Last week, SKPETRO’s share price notched a 4-month high of RM1.66 before settling at RM1.65. Investor sentiment towards the stock appears to be improving as a surprise output freeze by OPEC sent crude oil prices above the USD50/barrel mark, and as a new round of contract awards trickled in from Petronas. Just last month, SKPETRO secured five transportation & installation related contracts totalling RM264m (See SKPETRO Quick Bites dated 2-Sept), and this was promptly followed by another string of three contracts (involving 2 E&C and 1 drilling contract) totalling RM889m last week (See Company Update dated 4-Oct).

Fundamentally, we have maintained our RM1.57 target price and MARKET PERFORM call on both counts as these contract wins fall within our order book and drilling utilisation assumptions. However, we see these announcements as a step in the right direction, demonstrating SKPETRO’s ability to win contracts despite facing a challenging environment. From a charting perspective, SKPETRO’s share price is biased to the upside. From here, we expect a modest climb towards RM1.77 (R1) over the next 1-2 months and possibly RM2.00 (R2) further down the road. Investors who wish to gain a leveraged exposure may consider SKPETROC29 (strike RM1.40) which offers an effective gearing of 3.17x. For this structured warrant, a modest 7.3% climb in the underlying price to RM1.77 would translate to approximately 23% gain in SKPETROC29 to RM0.23.

Structured Warrant Strategy:

Since we expect a steady climb towards RM1.77 (+7.2%) over the coming 1-2 months, investors should opt for a more conservative strategy in favour of Call Warrants that are: (1) In-The-Money or Close-To-The-Money, (2) longer-dated which is less susceptible to time decay, and (3) lower implied volatility.

Of the 9 Call Warrants available on the market, just 3 fit the bill by being In-The-Money/Close-To-The-Money - SKPETROC27, SKPETROC28 and SKPETROC29 (all 3 have strike prices at RM1.40). More specifically, SKPETROC29 strikes us as being the obvious choice for this trading strategy. This Call Warrant offers a higher effective gearing of 3.17x. Additionally, time decay should also be negligible given SKPETROC29 has the longer time to expiry (8 months) and yet trades at the lowest implied volatility of 47.6% (compared to 71.3% - 102.2% range for the other Call Warrants).

Source: Kenanga Research - 10 Oct 2016