This time, Naga warrants focus on selectively counters from various sectors such as Banking, Technology, Rubber Glove, Oil and Gas, Property and Consumer Products. Kenanga Research remains OVERWEIGHT rating on rubber glove industry, as most of the rubber glove stocks have underperformed YTD which present buying opportunity, with potential recovery of the sector in subsequent quarter. Apart from one of our 3Q14 Top Picks of Hartalega Holdings (HARTA, OP, TP: RM7.48), we also like Kossan Rubber Industries (KOSSAN, OP, TP: RM5.13) and Supermax Corporation (SUPERMX, OP, TP: RM3.23). Despite our NEUTRAL call on banking industry, we focus on smaller banks like Alliance Financial Group (AFG, MP, TP: RM 4.93) as it is highly leverage on rising OPR environment and its M&A prospects.

*Source: Kenanga Research – Banking Sector dated 11 July 2014 and Rubber Gloves dated 2 July 2014

As for Oil & Gas sector, it is believed KNM Group (KNM, Not Rated, TP:RM 1.30) could benefit from PETRONAS contract flows for the RAPID works over the next three years, which could potentially boost its order book by about USD800m-USD1000m worth of jobs.

Warrants Commentary

The Eight (8) structured warrants that will be issued are as per table 1 below. All the warrants issue are European Styled Non-Collateralised Cash Settled Call Warrants with tenure of 10 months. There are two each from O&G and Bank name, whereas the remaining four are from technology, rubber glove, property and consumer products. All of the warrants are priced close-to-the-money with a range of +/-10% moneyness. The gearing ranges from as low as 4 to a high of 9 and the premium ranges from 8 to 24%. All the warrants are issued at a price of RM0.15.

Warrants are leveraged instruments. By participating in KNM-CO, the investor is exposed to a gearing of 4.84X. To be more precise, warrant investors should look at effective gearing. Based on our technical analysis, we are projecting a mid-term target of RM1.30 for KNM Group. This implies an increase of 21% based on yesterday’s close at RM1.07. At RM1.30, with an effective gearing of 2.90X, an 21.5% increase in underlying should translate to a 66.7% increase in KNM-CO to approximately RM0.25. This is a general estimate of how much a warrant price should increase for a given increase in underlying.

Source: Kenanga