Dear KC,
I have noticed the GPACKET warrant through bloggers recommendation. The warrant is currently sold at RM0.31 and its mother share is sold at RM0.97 as at 21.05.2020. With the conversion price of RM0.40 and more than 4 years to get matured, is it really sold at a bargain? It is negative premium of 27% is attractive enough. So, is there really such a big frog hopping around the street?

Thanks.
John

The Star

Thursday, 14 May 2020

KUALA LUMPUR: GREEN PACKET BHD's subsidiary Kiplepay Sdn Bhd is collaborating with Tencent Cloud to offer an "electronic know-your-customer" (e-KYC) service called KipleID e-KYC to businesses, especially those in the banking and financial sector.

Upon the above new, the share price of Green Packet, Gpacket, jumped from 88 sen to RM1.44, or 64% within a week from 13 May to 18 May 2020 as shown in Figure 1 below.

Figure 1: One month share price movement of Green Packet

The share price of its warrant, Wb also went up in price from 39.5 sen and was at 46.5 sen at its peak on 18 May 2020 as shown in Figure 2 below. On this date, Wb was trading at a huge discount of 40%.

The next day, GPacket share price went limit down to RM1.02. Wb followed suit and plunged to close at 26.5 sen as shown in Figure 2 below.  Punters of Wb, who thought that there was a big frog jumping around lost a whopping 43% if they had bought Wb at its peak price.

Has anyone got the message yet?

The share price of GPacket further retreated to close at 97.5 sen on 22 May 2020 before Hari Raya, but the share price of Wb is slowly moving up to close at 35 sen on the same day. The big discount persists. Is the big frog still there?

Figure 2: One month share price movement of GPacker Wb

The thesis

Gpacket has 935 m common shares and 423 m warrants B outstanding as at 24 May 2020. First, I would examine the investment case of Gpacket warrant.

The profile of the warrants is as below:

Maturity Date: 24 November 2023

Issue size: 423 million

Exercise price: RM0.400

Ratio: 1 warrant : 1 ordinary share

The warrants still have a long expiry date of three and a half years, and hence a good time value on top of its intrinsic value. As on the date of writing on 24 May 2020, Gpacket was trading at 97.5 sen and the warrant at 35 sen. With an exercise price of 40 sen, the warrant has an intrinsic value of 57.5 sen. The warrant is traded at a discount of 22.5 sen, or 23.1% with a good gearing of 2.8 times as shown in Table 1 below, not including the huge time value it is supposed to have.

Table 1: Green Packet warrant

Warrant price, W: 0.35

Underlying share price, S: 0.975

Exercise Price, E: 0.40

Intrinsic value, IV = S -E = 0.575

Premium, P = W+E-S = -0.225

Premium % = P/S*100 = -23.1

Gearing = S/W = 2.8

This is what you can do to profit from the situation as shown in Table 2 below.

Table 2: Risk Arbitrage

Short sell 100,000 shares of GPacket at 0.975, proceeds 97,500

Buy 100,000 shares of Wb at 0.350, pay 35,000

Convert 100,000 shares in Wb at 0.40 per warrant, pay 40,000

Total cost = 35,000 + 40,000 = 75,000

Profit = 97,500 – 75,000 = 22,500, 0r 23%

You borrow and short sell 100000 shares of Gpacket at 97.5 and get proceeds of RM97500 and use it to buy 100000 shares of its warrant at 35 sen. You send the warrants for conversion by paying 40 sen per share, or a total of RM40000. Your total cost is RM75000. After conversion, you pass the converted shares to the lender.  You pocket a clean RM22500 without coming out with a sen, ignoring the minor transaction costs. That is risk-free arbitrage. How nice!

The theory of arbitrage is enormously powerful in finance and investment. However, there are limitations. The constraint here is you cannot short sell Gpacket unless you have already own them. If you do not have any Gpacket shares in this case, you have to put out your own money of RM35000 to buy Gpacket Wb at 35 sen apiece, send them for conversion by paying another RM40000. Your total cost is RM75000. The conversion can take some time, probably more than a week.

The risk is when you get back the converted Gpacket shares, will the share price of Gpacket still remain the same for you to sell? If so, or if the share price moves further up, you have made good money. However, I am very sceptical about it.

I was once bitten more than 30 years ago in the same situation by Lee Kim Yew on Country Height warrant. I have also shared my view about 5 years ago on Asdion warrant when someone mentioned he found a big arbitrage opportunity, also under a remarkably similar situation in the link below.

https://klse.i3investor.com/blogs/kcchongnz/2015-08-06-story-h53203550-What_does_a_value_investor_do_when_he_sees_a_big_fat_frog_jumping_around_.jsp

Asdion shares and its warrant was trading at RM1.50 and 70 sen per share respectively when the “arbitrage opportunity” was mentioned. The exercise price was 50 sen. If one had bought the warrant then and sent for conversion to the underlying shares with 50 sen per share, his total cost was RM1.20. That means the warrants were trading at a big discount of 20% to the underlying shares, and hence the “arbitrage opportunity”.

Three weeks later on 6 August 2015, Asdion and its warrants closed at RM1.11 and 49 sen respectively. He was staring at a loss of 9 sen a share, or RM90k if he had bought 1m shares of Asdion warrants. That was not too bad. For those who had bought them but had not sent for conversion, the paper loss for the warrants was 21 sen, or a whopping loss of 30% in just three weeks later. At those prices of Asdion and its warrants, the warrants were still way undervalued.

Asdion closed at 13 sen recently on 29 May 2020. For those who had converted the warrants to Asdion shares and held them until now, he would have faced a whopping loss of 90%!

So, what about Green Packet warrants?

Whether one should invest in a stock or its warrant, he has first to look at and analyse its business.

Past performance of Green Packet

Green Packet Bhd is engaged in the business of research and development, marketing and distribution of wireless networking and telecommunication products, networking solutions, communication services, and other high technology products and services. The business of the company operates in various segments that include Solution Group, Communication Services, and Digital Services.

Green Packet has been making losses for the last umpteen years. It could not even make its EBITDA positive for ten years ago, after talking about closed to achieving it every year. Last two years, the loss was RM28m each. It has RM280 m debts as on 31 December 2019, which is higher than the total equity of the company of RM260m. The gearing is high at 1.1 times (>0.5). Book value per share is 29 sen.

Figure 3 below shows its disastrous share price movement for the last 13 years, falling from the adjusted price of about RM7.00 to close at 97.5 sen now.

Figure 3: 13-year share price movement of Green Packet

The Altman score of GPacket at 1.9 shows it is at the high-end “Alert level”. Its Piotroski Score at 2 is severely low and very precarious.

I have experienced many times, that news, even from mainstream newspaper could be rumours and hypes for insiders and manipulators to play up and down the share price at the expense of naïve retail speculators. It exaggerates my fear when the CEO goes often to the public to brag about how great their business will be, which it never had been good before.

Hence, I will never touch this stock with a ten-foot pole.

As for the big discount in its warrant, haven’t you got caught on 18 May 2020?

In investing, I always follow this wise Chinese maxim,

“There is no big fat frog jumping all around on the street”.

However, please make your own decision as market is unknowable and unpredictable. In market frenzy, one can make enormous amount of money doing short-term trading. You may miss a chance to make big money speculating, and please do not blame me if you follow what is written in this article.

Good luck if you think you can beat the insiders, manipulators, and the big-time traders with all the financial and computer powers. In trading and speculating in the stock market, you need luck badly.

There is only one way you can prevent yourself from falling into the traps and becoming the victim; that is to become a savvy investor. Equip yourselves with all the knowledge of finance and investing. Learn the language of the business of which you want to hold part of it. Read widely from the writings of true super investors and gain experience from them.

Do not listen to rumours and stock tips.

https://klse.i3investor.com/blogs/kcchongnz/2020-04-13-story-h1505955007-Don_t_listen_to_stock_tips_kcchongnz.jsp

Always do your own homework,

https://klse.i3investor.com/blogs/kcchongnz/2020-05-11-story-h1506997567-A_stock_investment_tip_Always_do_your_homework_kcchongnz.jsp

There are many resources and investment books out there to guide you how to do your homework; to avoid losing big, and make extra-ordinary return from the stock market over the long-term. One of them is this book, “Invest like a stock market guru: the complete guide to value investing that works!” written by KC Chong for the Malaysian stock market environment.

If you are interested to purchase one and posted to your house free of charge, you may contact me at

ckc15training2@gmail.com

KC Chong