Two weeks into the month and global equities are mostly sporting green arrows across the board. On the local front, the FBMKLCI is up by 8.35-points (0.50%) month-to-date at 1,686.44. That said, the local benchmark continued to trade sluggishly amid a lack of broad-based earnings catalyst and relatively weak excess liquidity. The recently concluded corporate earnings season has offered little direction, and continued to produce a string of weak results, albeit being slightly better compared to the prior quarters. While this has prompted a slight downward revision in our FBMKLCI earnings growth estimates to 1.6%/7.2% (from 2.3%/7.8% earlier), we believe downgrades by the market could be nearing a tail-end.

Market volatility has thus far remained uncharacteristically low. The 30-day average volatility on the FBMKLCI is now at the lowest in two years, at a mere 6.1%. As such, we do not rule out the potential for a spike ahead. Nevertheless, we maintain our Range-Trading view and end-2016 index target of 1,715 for now, and continue to advocate our Buy-on-Weakness zone at 1,660/1,620 with a Sell-on-Strength >1,715 level having previously widened the trading range in in our July Strategy and Naga Warrant reports.

In today’s batch of new Naga Warrant issues, the Equity Derivatives has captured some of the brighter spots, which have bucked the muted tone in the overall market. A total of 10 Structured Warrants will be listed, encompassing a diverse range of sectors, including Banking (AFFIN-CU), Aviation (AIRASIAC41, AAX-CY), Automotive (DRBHCOMC24), Plantation/ Timber (FGV-C18, JTIASA-CL), Technology/manufacturing (MPI-CD, SKPRES-CB), Consumer (PADINI-CG) and property developer (KSL-C18).

Structured Warrants Commentary

The Ten (10) structured warrants to be issued are as per table 1 below. All the warrants issued are European Styled Non- Collateralised Cash Settled Warrants with tenure of nine months. Most have seen their share prices rallying substantially over the past few months. Regardless, we still like the underlying shares of AIRASIAC41 and SKPRES-CB as well as newsflow driven/election-themed counters such as DRBHCOMC24 and FGV-C18 which provide good trading opportunities.

In particular, we like AIRASIA for its growth potential, competitive advantage in the aviation industry and see a potential special dividend from its divestment in AAC. Fundamentally, AIRASIA ranks among our 3Q16 top picks with a revised target price of RM3.82 and OUTPERFORM call after an outperformance in its latest reported earnings.

Meanwhile, SKPRES (OUTPERFORM, TP: RM1.48) is expected to see substantial earnings improvement in the coming two quarters, driven by a ramp-up in production capacity for its new and existing products. Recall that SKPRES has two long-term contracts awarded by a UK customer which amounts to RM1.1b/annum and this supports our forecast of two-year NP CAGR of 43%. Beyond that, we do not discount the possibility of more contracts being awarded for the revolutionary products in the long term.

These ten structured warrants are priced with a range of +/-21% moneyness. The gearing ranges from as low as 2.6x to as high as 9.6x and the conversion premium ranges from 16% to 51%. Call-warrants are leveraged instruments. For instance, by participating in AAX-CY, an investor is exposed to a gearing of 2.6x. To be more precise, this call warrant offer up to 1.8x effective gearing for investors.

Based on our charting, we are projecting a short-term target of RM0.48 for AAX. This implies a potential upside objective of 20.0% based on a closing price of RM0.40. Theoretically speaking, a 20.0% increase in the underlying price to RM0.48 should translate to >36% gain in AAX-CY. This general estimate is applicable to other Naga Warrants as well.

Source: Kenanga Research - 13 Sep 2016