May 15, 2014

More Stocks At Risk Under May 2014 Shariah Review

10 companies under coverage lost their Shariah status in November 2013
The Securities Commission (SC) last reviewed the Shariah compliance status for listed stocks on Bursa on 23rdNovember 2013. The November review was a significant milestone as it also incorporated stricter measures on interest income and income from selected businesses. Of the 100 companies under our coverage then, 10 of these lost their Shariah status, asa result of the stricter stance adopted. This included the likes of Tropicana, MRCB, AnnJoo, Parkson, Hiap Teck, Uchi, SP Setia, MCIL, Bumi Armada and YTL Power.

Flexibility masks true impact of selldown
Based on the strictest adoption of the Shariah guidelines, any paring down of positions by Shariah compliant funds should have been immediate. This potentially explains the kneejerk reaction on stock price performance of the names above – some shedding up to 19% of their values post the review (see figure 1). However, our checks indicated that selected institutions had adopted a more relaxed approach, providing a time frame for the disposal as well as allowing some flexibility especially on loss making positions. This we believe provides a semblance of short term stability for the affected stocks. Moreover, we believe that the stronger stock price performance of some of the 10 affected stocks over
the recent months may have been masked by their sharp underperformance in 2013 and a play on laggards this year, explaining their better ytd performance.

below: 1-month price performance of companies post losing their Shariah status (click to enlarge)

syariah_stocks_performance 
below: Ytd price performance of companies post losing their Shariah status (click to enlarge)

shariah_stocks_YTD_performance

Next review later this month
The SC which reviews for compliance on a 6 month interval, will provide an
update later this month. Pre-empting this, we have run checks for potential dropouts across our universe of Shariah compliant stocks (currently 68 companies after excluding banks, gaming and other non Shariah companies). This is based on either the annual audited accounts or latest annual report.

4 at risk, but a new one likely to be included AirAsia X (AAX), Perdana Petroleum (PP), Petronas Chemicals (PChem) and Sapura Kencana (SKP) are potentially at risk. SKP is a borderline case (in respect of its debt ratio). Notwithstanding this, we do not expect a significant kneejerk reaction as SKP’s management has been forthcoming on such a potential eventuality. The 13% stock price underperformance ytd may have also already priced in some of this risk. More importantly, the assessment made is still based on the Audited 2013 figures, unchanged from the last November review, implying that there is likely to be limited impact on Sapura Kenanca. Likewise, PChem also pulled through the Nov 2013 review despite failing to meet the cash/total asset ratio requirement then. This really leaves AAX and PP as companies that are really at risk of falling off this round. Conversely, IOI Properties has a strong chance of being included, meeting all requirements.

Scarcity premium will further increase
The demanding Shariah conditions reinforce our view that valuations for the KLCI will further trend up in the future, as liquidity is further narrowed down on a smaller pool of investable names. There is already a distinct scarcity premium for Shariah compliant stocks which may continue to expand given the ample domestic liquidity and strong participation by domestic institutions.

by AffinInvestment Bank Research