FTSE Russell is expected to announce the results of the semi-annual review of the FTSE Bursa Malaysia Index series after business close on 4th June. We expect TM (MP; TP: RM4.20) to be included into the FBMKLCI while MAHB (OP; TP: RM5.45) and AMMB (MP; TP: RM3.20) are likely to be dropped, having fallen in market cap rankings below the 36th position. In our view, KLCC (MP; TP: RM8.10) is likely to be included as well, being the largest market cap non-constituent after TM, which also qualifies in terms of free float and liquidity, by our estimates. QL (OP; TP: RM8.30) has done extremely well this past week, rallying 14%, most likely reflecting the prospect of its inclusion. While there is a chance, albeit less in our view, of it being included instead of KLCC, it seems to have fully priced in such an event. While a great stock, it is overpriced at 58x FY21 EPS - time to take some profits.

Expect changes to FBMKLCI constituents next week: Details of the review outcome will be available after the close of business on 4th June – being the first Thursday. Constituent changes will take effect after the close of business on the third Friday of June. This means that the updated FBMKLCI constituents will be reflected in the index at the start of trading on Monday 22nd June. The cut-off date for the present review was supposed to have been last Monday 25th May (being 4 weeks prior to the review effective date) but because it was a public holiday, the cut-off was taken on the close of Friday 22nd May.

On the closing prices at cut-off date, TM was ranked 24thby market cap, qualifying it for inclusion: The ground rules state that a non-component stock will be included if it has risen to 25th position or higher by full market value on cut-off date.

MAHB fell to 40th and AMMB to 37th which disqualify them: The ground rules for deletion states that a component will be dropped if it falls to 36th rank or below.

Down to KLCC or QL to be included: Given two deletions and one inclusion, maintaining the number of constituents at 30 demands the highest ranking non-constituent that also meets the free float and liquidity criteria to be included. In this case, we believe that either KLCC Property (KLCC) or QL will be included, with chances higher for the former. KLCC has risen to 28th in market cap, being the largest non-constituent versus QL at 30th. Both qualify on free-float criteria where they have free-floats well above the minimum threshold of 15%. Our analysis of liquidity shows that KLCC’s liquidity has picked up significantly over the past 12 months (see figure 1). The rules states that to be included, the security must turn over at least 0.05% of its free-floating shares in issue, using its median daily trading volume per month for at least 10 of the 12 months prior to the semi-annual review. Based on our findings of the monthly median daily volumes from June 2019 to 22nd May 2020 and using our estimated free float of 24.53%, we found that KLCC has generated median daily turnovers exceeding 0.05% for 11 of the past 12 months. On this basis, we believe it has a good chance of inclusion unless the FTSE Russell’s definition of free-float differs significantly from ours.

KLCC to rejoin other FBM Indices? KLCC was removed from the FTSE Russell Malaysia Indices in December 2018 on grounds that it failed the liquidity test. In the event of a re-admission in this review period based on it passing the liquidity test, it could potentially open doors of other FTSE Malaysia indices such as the FBM Emas Shariah Index or FTSE4Good Index for KLCC to be included into.

Bigger inclusion against exiting weights: TM and KLCC combined weightage are likely to come in slightly above 3% - more than replacing the existing combined weightage of AMMB and MAHB of 2.25%. This means that some weightage will inevitably be trimmed from each of the remaining 28 constituents. We estimate TM’s weightage to be around 1.83%, thereby raising the telecommunication sector’s weightage in the index to 12.45% from 10.72%.

Source: Kenanga Research - 29 May 2020