DRBHCOM’s share price rallied to an intra-day high of RM1.30 yesterday, before ending the day up 8.0 sen or 6.7% at RM1.27. Trading volume surged to 35m shares, more than seven-fold the 30-day moving average after local newswires stated that Chinese automaker Geely Automobile Holdings is reportedly leading a three-way race to be the technical partner for Proton Holdings Bhd, ahead of French carmakers PSA Group and Renault SA. According to the articles, Geely and PSA are interested in a 51% stake in the manufacturing plant in Tanjung Malim, and are actively conducting due diligence at Proton’s headquarters. The government has also reportedly given the approval for foreigners to own a majority stake in the assembly plant. It is also understood that the requirement to collaborate with a well-known strategic partner was imposed upon Proton as part of the conditions given by the government for its approval of a much-needed RM1.5b soft loan – which we believe is geared towards helping Proton in its turnaround efforts as well as to expand into domestic and international markets.

Based on our charting, DRBHCOM has broken out of a “Symmetrical Triangle-like” pattern and is poised to climb towards RM1.40/RM1.43. Investors who wish to gain a leveraged exposure may consider DRBHCOMC28 (strike RM1.05) which currently offers an effective gearing of 2.35x. This means that a 12.6% gain in the underlying price to RM1.43 would (all else remaining constant) translate to a 30% gain for DRBHCOMC28.

Structured Warrant Strategy:

Currently, there are 10 structured warrants available for DRBHCOM. However, since we expect a modest climb towards RM1.43 (12.6%) over the next 1-2 months, investors should be more conservative and opt for: (i) longer dated/reasonably priced Call Warrants, which are less affected by time decay, and (ii) In-the-Money/ Close-to-the-Money which are less risky. We like DRBHCOMC28 (strike RM1.05), DRBHCOMC31 (strike RM1.30), and DRBHCOMC29 (strike RM1.20). In particular, our preference is towards DRBHCOMC28. Although effective gearing is on the lower end at just 2.35x, it trades with tighter bid-ask spreads. DRBHCOM28 was also the most actively traded Call Warrant for DRBHCOM in yesterday’s session. This liquidity provides the ease of entry and exit even in the absence of the market maker.

For investors who are more aggressive, we like DRBHCOMC26 (strike @ RM1.55) which offers a higher effective gearing of 4.48x. The main drawback is that it is Out-of-the-Money, although the long time-frame to expiry and the comparatively cheap implied volatility of 52.4% provide a huge buffer against time decay should the underlying share price take longer to perform.

Source: Kenanga Research - 7 Feb 2017