The common purpose between environmental, social and governance (ESG) and shariah investment approaches to do no harm while encouraging sustainable economic activity can theoretically expand the investment universe for ESG investors in leading Islamic markets, according to analysts at CGS-CIMB Research.
In their June 14 note, the analysts wrote that securities deemed shariah compliant have been increasing every year — Bursa Malaysia, Indonesia Stock Exchange, the Stock Exchange of Thailand and Singapore Exchange S68 (SGX) have 80%, 60%, 39% and 20% respectively of their listed companies as shariah-compliant.
For SGX-listed companies, the analysts highlighted Keppel Corp, ComfortDelGro C52 (CDG), Netlink NBN Trust and Singapore Telecommunications Z74 (Singtel) as some of shariah-compliant companies that are also ESG high performers.
At 10.53% weighting, Keppel Corp ranks second among the top 10 constituents of the FTSE ST Singapore Shariah Index. Analyst Lim Siew Khee said sustainability is the core of Keppel Corp’s strategy, commanding above-average scores across various ESG rating indices, including FTSE Russell, MSCI, S&P Global, and Refinitiv.
“Keppel Corp’s 2030 vision clearly articulates its business strategy to address some of the macro ESG trends, such as scaling up its focus areas in renewables, decarbonisation solutions, and sustainable urban renewal,” Lim said.
Among others, Keppel Corp signed a definitive agreement with Sembcorp Marine (SCM) to merge Keppel Offshore & Marine with SCM to create a new entity, Bayberry. Lim said Keppel Corp achieved premium valuations for the proposed merger, estimating a 3.8x P/BV valuation compared to SCM’s 1x P/BV prior to the agreement announcement. She is keeping an “add” on Keppel Corp with a target price of $7.20.
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CDG is one of the top constituents of the FTSE ST Shariah Index. It is one of four companies in Singapore selected for inclusion in the Dow Jones Sustainability Index and has shown concerted effort to green its business with an increasing proportion of hybrid vehicles, said analyst Ong Khang Chuen.
“CDG was the first mobility operator in the region to commit to the Science Based Target Initiative, an international project to limit global warming to less than 1.5°C above pre-industrial levels. CDG has also demonstrated social efforts by providing its taxi drivers rental waivers and rebates during the Covid-19 outbreak,” he added.
CGS-CIMB has an “add” rating on CDG, expecting further earnings recovery in FY2022 with the easing of pandemic restrictions. Its target price is kept at $1.80, based on 16.8x CY2023 P/E.
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Netlink is another top constituent of the FTSE ST Shariah Index. Ong believes that Netlink has fared well in its sustainability efforts, especially in the social and governance aspects although more can be done to improve disclosures. “Netlink is actively trying to improve its sustainability reporting — the company has been gathering input from key stakeholders to identify areas for improvement, and has engaged KPMG to support its sustainability reporting process for FY3/22.”
Ong has an “add” rating on Netlink as he views it as a defensive yield play amid global market volatility, given its high barriers to entry, strong earnings visibility and stability. His target price is $1.10.
Lastly, Singtel has been classified as shariah-compliant by FTSE Group, SGX and Yasaar Limited (shariah consultancy firm) as it meets certain criteria including not being involved in non-compliant activities.
Singtel is ESG-rated by Refinitiv, given its high “ESG Reporting Scope” over the past three years. It is CGS-CIMB’s top ranked Asean telco for ESG, thanks to its robust cybersecurity system, superior network quality of service and reliability and more ambitious and concrete targets towards net zero carbon emissions by 2050, among others.
Analysts Foong Choong Chen and Sherman Lam Hsien Jin expect Singtel’s FY2023, FY2024 and FY2025 core EPS to rise 29.9%, 21.5% and 14.8% y-o-y respectively, led by higher associate earnings and the full-year impact of Singapore’s roaming revenue recovery post-Covid-19. They maintain an “add” call on Singtel, with a target price of $3.20.
Shares in Keppel Corp, CDG, Netlink and Singtel closed at $6.68, $1.40, 95 cents and $2.50 respectively on June 15.
