With the recent broad market sell-off on Bursa Malaysia, we believe the market could have oversold in nature. Hence, it may offer a good opportunity for investors to bargain hunt. For this batch of Call-Warrant Issuance, Naga Warrants will concentrate on selected companies from various sectors, including Automotive, Banks & Non-Bank Financials, Consumer, Industrial, Oil & Gas, Power Utility as well as Property Developers. These 8 structured call warrants are BJAUTO-CF, MBSB-CU, PMETAL-CG, QL-CG, RHBCAP-CS, SUNWAY-CL, TENAGA-C12 and YINSON-CE. Note that Kenanga Research has rated most of these underlying shares as OUTPERFORM or MARKET PERFORM with the exception of YINSON1 (UP, TP: RM2.31). However, despite Kenanga Research’s UNDERPERFORM call on YINSON, the Equity Derivatives & Structured Products (EDSP) team reckons that the recent pullback in its share price could have overdone from technical perspective. Furthermore, the possibility of securing new FPSO contract in 2014 and spinning off its non Oil & Gas operations could serve as rerating catalysts to its share price. As for others underlying shares, the research team generally likes them. For instance PMETAL2 (OP, TP: RM8.87) remains the team’s favourite pick due to its structural cost advantage, bullish aluminium price outlook, tax exemptions for its pioneer status and investment tax allowance as well as the good long-term expansion potential as SCORE development continues. Kenanga Research also has an OUTPERFORM call TENAGA (OP, TP: RM13.77), as they believe a tariff revision during the December review window is highly likely ahead of GST implementation in April 2015. As for others, the research team is calling OUTPERFORM on BJAUTO (TP: RM3.80), QL (TP: RM3.71) and SUNWAY (TP: RM3.87). However, the research team has recently downgraded MBSB (TP: RM2.65, Offer Price: RM2.82) and RHBCAP (TP: RM10.00, Offer Price: RM10.03) to MARKET PERFORM as their share prices has performed well after the recent announced merger deal.

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 from the Banking & Non-Bank Financial sector, whereas the remaining six are from Automotive, Consumer, Industrial, Oil & Gas, Power Utility and Property developer. All of the warrants are priced close-to-the-money with a range of +/-10% moneyness. The gearing ranges from as low as 3x to a high of 7x and the premium ranges from 12% to 26%. All the warrants are issued at a price of RM0.15. It is widely reckon that call-warrants are leveraged instruments. For instance, by participating in PMETAL-CG, an investor is exposed to a gearing of 4.5x. To be more precise, this call warrant offer up to 2.7x effective gearing for investor. Based on our technical analysis, we are projecting a mid-term target of RM6.28 for PMETAL. This implies a potential upside objective of 15.8% based on a closing of RM5.42 (as of 20 October 2014). Theoretically speaking, at RM5.42, with an effective gearing of 2.7x, a 15.8% increase in underlying should translate to >40% upside in PMETAL-CG to approximately RM0.22. This general estimate is applicable to other Naga Warrants as well.

Source: Kenanga