The local market has been turbulent in recent weeks with the Telco sector enduring a double whammy when the
government announced a spectrum reallocation involving the 900MHz and 1800MHz bands late last month. This in
turn prompted a string of target price cuts as initial expectations were that Telco operators would need to allocate
more funds to retain spectrums (See Telco sector update dated 29-Jan & 2-Feb).
Nevertheless, some green shoots are beginning to appear post sell-off. In particular, AXIATA’s share price appears to
have found strong support at current levels, and is poised for a rebound. Fundamentally, we have an OUTPERFORM
call on AXIATA (TP: RM6.30) with near-term catalyst being the proposed acquisition of Ncell, which could provide
immediate earnings accretion to the group.
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Structured Warrant Strategy:
Based on our technical analysis, we expect a rebound towards the RM5.90 (+4.8%) target over the coming weeks. Since the underlying share price is expected to increase over the short-term, traders may opt to be more aggressive. Traders who wish to gain a leveraged exposure have two call warrants to choose from – AXIATA-C4 and AXIATA-C5. While both structured warrants are trading Out-of-the-Money, their duration to expiry (5 months and 8 months, respectively) are sufficiently long to buffer again time decay. For this trading strategy, our preference is towards AXIATA-C4 which offers the highest effective gearing (15.1x) and is reasonably priced at 20.9% implied volatility. For an anticipated 4.8% gain in the underlying share price to RM5.90, AXIATA-C4 would return >72% from 2.0/2.5sen to approximately 3.5/4.0 sen.
Meanwhile, traders who are more conservative may opt for AXIATA-C5 which offers a still enticing 5.8x effective gearing. The same 4.8% increase in the underlying share price would translate to >28% gain in AXIATA-C5 to approximately 11.0/11.5 sen (from 8.5/9.0sen). Although implied volatility is higher at 37.6%, time to expiry is also longer at 8 months. At the same time, setting a stop-loss is less damaging on AXIATA-C5 given the wide bid-ask spread of 0.5 sen on this 8.5/9.0 sen structured warrant (compared to the same 0.5 sen bid-ask spread on AXIATA-C4’s 2.0/2.5 sen price). With that, traders should bear in mind that the risks for both structured warrants are high with the possibility of them expiring worthless if it is not in-the-money.
Source: Kenanga Research - 16 Feb 2016