Structured Warrants Commentary

In today’s batch of Naga warrant issuances, Equity Derivatives is issuing 12 (Twelve) Structured Warrants, comprising of AXIATA-C16 (strike: RM4.50), CBIP-CD (strike: RM2.00), JCY-C1 (strike: RM0.55), KAREX-CS (strike: RM2.55), KOSSAN-CQ (strike: RM6.80), MISC-C9 (strike: RM7.50), MMCCORP-C5 (RM2.40), MYEG-C9 (strike: RM2.40), PCHEM-C10 (strike: RM7.10), POS-C6 (strike: RM4.00) SIME-C12 (strike: RM8.50), and WPRTS-CQ (strike: RM4.45). 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 see index components AXIATA-C16, PCHEM-C10 and SIME-C12 as trading candidates for the year-end window-dressing theme. Just last week, we published a company update on AXIATA (OP, TP: RM4.81), highlighting the company’s plans to sell a minority stake in wholly-owned tower infrastructure unit edotco for up to USD600m – proceeds of which could potentially fund its growth strategies within the Asian region. We also like AXIATA as a recovery-play, following the sharp drop these past two months. For SIME (MP, TP: RM8.20), 1Q17 earnings came in at 11% of our full-year forecast. Nevertheless, we expect a stronger contribution in the quarters ahead, with near-term catalysts being higher CPO prices and the delivery of the 1st phase of the Battersea project.

Meanwhile, investors looking for export plays can consider JCY-C1, KAREX-CS and KOSSAN-CQ. While we do not have active coverage on JCY and KAREX, both have a consensus “HOLD” rating with target prices of RM0.54 and RM2.56, respectively. For KOSSAN, although we have a Market Perform call on the stock, our target price of RM6.90 implies a 46 sen (7.1%) upside from Friday’s closing price of RM6.44. Furthermore, investors can look forward to the new plant at Jalan Meru (Site 1) which is expected to be completed in the third quarter of 2017 and is capable of producing 3.0b pieces of gloves per annum.

These 12 structured warrants are priced with a range of +/-7.1% moneyness. The gearing ranges from as low as 5.0x to as high as 13.1x and the conversion premium ranges from 11.2% to 27.2%. Call-warrants are leveraged instruments. For instance, by participating in KOSSAN-CQ, an investor is exposed to a gearing of 7.2x. To be more precise, this call warrant offer up to 4.0x effective gearing for investors.

Based on our charting, we are projecting a short-term target of RM7.20 for KOSSAN. This implies a potential upside objective of 11.8% based on a closing price of RM6.44. Theoretically speaking, an 11.8% increase in the underlying price to RM7.20 should translate to ~47% gain in KOSSAN-CQ. This general estimate is applicable to other Naga Warrants as well.

Source: Kenanga Research - 20 Dec 2016