Initially touted as a potential beneficiary of: (i) being an election play, and (ii) a potential earnings turnaround, investors were handed a sobering experience after FGV posted 9M16 core net loss of RM80m and guided for a loss-making scenario for the full financial year. Elements of unusual stock losses in its Turkish unit only served to make matters worse. Consequently, FGV’s shares were heavily sold down, extending the already torrid share price performance these past two months.

As a brief recap of the earnings conference call, management highlighted that weaker production, currency risk and high sugar prices are contributing factors to a poor outlook for the year. Given that quarter-to-date, sugar prices has further risen by another 14% in RM terms, while 4Q16 production would at best only match 3Q16, we concur with management’s view and have slashed our FY16E earnings forecast to a CNL of RM5m (-105%), and FY17E CNP to RM71m (-46%). Unsurprisingly, our TP was also lowered to RM1.90 (from RM2.65 earlier) in our result note.

That being said, the recent sell-down appears to be overdone, and FGV appears poised for a relief-rebound. From a charting perspective, we see the potential for a near-term recovery towards RM1.60 (R1) and RM1.81 (R2) within the next 1-2 months. Investors who wish to gain a leveraged exposure may consider FGV-C14 (strike RM1.60) which currently offers an effective gearing of 4.1x. This means that a modest 16.0% climb in the underlying price to RM1.81 would translate to approximately 66% gain in the Call Warrant to RM0.17.

Structured Warrant Strategy:

Of the 10 Call Warrants available on the market, we like three of them: FGV-C12 (strike RM1.90), FGV-C14 (strike RM1.60) and FGV-C13 (strike RM1.50). More specifically, our preference is towards FGV-C14, which is best suited for our trading strategy. FGV-C14 is close-to-the-money (strike RM1.60) with a time to expiry of 3.5 months, yet offers a high effective gearing of 4.1x. This Call Warrant is also reasonably priced at 69.4% implied volatility (compared to the 56.7%-84.7% range for the other Call Warrants).

Source: Kenanga Research - 2 Dec 2016