This article first appeared in The Edge Financial Daily on November 1, 2017

KUALA LUMPUR: British American Tobacco (M) Bhd (BAT) shares were down yesterday, while Press Metal Aluminium Holdings Bhd hit a record high, ahead of potential changes in the component stocks of the FBM KLCI index.

BAT touched an intraday low of RM39.06 before closing at RM39.20, its lowest closing price since finishing at RM37.86 on Dec 30, 2011. At yesterday’s closing price, the company’s market capitalisation stood at RM11.19 billion.

Press Metal hit an intraday high of RM4.50 before closing at RM4.43, an all-time high close, with a market capitalisation of RM16.7 billion.

In a note to investors yesterday, AmInvestment Bank highlights the possibility of BAT being removed from the FBM KLCI as a component stock. The research firm said there are two possible scenarios of BAT being removed from the index, according to FTSE Bursa Malaysia Index Series’ ground rules.

Under the first scenario, BAT is removed if its market capitalisation ranking of eligible securities drops to 36 or lower. As of Monday, BAT’s market capitalisation was ranked 36th.

In the second scenario, BAT is replaced as the lowest ranked component security by a new security. This occurs if the market capitalisation ranking of eligible securities rises to 25 or higher. As of Monday, Press Metal’s market capitalisation was ranked 24th.

AmInvestment said the market capitalisation ranking will be determined based on the last trading day of November — on Nov 30. “Meanwhile, the effective replacement will take place on the trading day after the third Friday of December — on Monday, Dec 18,” it said.

However, AmInvestment pointed out the share price performance tied to the inclusion and exclusion of the FBM KLCI index may be heavily obfuscated by company-specific factors.

It cited the case of SapuraKencana Petroleum Bhd (now known as Sapura Energy Bhd), replaced by IJM Bhd as a component stock on Dec 19, 2016 after the former’s market capitalisation ranking fell to 37th spot.

“Notably, the subsequent alteration did not have the expected impact. In fact, the opposite occurred with Sapura outperforming IJM on every basis measured — absolute returns, relative returns of FBM KLCI and relative return to sector benchmarks,” said the research firm.

AmInvestment has a “sell” call on BAT, with a fair value of RM36.70. “Aside from the potential capital market impact on BAT, we think that perpetual regulatory hurdles and disruptive substitute tobacco products do not justify its lofty valuations, with forward price earnings of 19.8 times versus the historical average of 17.7 times,” the firm said.