For the year 2015, Malaysia equity is expected to remain volatile due to macroeconomic headwinds. Therefore, investors are advised to be on the defensive mode and buy on weakness on sectors that are resilient and export-oriented. Naga Warrants first 2015 issuance will focus on different sectors such as Aviation, Insurance, Rubber, Plastic and Packaging, Construction and Property Developer. These 7 structured warrants are AIRASIA-C18, TUNEINS-CD, HARTA-CN, KAREX-CE, SCIENTEX-CC, IJM-CV and SPSETIA-CQ.

Kenanga Research has an OUTPERFORM call on AIRASIA (OP, TP: RM3.27), as its 4Q14 earnings in the upcoming Feb-15 result season is expected to be strong due to its seasonally strong quarter coupled with better earnings prospects on lower jet fuel cost. Although Kenanga Research does not cover TUNE INS (Not Rated), the Equity Derivatives and Structured Products (EDSP) team is in the view of growing demand on air travelling due to aggressive marketing strategy by AIRASIA will continue to boost TUNE INS’s profit.

As for other underlying shares, the research team like HARTALEGA (OP, TP: RM7.36) due to its highly automated production processes model, solid improvement in its production capacity and reduction in costs, and positioning in a booming nitrile segment with a dominant market position. For condom maker KAREX (Not Rated), the EDSP team feel positive in Karex as it is well positioned to gain market share in the industry on the back of expanded production capacity. Kenanga Research has an OUTPERFORM call on IJM (OP, TP: RM7.68), as its fat construction orderbook of about RM6.0b will provide a 5-year earnings visibility. Furthermore, IJM’s net profit likely to be boosted by another 20% in year FY16 due to the privatisation exercise of IJM Land, which is expected to be completed in 4Q15. As for the remaining underlying counters, the research team has an OUTPERFORM call on SPSETIA (OP, TP: RM3.95) and UNDERPERFORM on SCIENTEX (UP, TP: RM5.49).

Warrants Commentary

The Seven (7) 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, with 2 names from the Rubber sectors and other name across different sectors from Plastic and Packaging, Insurance, Aviation, Property Developers and Construction. Most 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 20%. All the warrants are issued at a price of RM0.15.

It is widely believed that call-warrants are leveraged instruments. For instance, by participating in AIRASIA-C18, an investor is exposed to a gearing of 5.31x. To be more precise, this call warrant offer up to 3.16x effective gearing for investor. Based on our technical analysis, we are projecting a mid-term target of RM3.20 for AIRASIA. This implies a potential upside objective of 13% based on a closing of RM2.77 (as of 27 January 2015). Theoretically speaking, at RM3.20, with an effective gearing of 3.16x, a 13% increase in underlying should translate to >45% upside in AIRASIA-C18 to approximately RM0.22. This general estimate is applicable to other Naga Warrants as well. 

Source: Kenanga