The Securities Commission (SC) is slated to release its new shariahcompliant stocks list at end-May. This will be the second review based on the revised shariahscreening methodology that was introduced in Nov 2013. Currently, of the 168 stocks in our coverage universe, 52 stocks are non-compliant. We have identified 11 stocks that may become non-compliant and six that could be deemed compliant.

• Stocks at risk of exclusion.Please refer to Figure 1 for the list of the 11 stocks that could be excluded from the new list of shariah-compliant stocks. These stocks fall into the oil and gas (O&G), ports, airlines, healthcare, education and consumer sectors. Only Petronas Chemicals (PCHEM MK, NEUTRAL, FV: MYR6.58) is a component of the benchmark FBM KLCI index. Based on its 2013 annual report, Petronas Chemicals has a cash to total asset ratio of 36.6%, which is well over the allowable 33% threshold. While management continues to guide investors that it expects to remain shariah-compliant, the notes to the accounts do not indicate if any of the cash holdings are in the form of Islamic accounts or instruments. SapuraKencana’s (SAKP MK, BUY, FV: MYR5.61) unaudited 4QFY14 accounts reveal a debt ratio of 46.4%. However, we do not have a breakdown of the debt composition, ie there could be elements of Islamic debt instruments. Prestariang (PRES MK, BUY, FV: MYR4.32) is the only stock here with a BUY recommendation and has featured prominently on our Top Picks list. The stock trips over the cash hurdle, however. Meanwhile, Faber (FAB MK, NEUTRAL, FV: MYR2.43) also has cash exceeding 33% of its total assets. However, as it is already in the process of acquiring new businesses that should reduce its cash holding below the threshold, it is possible that it could obtain an exemption from the SC and remain on the compliant list. We also note that Lembaga Tabung Haji is a substantial shareholder in Perdana Petroleum (PETR MK, NEUTRAL, FV: MYR2.10), Padini (PAD MK, NEUTRAL, FV: MYR2.15) and Parkson (PKS MK, NEUTRAL, FV: MYR2.25). Investors in stocks that were earlier classified as shariahcompliant but which are subsequently reclassified as shariah noncompliant, are given a 6-month grace period from the effective date of the updated list to dispose of such securities. Note that there are exceptions to this rule.
• Stocks that could be deemed compliant. Please refer to Figure 2.These six stocks are not currently on the shariah-compliant list but could be deemed compliant in the upcoming review as their debt ratio has fallen below 33%.
• Stocks at risk during the next review.There are three shariahcompliant stocks in our coverage universe, namely Berjaya Auto (BAUTO MK, BUY, FV: MYR2.55), Caring Pharmacy (CARING MK, BUY, FV: MYR2.48) and Hua Yang (HYB MK, BUY, FV: MYR2.40) that, based on their latest unaudited quarterly accounts, do not meet either the cash or debt hurdle. If the conditions are not regularised by the time the audited accounts are finalised, they run the risk of being excluded at the next review in November. Please refer to Figure 3. Stocks that are shariah-compliant should have a larger addressable investor base that could increase the potential demand for the stock.

Source: RHB