Yangzijiang Financial listing creates battle among smallest constituents to remain in the index

THE 30-counter Straits Times Index (STI) is set for a shake-up later this week, with the smallest companies on the market barometer fighting to stay on the index.

This has been triggered by index constituent Yangzijiang Shipbuilding (YZJ Shipbuilding), which is spinning off its investment arm into a separately listed entity.

The shipbuilding segment remains in YZJ Shipbuilding while Yangzijiang Financial Holding (YZJFH) will list on Thursday (Apr 28).

As a component of YZJ Shipbuilding, YZJFH will be included in the STI on day 1. Index provider FTSE Russell has announced that all constituents will be ranked by their full market capitalisations on Apr 28, and the smallest constituent will be removed effective May 5.

Investors in the smallest STI counters should keep a close watch on the companies at risk of deletion, as passive index trackers would need to sell shares in the counter that gets deleted.

Stocks to watch

As at Tuesday’s close, 3 STI counters had a market capitalisation of under S$4 billion: ComfortDelGro Corp, Keppel DC Reit and YZJ Shipbuilding – the latter trading ex-entitlement.

The smallest was ComfortDelGro , with a market capitalisation of S$3.2 billion. Its share price has been struggling over the past 2 years, following a plunge in early 2020 when Covid-19 started becoming an issue worldwide.

Although many other local counters have since recovered and reached new highs, ComfortDelGro’s shares remain well below their pre-pandemic levels of above S$2 per share.

DBS Group Research noted that the total holdings of the 2 STI ETFs in the counter is around S$33 million. The stock’s average daily trading volume over the last 12 months was nearly S$20 million.

“While we can expect some near-term pressure on ComfortDelGro’s share price as the ETFs rebalance, ComfortDelGro’s liquidity appears ample to absorb the impact,” the research house wrote. It has a “buy” call with a S$1.95 target price – a 31.8 per cent premium to Tuesday’s close of S$1.48.

Whether ComfortDelGro is deleted from the STI also depends on how both Yangzijiang entities trade.

Immediately prior to the investment unit spin-off, YZJ Shipbuilding had a market capitalisation of around S$6.1 billion – ranking it as the 22nd-largest STI counter, according to Bloomberg data.

Its last traded share price of S$1.54 prior to going ex-entitlement was around 80 per cent of its book value. Analysts noted that the stock was undervalued, and said the counter could re-rate following the restructuring exercise.

Following the spin-off, YZJ Shipbuilding had a net asset value per share of 4.0586 yuan (S$0.85). It traded on an ex-entitlement basis on Friday (Apr 22), and the counter closed at S$0.965 – giving it a market capitalisation of S$3.8 billion.

The counter fell to S$0.90 as at Tuesday’s close, giving it a market capitalisation of S$3.6 billion and ranking it the second-smallest constituent.

YZJFH’s listing on Apr 28 also presents uncertainties.

The implied valuation of YZJFH – derived by subtracting the last traded price of the shipbuilding business of S$0.90 from the S$1.54 price before the stock traded ex-entitlement – is S$0.64 per share, giving it a sub-S$3 billion market capitalisation that would eject it from the STI.

But investors may choose to value the parts above what they were worth as a whole.

YZJFH has a net tangible asset value of around S$1.08 per share based on the value of the assets that were spun off from YZJ Shipbuilding. A valuation at that level would give YZJFH a market capitalisation in excess of S$4 billion.

Insight provider Brian Freitas of Periscope Analytics, who publishes on Smartkarma, noted that the counter would need to trade above S$0.825 at the close of trading on Apr 28, and ComfortDelGro at S$1.49 per share or lower, in order for YZJFH to stay in the STI. If YZJFH were deleted, he calculated that passive funds would need to sell 23.3 million shares at the close of trading on May 4.

More changes could come

The other small index constituents may only have a temporary respite as further changes could take place in the coming months.

Companies are inserted into the STI at quarterly reviews if they rank 20th or higher among eligible securities by full market capitalisation. STI companies are deleted if they rank 41st or below among all eligible securities.

Olam Group is a large cap that could be included at some point, with the counter ranking highest on the STI reserve list, at the last quarterly review.

Freitas also noted that the potential secondary listing of Philipines liquor giant Emperador in Singapore could also be an STI inclusion, with the stock on the borderline for several of the index criteria.

Keppel DC Reit is another stock worth looking out for, being the third-smallest STI counter with a market capitalisation of S$3.6 billion as at Tuesday’s close, just slightly above YZJ Shipbuilding.

The real estate investment trust is one of the more recent additions to the STI, having joined the index in October 2020, when its shares were trading around S$3 apiece, giving it a market capitalisation of around S$4.8 billion. But it has seen a steady decline over the past year, closing as low as S$2.08 last week.

Given potential shake-ups in the STI, management of the smallest STI constituents would need to stay on their toes and deliver growth and positive results to ensure that their valuations can keep them in the index in the near future.