Until recently, KAREX’s share price has been under pressure, having declined by as much as 32.6% from a high of RM3.16 (January) to as low as RM2.13 (June). This came amid a string of analyst downgrades, after the company posted two consecutive quarters of earnings that fell short of expectations. Investors' attentions were focused on lower ASPs (average selling prices), rising production costs, forex losses and increased production downtimes even as the company delivered an enviable 19.9% YoY increase in 9M16 earnings.
Nevertheless, investors may look forward to a normalisation of utilisation rates and on-going expansion plans in the coming quarters as near term catalysts The share price is also beginning to show signs of a reversal, as signalled by the “Inverted Head & Shoulders” pattern yesterday. Based on our charting, we expect KAREX to recover towards RM2.76 (+9.1%) over the coming 4-6 weeks. Investors who wish to gain a leveraged exposure may consider KAREX-CQ (strike RM 2.20) which offers an effective gearing of 3.29x, For this structured warrant, a 9.1% increase in the underlying price would translate to approximately 29.9% gain in KAREX-CQ.
Structured Warrant Strategy:
Investors who wish to gain a leveraged exposure have six call warrants to choose from. However, since we expect a modest rebound towards RM2.76 (+9.1%) over the next 4-6 weeks, investors should be conservative and opt for Call Warrants that are (1) In-The-Money or Close-To-The-Money and (2) longer-dated which are less susceptible to time decay. For these reasons, we would avoid KAREX-CO (strike RM3.32), and KAREX-CN (strike RM3.05) which are far Out-Of-The-Money.
For this trading strategy, our preference is towards KAREX-CQ (strike RM2.20) which is In-The-Money and has more than six months till expiry – more than sufficient time to play out trading strategy with little effects form time decay. This call warrant has been popular (1.0m units changing hands yesterday), and offers an effective gearing of 3.29x. Investors who are more aggressive may also consider KAREX-CM (strike RM2.67). KAREX-CM is trading Out-Of-The-Money with 79 days till expiry. While this call warrant offers the highest effective gearing at 5.89x, risks are also significantly higher with the possibility of expiring worthless if it is not In-the-Money at expiry.
Source: Kenanga Research - 10 Aug 2016
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