end-2022 KLCI target at 1,540 (15.4x PE on mid-CY23 EPS). Our top picks that are Shariah compliant include Tenaga, Dialog, Sunway, BIMB, VS, DNeX and FocusP, while the non-Shariah ones are RHB, MAHB, Carlsberg, Armada and SPToto.

Source: Hong Leong Investment Bank Research - 16 Nov 2022