6 November 2014
IOI Corp Bhd, Perdana Petroleum Bhd and SapuraKencana Petroleum Bhd could be designated as non-syariah-compliant securities when the Securities Commission (SC) publishes its semi-annual review at the end this month.
RHB Research said in a note yesterday it expects the three stocks to designated as non-syariah-compliant as they each has conventional debt that exceeds 33% of their respective total assets.
The Shariah Advisory Council (SAC) of the SC stipulates that on top of the business activity benchmarks, cash and debt with conventional banks should each not exceed 33% of total assets.
Of the 169 stocks under its coverage universe, RHB Research said, 121 are currently designated as syariah-compliant. However, it has identified 10 stocks, including the three, that are currently syariah-compliant but has fallen afoul of the financial ratio hurdles based on their latest audited accounts.
Seven other stocks that are at risk of being redesignated are Malaysian Airline System Bhd (MAS), Malaysian Resources Corporation Bhd (MRCB), Pintaras Jaya Bhd, Faber Group, SHL Consolidated Bhd, Hartalega Holdings Bhd and Globetronics Technology Bhd.
However, RHB Research noted that MAS, which has a nominal debt that exceeds the allowable threshold, should remain syariah compliant. It believes that a portion of the debt is Islamic debt as the stock passed the May review.
It also expects MRCB to remain syariah compliant as only 29.3% of its debt is conventional.
The remaining five stocks, Pintaras Jaya, Faber Group, SHL Consolidated, Hartalega and Globetronics Technology have "excess" cash but are all expected to pass scrutiny as most of the cash holdings are parked in Islamic accounts.
RHB Research said investors in syariah-compliant securities which are subsequently reclassified as non-syariah-compliant are required to dispose of the stocks within a month, unless the market price is below investment cost.
On the flip side, RHB Research has identified Esthetics International Group, Pantech Group, SKP Resources and Padini as stocks that could be included in the syariah-compliant list. The four stocks are not in the list of syariah-compliant securities but could be included in the coming review, it said.
RHB Research said that in stocks that are syariah-compliant, the addressable investor base is significantly larger with commensurate benefits to their share prices.
According to data from the SC, domestic assets under management (AUM) at end-September 2014 amounted to RM633 billion, of which RM263 billion is invested in equities and unit trust funds. "Around 12.7% of this amount is invested in syariah assets," it said.
It added that the addressable investor base grows exponentially if it includes foreign portfolio investors such as sovereign wealth funds from the Middle East, such as the Abu Dhabi Investment Authority, which has an AUM of about US$773 billion.
"The growing AUM of Islamic funds and the diminishing quantum of syariah-compliant stocks could give rise to a scarcity premium for these stocks," the research house said.
RHB Reseach's top picks in the syariah-compliant space include Tenaga Nasional Bhd, Unisem (M) Bhd, Matrix Concepts Holdings Bhd, Cahya Mata Sarawak Bhd and Naim Holdings Bhd.
"We remain optimistic on the outlook for equities heading into the tail-end of 2014 and looking ahead into 2015. We expect the global economy to stage a steady recovery coupled with a shallow pace of interest rate normalisation.
"We continue to like stocks in the construction, property and basic material sectors in addition to other selective growth stocks," it said.
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