Just sharing

Jaks announced the profile of its warrant issues yesterday on 21^st November 2018 as below,

On behalf of the Board, UOBKH wishes to announce the following: -

1. the issue price of the Warrants has been fixed at RM0.25 per Warrant;
2. the exercise price of the Warrants has been fixed at RM0.64 per Warrant; 
3. the Entitlement Date has been fixed as at the close of business at 5.00 p.m. on 21 November 2018; and
4. the Deed Poll has been duly executed on 5 November 2018.

The exercise price of RM0.64 per Warrant represents a discount of RM0.27 or approximately 29.67% to the 5-day VWAMP of JRB Shares up to and including 2 November 2018, being the last trading day of JRB Shares immediately preceding the price-fixing date, of RM0.91 per JRB Share. 

It is noted that the expiry duration of the warrant will be 5 years after the issuance.

Someone posted a comment in Jaks thread in i3investor today.

Posted by Nikmon > Nov 22, 2018 09:13 PM | Report Abuse

haha, exercise price is 0.64, now warrant is only 0.05
0.75-0.64-0.05= 0.06.....8% premium....crazy pruce.

Company warrants are derivatives, or financial instruments whose value depends upon and is derived from an underlying instrument, in this case the underlying share listed in Bursa. In other words, the values of the warrants are linked to the expected future price movements of the underlying share.

Company warrants are issued by the company to raise money. They are normally initially issued “free” as a “sweetener" for a bond, preferred stock, or rights offering. It gives the holders the right, but not an obligation, to subscribe for new ordinary shares at a specified price during a specified period.

In this case for Jaks, the warrants are issued at a cost of 25 sen each, not free.

Jaks Warrants have a maturity date of 5 years after which they expire and are worthless unless the holder subscribes for the new shares of the company before the maturity date.  it raises funds for Jaks immediate need of about RM70m, mainly for use for the Vietnam Power Plant, some for a renewable energy project, and to reduce borrowings.

Company warrants are generally “American style” option which can be exercise any time by paying the exercise price and convert to the underlying shares before the expiry of the warrants. In Jaks case, the warrants can only be exercised after the second anniversary of the issue. If all warrants are exercised before/at the 5-year expiry date, it will receive RM178m. The proceeds will be used for investment opportunities, repayment of borrowings and additional working capital.

Jaks’ share price closed at 75 sen and its rights-to-purchase its warrants (WR) at 5 sen today on 22^nd November 2018. If you are interested in the business of Jaks, is WR a good buy now?

To answer this, one must understand how their values are derived in order to make an informed judgment, rather than just looking at the technical chart, or just relying on supply and demand.

Date: 22^nd November 2018

Jaks Price P: 75.0 sen

Jaks’ warrant rights WR: 5 sen

WR issue price: 25 sen

Exercise price: 64 sen

Date of expiry: December 2023

The Lingo

The price at which an underlying stock can be purchased or sold is called the strike price or exercise price (X). In Jaks’s case, X is RM0.64. This is the price, S, a stock must go above before a position can be exercised for a profit. This must occur before the expiry date.

Company warrant is said to be in-the-money if the share price (S) is above the strike price (S>X). The intrinsic value is the difference between the underlying share price (S) and the exercise price (X). However, the IV cannot be a negative number, as the holder is not obliged to come out with additional money to exercise it and can just let the warrant expires without doing anything. Hence

IV = Max [S – X, 0]

Assuming after the ex-date of the WR in a few days’ time, the share price of Jaks remains unchanged at 75 sen,

IV of Jaks warrant = Max [S-X, 0] = Max [0.75-0.64, 0] = 0.11

This means the warrant is already in-the-money with the share price of Jaks at 75 sen. But this doesn’t mean WR is already considered a good buy, because you got to pay some money to get the warrant.

In this case, the cost W is 5 sen + 25 sen = 30 sen. This being the cost of WR plus the cost of subscribing to the warrant.

The total cost (the price) of a warrant above the market price of the underlying share is called the premium P.

Premium P = W + X - S

% P = (W + X - S) / S = (W + X) / S – 1

Where W is warrant price, X is exercise price and S is the underlying share price.

Further assume that this 30 sen is the price of warrants traded after the ex-date of WR and upon the listing of the warrants. Note, it is not necessary so.

Premium of Jaks warrant, P = 0.30+0.64–0.75 = 0.19

P% = 0.19/0.75 = 25.3%

The lower the premium the more valuable is the warrant. Is 25.3% premium high? It depends.

The two components of the price of a warrant are the intrinsic value (IV) and the time value (TV).

Price of warrant W = IV +TV

TV = W-IV = 0.30-0.11 = 0.19 which is the same as the premium

This price of warrants, W, in actual trading later is determined by factors including the stock price, strike price, time remaining until expiration (time value) and volatility.

In general, the more time to expiration, the higher the gearing, the greater the time value of the warrant. Investors are willing to pay a higher premium for more time, since time increases the likelihood that the position can become profitable.

In this case, the gearing is share price/warrant price = 0.75/0.30 = 2.5

Is Jaks’ WR worth a punt?

The above may serve as a guide for you to make an educated decision.

We will have to wait for a few days later when the warrants are traded at actual price to determine if the warrants are attractive in relation to the share price of Jaks.

K C Chong