FTSE Russell is due to announce the results of the final semi-annual review for 2020 of the FTSE Bursa Malaysia Index series after business close on Thursday, 3rd December. Decision will be based on yesterday’s closing data. We expect KLCC (OP; TP: RM8.20) to be edged out from the FBMKLCI, being the smallest market cap constituent, by SUPERMX (OP; TP: RM12.00) coming in as the largest non-constituent. SUPERMX which is the market’s 22nd largest by market cap, cleared the threshold of 25th as a condition for entry. The changes would see the rubber glove sector’s weight increase from 11.7% currently to about 14.3% and the FBMKLCI FY21E EPS enhanced marginally by about 2.4%. Separately, the updated SC list of Shariah approved stocks will be out after business close on Thursday 26th November. We expect all 135 stocks under our coverage to remain status quo.

Expect announcement of changes to FBM series constituents next week: Details of the review outcome will be available after the close of business on 3rd December. Constituent changes will take effect after the close of business on Friday 18th December and the updated FBM series constituents will be reflected in the indices at the start of trading on Monday, 21st December.

On the closing prices at cut-off date, SUPERMX was ranked22nd by market cap, qualifying it for inclusioninto the FBMKLCI: 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 which was yesterday, 23rd November. (see table of ranking overleaf)

KLCC edged out: Because of SUPERMX’s inclusion, the smallest FBMKLCI incumbent, which happens to be KLCC has to be dropped from the 30-member constituent. Contrary to earlier expectations, GENTING (OP; TP: RM5.10) and GENM (OP; TP: RM2.75) did not fall off the list due to strong price recoveries recently on the back of positive vaccine news.

Bigger inclusion against exiting weight: Based on SUPERMX’s represented index shares of 1,618.75m at RM8.16 versus KLCC’s 442.85m at RM7.71, we estimate that SUPERMX would be coming in at around 2.6% weight versus KLCC exiting at 0.68% weight. The final figures, however, will be based on closing prices on Friday, 18th December after which the new constituents will be first reflected when trading starts on Monday, 21st December.

Rubber gloves sector estimated to make up 14.3% by weight: With the latest expected changes, the rubber gloves sector will be represented by three constituents – TOPGLOV, HARTA and SUPERMX – making up an estimated 14.3% weight based on current prices, up from 11.7%.

Marginal upside to FBMKLCI’s FY21 EPS is likely with the changes: Supermax’s estimated net profit for CY21 of RM2.5b (EPS: 92.3 sen) exceeds KLCC’s estimated RM669m (EPS: 37.1 sen). And as SUPERMX’s entry will be represented with a higher number of shares compared to KLCC’s, it is highly likely that the estimate FBMKLCI EPS for FY21 will be enhanced as a result by about 2.4%. We keep our FY21 EPS estimate at 95.5 sen for now pending the conclusion of the 3QCY20 earnings season early next week.

The SC Shariah review and updated list will be announced after business close on Thursday, 26th November:We do not expect any changes in the status of the stocks under our coverage. However, we sense that several stocks may be at risk of exclusion in the subsequent reviews. We understand that names such as AAX which is facing financial distress and having to pay penalties on late or non-servicing of debt on lease liabilities, may render it to become non-Shariah compliant based on Islamic jurisprudence on leases. As these issues will likely surface only in the next set of audited financial accounts, they should likely remain in the Shariah index for now as this Thursday’s review (26th November) will be based on the latest available annual report which is FYE Dec 2019. Another exclusion risk for November 2021 (if not May) review is YINSON as its FYE Jan 21 Annual Report should reveal higher foreign currency debt that exceeds 33% of total assets. A promising prospect for re-entry in the November 2021 review is IJMP if it makes the right adjustment to reduce their conventional debt ratio to below the 33% threshold (from 35% as per FYE March 2020 Annual Report), which is within reach.

Source: Kenanga Research - 24 Nov 2020