Donald Trump’s victory in the US Presidential Elections came as a massive shock to the investment community. As the election results unravelled during the Asian trading hours last week, the Dow Jones Industrial Average futures plunged as much 800 points at its worst. Still more unexpectedly, the DJIA staged a near-identical post-Brexit rebound the very same day, totally against the majority of economists’ predictions of steeper market losses and protracted dollar weakness. As the market attempts to make sense of a Trump presidency, expectations are rife that Donald Trump will scrap the TPPA given his stance on trade protectionism. Increasingly apparent to investors, the Malaysian economy will be at the losing end of this notion, as evidenced by the FBMKLCI’s 47.18-point drop over the past four trading days. Amid the uncertainty, the FBMKLCI’s 30-day average volatility has spiked to 7.7% from a two-year low of 5.6% at the start of the month. Sentiment is fragile and we believe that the heightened volatility environment is likely to remain in the months ahead. Nevertheless, this also means that there will be increased trading opportunities for short-term investors who wish to gain an exposure through structured warrants.

Structured Warrants Commentary

In today’s batch of Naga warrant issuances, Equity Derivatives is issuing 12 (Twelve) Structured Warrants, comprising of GENM-C18 (strike: RM5.00), HARTA-CU (strike: RM5.00), IHH-C2 (strike: RM6.70), INARI-CW (strike: RM3.50), MPI-CE (strike: RM8.10), MYEG-C6 (strike: RM2.60), SKPETROC34 (RM1.80), SUPERMX-C21 (strike: RM2.30), TAANN-CH (strike: RM3.65), TOPGLOV-C10 (strike: RM5.00) TUNEPRO-CI (strike: RM1.70), UEMS-C37 (strike: RM1.20). All the warrants issued are European Styled Non-Collateralised Cash Settled Warrants with a tenure of 8 months.

From this batch of Naga Warrant issuances, we like HARTA-CU, TOPGLOV-C10 and MYEG-C6, all of which our research team has OUTPERFORM call.

Just last week, HARTA (OP, TP: RM5.33) announced 1H17 PATAMI which rose 3.5% YoY. While the earnings were in line with expectations, we took the opportunity to upgrade our target price from RM4.90 after rolling over our valuation base year from CY17E to CY18E. We expect near-term catalysts to include: (i) margin improvement from operating efficiency and better economies of scale, (ii) subsiding nitrile glove competition and more importantly, (iii) earnings to jump upon the gradual ramp-up of the Next Generation Integrated Glove Manufacturing Complex (NGV).

Similarly, we expect TOPGLOV’s (OP, TP: RM6.10) subsequent quarterly earnings to improve, driven by cost pass-through via hikes in ASPs, abating price competition and sustained demand for rubber gloves. Sustained weakness of the Ringgit is a near-term positive. And with ASPs already raised by USD0.20-USD0.30/1,000 pieces, which we expect will contain high operating costs and put the brakes on further margin compression in the quarters ahead.

As for MYEG (TB, TP: RM2.80), the company is still gaining traction from its immigration-related services and we have projected the Group to register a 2-year NP CAGR of 36%. .

These 12 structured warrants are priced with a range of +/-13% moneyness. The gearing ranges from as low as 3.7x to as high as 10.7x and the conversion premium ranges from 14% to 36%. Call-warrants are leveraged instruments. For instance, by participating in TOPGLOV-C10, an investor is exposed to a gearing of 7.3x. To be more precise, this call warrant offer up to 4.2x effective gearing for investors.

Based on our charting, we are projecting a short-term target of RM5.60 for TOPGLOV. This implies a potential upside objective of 14.3% based on a closing price of RM4.90. Theoretically speaking, a 14.3% increase in the underlying price to RM5.60 should translate to ~60% gain in TOPGLOV-C10. This general estimate is applicable to other Naga Warrants as well.

Source: Kenanga Research - 15 Nov 2016