KUALA LUMPUR (May 17): Kenanga Investment Bank Bhd said today it had revised its FBM KLCI target to 1,710 points from 1,745 based on downgraded target prices (TPs) of selected environmental, social and governance (ESG)-sensitive components of the 30-stock KLCI.

In a note today, Kenanga analyst Koh Huat Soon said the research firm identified the plantation, power utility, rubber glove, and oil and gas sectors as industries that investors have the most immediate ESG concerns about.

"We then endeavour to crystalise the complexities of the ESG issues into just one or two major areas of ESG concerns of each sector. 

"From there, we embed the impact of these issues into valuations where we find us reducing the TPs of 10 component stocks in the KLCI,” Koh said.

According to Kenanga’s note, the research firm reduced its TPs for Sime Darby Plantation Bhd, IOI Corp Bhd, Kuala Lumpur Kepong Bhd (KLK), PPB Group Bhd, Tenaga Nasional Bhd, Top Glove Corp Bhd, Hartalega Holdings Bhd, Supermax Corp Bhd, MISC Bhd and Petronas Chemicals Group Bhd.

Within the plantation sector, Koh said Kenanga had cut its TP for Sime Darby Plantation to RM5.40 from RM5.50 while the TP for IOI Corp was reduced to RM4.20 from RM4.55.

He said  Kenanga had cut its TP for KLK to RM24 from RM25.40 while the TP for PPB was reduced to RM19.20 from RM20.70.

Within the rubber glove manufacturing industry, Koh said Kenanga cut its TP for Top Glove to RM6.49 from RM6.80 while Hartalega’s TP was reduced to RM15.76 from RM16.

According to Koh, Kenanga cut its Supermax TP to RM6.49 from RM6.80. 

Within the oil and gas sector, Kenanga cut its TP for Petronas Chemicals to RM6.88 from RM7.50 while MISC’s TP was reduced to RM7.51 from RM8.10, according to Koh.

He said Kenanga lowered its Tenaga's TP to RM11.76 from RM12.72.

"While ESG concerns are not new, the need to properly embed these concerns into stock prices has become urgent. Investors’ perception is generally negative on our market’s sustainability management. Take for instance the sell-offs on Top Glove on alleged labour mismanagement, or the plantation sector’s stagnated stock prices despite higher CPO (crude palm oil) prices on environmental and labour concerns and the continued sell-down by foreign funds on Tenaga over coal generators. 

"The KLCI has been penalised. But what is a fair penalty or discount? Here, we attempt to provide an answer by using a bottom-up computation of the KLCI based on the downgraded TPs of selected ESG-sensitive components. From there, we can work backwards to gauge the implied incremental ERP (equity-risk premium) due to ESG penalty. On this raised ERP, we revise our top-down KLCI target from 1,745 to 1,710,” Koh said.

On Bursa Malaysia today, the KLCI rose 2.71 points or 0.17% at 2:38pm to 1,585.23.

The KLCI was traded between 1,592.57 and 1,577.49 so far today.