Posted by kk123 > 2014-06-02 18:40 | Report Abuse

The SC has tightened the criteria for its business activity benchmark, and introduced a financial ratio benchmark which calls for Shariah compliant companies to have a cash-in-conventional- accounts/assets ratio and a conventional debt/assets ratio of less than 33%. Fund managers will be given a grace period of six months from November to align their portfolios to the new stock selection. Our screening process. To assess compliance to the new financial ratio benchmark, we focused on stocks with a market cap of > MYR500m and screened them according to their cash/assets and debt/assets ratios. We stress that screening is on a best endeavor basis since the financial statements do not distinguish between conventional vs Islamic deposit accounts and it cannot be ascertained that the reports fully distinguish between conventional and Islamic debt. Also, some companies may have moved into compliance since their last balance sheet date, which is the base period for our assessment. 37 stocks identified. Of the 62 stocks that we selected, we identified 17 stocks that had a cash/asset ratio of > 33% and 20 stocks with a non-Islamic debt/asset ratio of > 33% as at end-Dec 2012. Of the 17 stocks with a cash/asset ratio of > 33%, three are under our coverage: FGV, PCHEM and Padini. And, of the 20 stocks with a non-Islamic debt/asset ratio of > 33%, eight are under our coverage: AirAsia, Ann Joo, IOI Corp, MAS, SP Setia, Tan Chong, Yinson and YTL Power. Less of an issue for stocks with a cash/asset ratio >33%. We think the solution for these companies is relatively straightforward in that all they would need to do is to shift sufficient funds into Islamic deposit accounts to ensure that the 33% rule is not breached and that their interest income does not exceed 5% of total group revenue (to satisfy the refined business activity benchmark). A little more complicated for stocks with a non-Islamic debt/asset ratio >33%. The solution would be for these companies to convert some of their conventional debt to Islamic debt. There are some legal costs to be incurred in the conversion but we understand the process is relatively straightforward and that it would be possible to structure Islamic debt instruments or sukuk that mirror the existing conventional debt without any disadvantage to the bondholders or the company. Big-cap companies excluded from the revised list include YTL Power International Bhd, Bumi Armada Bhd, S P Setia Bhd, AirAsia Bhd, Panasonic Manufacturing (M) Bhd, Malaysian Resources Corp Bhd (MRCB), Parkson Holdings Bhd and Dutch Lady Milk Industries Bhd..  Petronas chemical , SAB,faber