CIMB’s share price climbed for a fourth straight day, ending Friday at a 12-month high of RM5.04. This follows last Monday’s announcement of a strong set of 3Q16 results by 93.7% owned subsidiary CIMB Thai. More importantly, CIMB had also announced that it had entered into a Heads of Terms with China Galaxy International Holdings Limited with respect to a potential strategic partnership in the cash equities business comprising institutional and retail brokerage, equities research and associated securities businesses in the region. We also believe that under the challenging loan growth environment, earnings enhancement can only be derived from business ventures with the added value of cost rationalisation. In this instance, we understand that the JV structure with China Galaxy is expected to be out within 3 months, and the Group expects commencement of the JV in 1H17, which will have a significant impact on its OPEX. With the JV, the Group’s stockbroking business is expected to see costs down by 100bps or slightly more than RM300m, necessitating an upwards tweak to our earnings estimates and fundamental target price to RM5.27 (from RM4.87 earlier). From a charting perspective, CIMB’s share price is biased to the upside after breaking above the key RM5.00 resistance on Friday. From here, we expect a modest climb towards RM5.35 (R1) and possibly RM5.69 (R2) over the next 2-3 months. Investors who wish to gain a leveraged exposure may consider CIMB-C12 (strike RM4.50). Currently, CIMB-C12 offers an effective gearing of 4.27x, meaning a modest 6.1% climb in the underlying price to RM5.35 would translate to approximately 26% gain in the Call Warrant to RM0.27.

Structured Warrant Strategy:

Since we expect a modest climb towards RM5.35 (+6.1%) over the coming 2-3 months, investors should opt for Call Warrants which are (1) In-The-Money or Close-To-The-Money, (2) longer-dated which is less susceptible to time decay, (3) lower implied volatility, and (4) with good liquidity for ease of entry and exit. Of the 3 Call Warrants available on the market, we like CIMB-C12 (strike RM4.50) and CIMB-C14 (strike RM5.00) for varying reasons. CIMB-C12 has been popular among investors (daily average volume of 1.0m units) for good reasons as well. This Call Warrant offers the highest effective gearing at 4.27x, yet is reasonably priced at an implied volatility of 43.0%. Currently, it has almost 5 months till expiry, more than sufficient time for our trading strategy to play out with little ill effects from time decay.

Source: Kenanga Research - 24 Oct 2016