What’s New

• We have attended OldTown’s 2Q17 results briefing with the limelight on its Shariah status. Management explained reasons behind the stock being removed from the Shariah-compliant list by the Securities Commission (SC). To recap, OldTown’s share price tumbled 7.4% on 25 Nov 2016, last Friday.

Comment

• SC updates Shariah list. The Securities Commission (SC) has released its revised Shariah compliant securities/stocks list on 24 Nov. The revised list will take effect from last Friday, 25 Nov 2016. It includes 34 newly classified shariah-compliant securities and excludes 30 from the previous list issued in May 2016. The number of Shariah compliant stocks now stands at 672 (74%), out of total 904 listed on Bursa Securities.

• Removal from Shariah-compliant list. Oldtown has been removed from the Shariah-compliant list by SC effective from last Friday (25 Nov). Oldtown’s exclusion from the SC’s revised Shariah list came after it failed to meet the financial ratio benchmark relating to its cash. Management said it overlooked the requirement ratio of less than 33% cash over total assets. Management noted that OldTown has achieved Shariah compliance since Dec 2012. Currently, only 1.5% of total shareholding is owned by Islamic funds. Nonetheless, the Group has since then switched RM43mill of its cash into Islamic instruments and achieved 29% of cash over total assets to meet the requirement.

• Waiting for next revision. The full Shariah compliance list, which is updated twice a year, is based on companies' latest annual audited financial statement. Hence, Oldtown could only officially be reinstated as Shariah compliant after SC review its audited accounts in the next annual report next year.

Earnings Outlook/Revision

• We maintain our earnings forecast for FY17-18F. We opine that OldTown’s fundamentals remain intact.

Valuation & Recommendation

• Despite the exclusion from the Shariah list, we reiterate our BUY rating on Oldtown with an unchanged target price of RM2.21, based on FY17 EPS forecast 13 sen with blended industry PER of 17x. We view the present price weakness as an opportunity to accumulate the stock.

Source: JF Apex Securities Research - 28 Nov 2016