Astro and AMMB could potentially face some near-term selling pressure ahead of the review of the KLCI constituents in June, as investors reposition their weightings on these stocks. Likewise, we screened our coverage of 118 companies for any risk of companies losing their Shariah Compliance status later this month and expect that SLP Resources could be most at risk of losing this premium status. On the flip side, possible inclusions into the KLCI constituents are Hartalega, Dialog and Malaysia Airports. Digi, which was deemed non-Shariah compliant in the November 2017 review, could possibly reclaim its Shariah status after addressing its nonconventional gearing. Maintain Overweight and year-end KLCI target of 1,923 (based on 18.6x or +1SD historical mean on 2018E earnings).

KLCI 30 Review by June 2018 – Astro, AMMB Most at Risk

We note that there are 3 key criteria used in the determination of the KLCI constituents: 1) free float >15%, 2) stock is added to the list when its market cap rises to 25th position or above; and 3) removed when market cap falls to 36th position and below. Based on market closing prices on 16 May 2018, we flag the risk of Astro and AMMB falling off this list as they meet condition No 3, as based on market cap, both stocks are trading at position 39 and 43 respectively (Fig 1). YTL Corp, which is the 36th largest company based on market cap, could also potentially be at risk when the next review is done later this month/June. However, we note that Astro and AMMB’s stock prices have underperformed the KLCI by 35.8% and 20.6% respectively over the past 3 months, likely pricing-in some of this risk. Beneficiaries from the upcoming KLCI constituent review will likely be Hartalega, Dialog and potentially Malaysia Airports.

Bi-annual Shariah Review – SLP at Risk, DiGi Could be Reinstated

The Securities Commission, which updates its list of Shariah-compliant stocks twice a year, will provide an updated list later this month. After scanning through the latest annual reports of the 118 companies we cover, we identify several companies (Fig 3) that do not fit the bill due to either their cash holdings or gearing position. More importantly, to achieve Shariah-compliant status, companies need to meet key financial benchmarks - cash to total assets and debt to total assets cannot exceed 33%, unless held in non-conventional instruments. Within our coverage, we identify 7 companies that do not meet the financial benchmark criteria, although upon further checks with management, we gather that most of the affected companies’ cash/debt is in non-conventional instruments. Thus, we believe only SLP Resources is at risk of losing its Shariah-compliant status. Conversely, DiGi, which was removed from the Shariah list after the November 2017 review, will likely have its Shariah status reinstated after having addressed its conventional debt.

Maintain Overweight and 2018 FBMKLCI Year-end Target of 1,923

The upcoming KLCI/Shariah reviews have little bearing on our sector weighting or stock positioning. We remain market Overweight with a FBMKLCI target of 1,923. With likely better governance from the newly formed government and potentially improved consumer demand ahead, there could be likely upside to our earnings growth estimates (+7.1% for 2018E). Near term, with the removal of the risk of political uncertainty, improved sentiment and a still-undervalued RM (RM3.80 year-end target), we think that risk-reward is favourable. Key risks include a global macro slowdown, capital outflows and weak domestic demand.

Source: Affin Hwang Research - 16 May 2018