Since our previous post in December 2021 highlighting the potential exclusion of ComfortDelGro (CDG) from the Straits Times Index (STI), the inevitable has finally happened!
In what must have been a surprise to many, on 1 September 2022, FTSE Russell (the organization that manages the STI and computes the index) announced that there will be one change to the constituents of the STI.
And, replacing CDG was a company not on the reserve list!
Emperador replaces ComfortDelGro in the Straits Times Index
Following FTSE Russell’s September 2022 quarterly review, Emperador has been added to the STI and CDG has been removed from the index. This will take effect on Monday, 19 September, which means that the last trading day for CDG will be on the Friday, 16 September.
The STI reserve list, comprising the five highest ranking non-constituents of the STI by market capitalisation, includes (in order of size):
- Olam Group,
- Suntec REIT,
- Keppel REIT,
- Frasers Centrepoint Trust and
- Ascott Residence Trust.
Ascott Residence Trust had been added into the reserve list following the merger between Mapletree Commercial Trust and Mapletree North Asia Commercial Trust.
Current Situation of STI
The fact of the matter is that there are not many stocks listed on the Singapore Exchange and it has been challenging to find companies to add into the STI.
The Straits Times Index has always been seen as an index with little variety and representation, especially when compared to indices such as the Hang Seng Index and S&P 500 index. The bulk of the STI comprise banks and REITs with the three Singapore banks weighing more than 40% and seven Singapore REITs accounting for nearly 15%.
How are constituents added into the STI?
To assess a stock for inclusion into the index, it has to be listed on the Singapore Exchange (SGX). The other key metrics taken into consideration are the stock’s:
- market capitalization,
- free float and
- trading liquidity.
To be included in the index, Emperador would have to meet all these requirements since its listing in Singapore in July.
For example, it was shared by SGX that since its listing on 14 July, Emperador has ranked amongst the top tier of most traded Singapore stocks. Emperador also saw record daily turnover of S$7 million on 29 July, more than threefold the session’s turnover of the primary Philippines listing.
Unfortunately, not many stocks outside of the STI have the required market capitalisation, free float and trading liquidity.
What is Emperador (SGX:EMI)?
If this is the first time you’ve heard of this stock, you’re probably not alone. Here’s a quick introduction.
Emperador is a Philippines-based manufacturer and distributor of brandy, whisky and other spirits and is the first stock listed on the Philippine stock exchange to have a secondary listing on the SGX and has a market cap of approximately S$7.7 billion at a traded price of 20.35 pesos.
It owns subsidiaries operating an integrated business of manufacturing, bottling, and distributing distilled spirits and other alcoholic beverages from the Philippines, Scotland, Spain and Mexico. It is a subsidiary of Alliance Global Group, Inc., a publicly listed conglomerate in the Philippines with diversified investments in real estate development, food and beverage, quick-service restaurants, and tourism-entertainment and gaming business.
Amongst its brands of whiskey and brandy, Emperador owns the 5th biggest scotch whisky maker in Scotland, Whyte & Mackay, and the biggest and oldest brandy maker in Spain, Bodegas Fundador.
Impact on Emperador
A listing on the SGX and addition into the STI definitely adds some clout to most companies.
Emperador’s share price was up 5% on the day and 20% since its listing on 14 July 2022.
Current situation of ComfortDelGro (SGX:C52)
This is yet another bad news for CDG.
CDG entered into the STI as a constituent on 28 July 2010 and will exit the index on 16 September 2022. This was off the back of the MSCI removal in May 2020
The company seemed like it was just starting to turn around the corner as Singapore and the other key countries it operates in such as Australia and the United Kingdoms emerges from the pandemic. Being replaced by Emperador, a stock that just commenced its secondary listing on the SGX on 14 July must be a hit to its reputation.
The share price took a dip after the announcement of its exclusion, trading as low as $1.36, from a previous day close of $1.40. This is a far cry from when CDG traded above $3.20 in June 2015.
How does this affect CDG investors?
Fund inflows and optics comes with being part of an index.
The STI is the largest index focused on Singapore stocks and it tracks the performance of what is regarded as the top 30 companies listed on the Singapore Exchange. These companies include the biggest and most well-known names.
There are many exchange traded funds (ETF) that track the movement of the index such as the STI ETF, which has an AUM of S$1.6 billion, and the Nikko AM STI ETF, with an AUM of S$600 million.
In total, this represents billions of dollars being invested. CDG, which has a constituent weight of 0.9%, would have approximately 0.9% of this value under the ETFs.
If CDG is removed from the STI, the ETFs tracking the STI would have to rebalance and sell all holdings in CDG so as to continue meaningfully represent the index. Conversely, if CDG’s constituent weight increases, the ETFs would have to increase their positions in CDG.
There would also be other funds who are invested into CDG, due to the reputation and presence of the company.
In the short term, there will be fund outflows. In the longer run, based on its current status, the company may not see its share price perform like the past.
However, there could be some upside from current share price levels as CDG is still deemed as a potential reopening play and provides a good dividend yield at current prices.
Closing statement
We think that in the short term this news is definitely a negative for CDG. Investors will also have to take into consideration the impact on share prices from lowered optics and fund inflows. In the longer term, it seems like the fundamentals of CDG is still strong and it may very well be added back into the index should the company and its share price perform in the future.
Chinese EV Maker, NIO carried out a successful listing by way of introduction on SGX in May 2022. In August 2022, SGX’s CEO Mr Loh Boon Chye said that he expects more US-listed Chinese companies to carry out an additional listing in Singapore.
Although Emperador is not the first secondary listing to be part of the STI, the inclusion of Emperador into the STI shows that secondary listings may very well comprise a larger portion of the STI.
Other secondary listings like Hongkong Land have become a well accepted part of the STI. Meanwhile, NIO has gained interest as a secondary listing in Singapore. Like Emperador, NIO has also been among the top most traded Singapore stocks since its debut in May.
For the STI, we are sure that there are going to be more changes in the future and we hope that this will be for the better. The current lack of diversity and reputable names in the STI has been one of the reasons why investor interest has been waning.
Of course, one can only hope that additions will be of good quality and value would be add to the STI.
Hi Alex, regarding Emperador, who are the listed peers in S’pore? Is it Ascent Bridge (formerly known as AEI Corp)?
Hi Felix, a comparable peer may be ThaiBev. It will not be Ascent Bridge as it is a diversified small cap with a beverage arm while Emperador is a large brandy/spirits player.