The improvement in market sentiment has caused investors to shift focus towards bombed-out stocks in recent days. One such example is SUPERMX, which saw its shares emerge among the top gainers of the day with a 14 sen gain (+6.5%) to RM2.28. SUPERMX had previously lost as much as 43.3% from its January highs, as earlier concerns of oversupply and price competition led investors to sell-down their holdings in rubber glove counters. Nevertheless, valuations have become compelling and we see current prices as a buying opportunity.

We also like SUPERMX for its: (i) volume growth from gradual ramp-up of new plants to provide earnings growth over the next two years, (ii) steep 40% discount to the sector average compared to previously 30%, and (iii) it is not just purely a rubber gloves play, but it may potentially see recurring earnings stream from its venture into contact lens manufacturing.

From a charting perspective, SUPERMX has broken above a major downtrend line and we expect to a short term bounce towards RM2.50 (implying a +9.6% upside). Short term traders who wish to gain a leveraged exposure may consider SUPERMX-C4 (strike RM2.20) which offers an effective gearing of 4.97x. For this structured warrant, a 9.6% increase in the underlying price would translate to approximately 47.7% gain in SUPERMX-C4.

Structured Warrant Strategy:

Traders who wish to gain a leveraged exposure have a good selection of thirteen Call Warrants to choose from. However, since we expect a modest 9.6% rebound towards RM2.50 over a short 2-3 weeks, traders can opt to be more aggressive and opt for Call Warrants which are (1) Closer-To-The-Money/ Slightly out of the money (2) shorter dated, which are more sensitive to price changes, and (3) higher effective gearing for a greater bang for their buck.

Our preference is towards SUPERMX-C4 (strike RM2.20) which is trading Close-To-The-Money and has 80 days till expiry – sufficient time to encompass our 2-3 weeks trading strategy. SUPERMX-C4 also offers a high effective gearing of 4.97x, and trades at a reasonable implied volatility of 58.6%. For traders more conservative, we like SUPERMX-C19 (strike RM2.20) and SUPERMX-C18 (strike RM2.20) which offer longer durations till expiry (6 & 9 months) and lower effective gearings (3.32x & 3.85x). These two are less susceptible to time decay, and have been popular among traders (16.0m & 5.3m units changing hands).

Source: Kenanga Research - 9 Aug 2016