• The Securities Commission of Malaysia (SC) is expected to announce its new list of shariah compliant securities by Friday 29th Nov 2024.

• Based on previous practice by Shariah Advisory Council (SAC) of SC, the updated list will be based on the audited financial statements that are made available on Bursa Malaysia website between 1 Apr 2024 and 30 Sep 2024.

• Based on our assessment, there is a risk for two exclusions from our stock coverage which warrants the attention of fund managers, namely Apex Healthcare (HOLD, TP: RM2.51) and PMB Technology (SELL, TP: RM1.11).

• On the other hand, we think it is unlikely that the previous exclusion among our stock universe (i.e. Supermax and Ann Joo) will make a comeback this time around.

The Securities Commission (SC) is expected to unveil the updated list of Shariah-compliant securities by this Friday (29th Nov 2024). In the previous list that was released in May 2024, a total of 27 new securities were classified as Shariah-compliant, including 17 IPO stocks. Meanwhile, the number of securities failing to maintain its Shariah compliance or placed in the 'exclusion' list was 14 securities. Comparatively, this is lower than 26 securities that were excluded from Nov 2023. In total, there were 820 Shariah-compliant securities listed on Bursa Malaysia, represent 81% of all securities in the universe.

In our stock universe, there are 2 stocks that are currently Shariah noncompliant namely Supermax (Not-rated) and Ann Joo (Not-rated). Both stocks were excluded in May 2023 and Nov 2023 lists respectively.

Our analysis suggests that Supermax may not be reclassified as Shariahcompliant in the forthcoming announcement. This is due to its audited financial statements was made available on Bursa Malaysia’s website only in Oct 2024 which passed the cut-off date of 30th Sep 2024. Nonetheless, we think the inclusion is very likely in May 2025 list as our findings indicate that its cash to total asset (C/TA) ratio has fallen below 33% threshold limit in FYE June 2024 Annual Report.

Meanwhile, we think Ann Joo also may not be reclassified as Shariahcompliant securities in the forthcoming announcement. Based on its audited financial statements that was made available on Bursa Malaysia’s website in Apr 2024, our analysis showed that its debt-to-total-asset (D/TA) ratio continued to exceed the threshold limit of 45.8% (refer to Table 3). Thus, this suggests that its resurgence in the forthcoming announcement is also unlikely.

Additionally, our analysis identified several stocks under our coverage that surpassed the financial benchmark set by SC's SAC, as summarized in Table 2 and 3. Notably, our assessments of C/TA and debt to D/TA for these stocks were based on considering 100% cash and debt as being held in conventional accounts. We have taken this approach since the companies did not disclose the breakdown of cash and debt held in Islamic and conventional accounts.

Note that, based on Table 2 above, Wellcall (BUY, TP: RM1.90) and Bursa Malaysia (BUY, TP: RM11.10) managed to maintain the Shariah-compliant status in May 2024 list despite having breached the C/TA ratio. This could be due to the placement of some of the cash in Islamic financial instruments. Considering that many companies hesitate to disclose their breakdown of deposits in either conventional or Islamic financial instruments, we think it is premature to assume that all the remaining stocks will be excluded from upcoming Shariah list.

Nevertheless, given their consistent track record of maintaining Shariahcompliant status over the years, we anticipate these companies will continue to adhere to the established benchmarks, especially considering that these companies have a significant number of Islamic asset management firms as their major shareholders.

For example, Amway (HOLD, TP: RM6.80) has exceeded the C/TA ratio 33% limit at 55.4%, as we included the entire cash holdings in our calculation. It's important to note that the company does not disclose the breakdown of cash held in conventional and Islamic accounts, making it hard for us to determine a definitive ratio. Based on its historical performance, Amway's C/TA ratio has ranged from 33% to 48% over the past 10 years. Amway has a history of being removed from the Shariah list in Nov 2013 and Nov 2015. However, it was reinstated in Nov 2016 and has maintained its position on the Shariah list since then, demonstrating management's commitment to Shariah-compliance.

Similarly, Padini (HOLD, TP: RM3.60) does not disclose the percentage of funds held in Islamic accounts. Over the past five years, Padini's C/TA ratio has fluctuated between 41% and 52% and has consistently remained on the Shariah list.

However, there is a risk for Apex Healthcare (HOLD, TP: RM2.51) which has just recently breached the limit. Its C/TA ratio of 34.1% exceeds the 33% threshold. The increase in cash position, mainly driven by a one-off dividends received from SAG (as part of a divestment exercise from the associate company, Straits Apex Group Sdn Bhd), amounted to RM214.4mn. Assuming all cash is in a conventional account, we think Apex is at risk of being reclassified as Shariah non-compliant security.

Meanwhile, we also found that many companies that breached the D/TA threshold of 33% (as listed in Table 3) have issued Islamic Debt instruments (i.e. Sukuk) which gives us the comfort that these company may retain its Shariah status. However, we can’t find such info on PMB Technology (SELL, TP: RM1.11) and Reservoir Link Energy (HOLD, TP: RM0.33). Thus, we think it could also be excluded from Shariah list. However, Reservoir Link Energy may only be excluded in May 2025 review as it submitted the audited financial statements only in Oct 2024 which passed the cut-off date of 30th Sep 2024.

In summary, our findings indicate that there are 2 potential dropouts within our coverage from SAC’s list for the upcoming review, namely Apex Healthcare and PMB Technology. Meanwhile, for May 2025 review, the Shariah status for Supermax is likely to be reinstated while Reservoir Link Energy might be excluded.

Source: BIMB Securities Research - 27 Nov 2024