LTH's Shareholding In Syariah Compliant Counters

Big cap companies excluded from the revised list are YTL Power, Bumi Armada, SP Setia, Airasia, Panasonic, MRCB, Parkson and Dutch Lady.

Other names excluded are Silver Bird, Southern Steel, BJFood, Pantech, SKP Res, Yinson and SKPRES.

As at 29 Nov 2013, LTH holds a 8.8% stake in MRCB, 6.93% stake in Parkson, 4.55% stake in Pantech and 5% stake in SKP Res.

To recap, the Securities Commission has introduced a revised Syariah-compliant securities list which is said to be helping Malaysia to draw more investments from the Middle East.

The updated list, which took effect 29 Nov 2013, will feature a total of 653 Syariah-compliant securities, which constitute 71% of the 914 listed securities on Bursa Malaysia. The list includes 16 newly classified Syariah-compliant securities and excludes 158 from the previous list issued in May 2013.

A new set of Syariah guidelines by the SC may see fund managers sell more than rm1 billion in the stocks from Nov 2013.

The new SC rules, announced on June 18 2013 entail a revised screening method which introduces new financial ratio benchmarks to determine the Syariah complaint status of listed companies.

Essentially this means listed companies which do not have at least two thirds of their debt and cash that are Syariah compliant will see Syariah funds and investment schemes compelled to sell their shares in these companies. Currently (Sept 2013), the ruling does not require companies to adhere to the financial ratio benchmarks to be Syariah compliant.

Funds which will include LTH … As of June 30 2013, there are 173 Islamic based funds with assets of rm37.48 billion or 11.4% of total assets of rm326.4 billion.

The new ruling of less than 33% conventional debt to total assets is not so easy to comply with.

It is learnt that the SC has had discussions with key shareholders including companies which will be affected following the newly introduced financial ratio benchmarks. They have been asked to refinance all their conventional borrowings to sukuk or Islamic financing but this is not feasible for them, as this will bring their cost of financing up.

Institutions that manage Islamic and Syariah compliant funds will be impacted. They will have to tailor their portfolios to account for quite a few companies that may drop out of the Syariah compliant list.

The good news however is that funds have a grace period of six months from the effective date of the Syariah compliant list in Nov 2013 to dispose of affected securities.

Looking at LTH’s shareholding in current (Sept 2013) Syariah compliant stocks, a possible selldown by LTH in the event of the breach of the financial ratios benchmark would include FGV, Faber and Hiap Teck.

FGV and Faber can easily take steps to ensure the conventional cash to total assets ratio follows below the Syariah compliant list. They can simply move their cash in conventional banking accounts to Islamic ones.

Naturally there are some that will not comply but these affected ones will find ways to rectify the situation. Thus within a year so from the time the new guidelines come into force, expect an increase in Islamic deposits and in Islamic financing.

A second revised benchmark’s involves the business activity of the companies, currently (Sept 2013) assessed under 10% or 25% benchmarks; this may affect companies as their activities will now (Sept 2013) assessed under 5% or 20% benchmarks.