Yesterday, FGV’s share price surged 13.0 sen (8.4%) to RM1.68 following news reports that it plans to become a leaner and stronger organization this year, riding on the improved plantation performance and higher commodity prices after a challenging and tumultuous 2016. In a statement by CEO Datuk Zakaria Arshad, FGV is upbeat as the industry looks forward to better commodities market sentiment in light of lower palm oil inventory levels, improving export demand and a moratorium on new plantings in Indonesia and recovery in crude oil prices.

This also builds upon last week’s news reports that Federal Land Development Authority (FELDA)’s subsidiary FIC Properties Sdn Bhd is acquiring the 37% stake in PT Eagle High Plantations Tbk that was previously eyed by sister company FGV but at a 26% discount to the original price tag (USD505.4m vs USD680m earlier). With intense criticism surrounding the pricing of the original deal, this news came as a welcomed relief for investors as evidenced by FGV’s cumulative 21.0 sen rebound since last week’s RM1.47 intraday low.

From a charting perspective, FGV’s share price has bottomed out in the short-term and is now poised for further gains ahead. We expect FGV to stage a retest of last month’s RM1.73 (R1) high before a possible move towards RM1.84 (R2). Investors wishing to gain a leveraged exposure can consider FGV-C14 (strike RM1.60) which currently offers an effective gearing of 4.4x This means that a modest 9.5% gain in the underlying price to RM1.84 would (all else remaining the same) translate to an amplified gain of 42% for FGV-C14.

Structured Warrant Strategy:

Of the 11 call warrants available for FGV, we like 3 of them: FGV-C14 (strike RM1.60), FGV-C13 (strike RM1.50) and FGV-C16 (strike RM1.95). Our preference is towards FGV-C14 (strike RM1.60) which is best suited for our trading strategy for 1-2 weeks’ time frame. While time to expiry is comparatively short at 2.5 months, it is trading in-the-money and hence is more sensitive to changes in the underlying share price. Effective gearing is also decent at 4.4x. We also like FGV-C13 (strike RM1.50) for being in-the-money and effective gearing of 4.1x. FGV-C13 has the advantage of a longer time to expiry (4 months) and lower implied volatility (53.7%). However, the main drawback is that bid/ask spread tend to be wide at times.

For investors who are more aggressive, we like FGV-C16 (strike RM1.95) which has been popular among investors (11.3m units changing hands yesterday). FGV-C16 offers a high effective gearing of 6.2x. Although FGV-C16 is out-of-the-money, it still has 4 months till expiry and is reasonably priced at just 49.4% implied volatility. Collectively, these provide some buffer against time decay.

Source: Kenanga Research - 4 Jan 2017