The changing face of the FBM KLCI

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OVER the last 10 years, technology companies around the world have attracted significant investor interest. Companies like Apple and Microsoft have become the world’s largest companies by market capitalisation.

Tech start-ups have also been drawing in the big bucks from investors. Besides unicorns, which have valuations of at least US$1bil (RM4.14bil), there are also decacorns, which have valuations surpassing US$10bil (RM41.48bil). There are an estimated 700 plus unicorns, out of which, approximately 30 are decacorns.

Despite all that, there is not a single technology company among the constituents of the main index of Bursa Malaysia, namely, the FBM KLCI.

The FBM KLCI, which comprises the top-30 largest companies on Bursa Malaysia by market capitalisation, has stocks mainly from the banking, telecommunications and plantation sectors.

Things could change in the next revision of the FBM KLCI constituents, which takes place in December.

A quick check on the largest companies on Bursa Malaysia shows that Inari Amertron Bhd stands a good chance of becoming the first technology company on the index. It is now the 32nd largest company on the local stock exchange.

“Never before has there been a technology company on the FBM KLCI. But it looks like Inari could be the first, should its share price continue to rise,” points out Rakuten Trade head of equity sales Vincent Lau.

Other changes to the index have also taken place recently.

“Banks have long made up the heavyweights on the main index. But the Covid-19 pandemic has changed the index components over the past two years. We have seen glove stocks go in and out of the index.

“Then, there is the newcomer MR DIY Group Bhd, which made it into the list in June, when it replaced glove maker Supermax Corp Bhd,” he adds.

Meanwhile, the Covid-19 pandemic has accelerated the digitalisation trend, as customers shifted to online platforms, in turn forcing businesses to adopt more technology processes.

This fast-paced technology adoption has resulted in semiconductor chip shortages globally.

Malaysia’s electrical and electronics (E&E) companies play a significant role in the supply of chips that are used in cars, smartphones, laptops and home devices.

Over the last one year, the Bursa Malaysia Technology Index has risen more than 60%. “The changes in the past two years reflect the interest from investors and understandably some sectors gained prominence.

“We understand that FBM KLCI may not be sectoral based, but going forward with the increasing push for technology, and the fact that our exports are predominantly contributed by the E&E sector, we could see representatives in the technology sector in the FBM KLCI,” says MIDF Research head Imran Yassin Yusof.

In August, several research houses raised their target price on Inari to between RM4.48 and RM4.80 per share after the electronics manufacturing service provider posted impressive earnings.

Its net profit for the financial year ended June 30, 2021 (FY21) doubled to RM330.47mil from RM155.75mil a year earlier, on the back of a 34% jump in revenue to RM1.43bil from RM1.06bil previously.

Glove makers Top Glove Corp Bhd and Hartalega Holdings Bhd are likely to stay as KLCI constituents despite the plunge in their share prices this year.

Top Glove, the world’s largest glove maker, has seen its share price decline almost 53% year-to-date to RM2.59 apiece, giving it a market capitalisation of RM21.26bil.

Meanwhile, Hartalega’s share price dropped by more than 46% to RM5.64 per share in that period, giving it a market capitalisation of RM19.33bil.

“Although Top Glove and Hartalega have fallen off from their peak, their market capitalisations are still not the lowest amongst the FBM KLCI components.

“Of course, market capitalisation is not the only consideration but we believe it provides some indication.

“Nevertheless, there is still some time until the assessment, so it could change until then,” Imran says.

Top Glove and Hartalega sit at the 22nd and 27th spots, respectively, of the largest companies on Bursa Malaysia in terms of market capitalisation.

FTSE Russell is expected to announce its review of the FBM KLCI in December. Based on FTSE Russel’s rules, a stock would be included as a component of the KLCI if its market capitalisation is at the 25th place or above, while one will be removed if it falls to the 36th spot and below.

At Wednesday’s closing, it showed that Dialog Group Bhd and Sime Darby Bhd are at risk to be removed from the FBM KLCI.

They are likely to be replaced by Westports Holdings Bhd and Inari, which stood at 31st and 32nd on the largest companies list on Bursa Malaysia.

In the previous review of the index in June, MR DIY was added as a constituent, while Supermax was removed.

“The bottom five of the FBM KLCI constituents are rotational.

“Aside from market capitalisation, factors such as liquidity and free float are also factors that are taken into consideration,” says Lau of Rakuten.

He says the FBM KLCI is currently trading at a price earnings (PE) multiple of 14 times, and that this means it is lagging behind its peers.

“The FBM KLCI is looking attractive now compared to peers, which are trading at an average of 18 times PE,” he adds.

For the nine months to September 2021, the FBM KLCI was among the three stock indices in Asia that were in the red, while others in the region remained in positive territory.

On the broader market, the outperformers year-to-date are led by technology, transportation and logistics companies.

The underperformers, on the other hand, are led by the healthcare (glove makers in particular), energy, plantation, construction and utility sectors.

Kenanga Research expects earnings per share of Malaysian listed companies to grow 41% this year and 2% in 2022.

Meanwhile, foreign investors continue to buy local stocks, recording a total net inflow of RM587.61mil last week, making it the third week of net inflow by foreign investors.