The local stock market has been much stronger than expected. Apart from seeing spill-over effects from the strong regional and global markets, and feel-good factors on expectations of the 14th Malaysian General Election (GE14), the return of foreign investors to the local equity market in a more aggressive way comes as a pleasant surprise. That said, we believe the recent market rally could be sentiment and liquidity driven. Despite such exciting and encouraging signs, we believe the underlying fundamentals have not changed much.

Various analyses (see Market Strategy report dated 27-March) have shown that the underlying uptrend in FBMKLCI remains intact, but risk of a short-term correction is heightening. As such, we prefer to position for a B.O.W. strategy, if and when the index pulls back to 1,705/1,670, and to focus on our Overweight sectors or Outperform rated stocks, especially laggards. We like: (i) Aviation, (ii) Gloves, (iii) Plastic Packaging, (iv) Power Utilities, (v) Property, and (vi) Technology sectors.

In today’s batch of Naga warrant issuances, Equity Derivatives is issuing 12 (Twelve) Structured Warrants, comprising of MBSB-C1 (strike: RM1.30), CIMB-C22 (strike: RM5.70), DRBHCOMC34 (strike: RM1.50), GENTINGC45 (strike: RM9.80), LBS-CA (strike: RM2.10), MAYBANKC30 (strike: RM9.10), MRCB-C15 (RM1.80), SENERGYC43 (strike: RM2.20), TENAGA-C37 (strike: RM14.10), UEMS-C44 (strike: RM1.35), UMWOG-C17 (strike: RM0.80), DIALOG-C16 (strike: RM1.95).

Structured Warrants Commentary

Within this batch of Naga Warrant issue, we like GENTINGC45 and TENAGA-C37 from both fundamental and technical perspectives. Besides, we also have a tactical overweight on the property sector. Recently, we re-rated our valuations (discounts mainly narrowed by 0.25SD) to reflect this high-beta play effect to a broader market and consequently, we expect the potential for LBS-CA and UEMS-C44 to attract some trading interest. Additionally, DRBHCOMC34 should also attract trading interest in the coming months, given its abundance of news-flow and as an election-related proxy play.

In particular, GENTING (MP, TP: RM10.19) produced a good set of FY16 results in its recent quarterly report card. Both its gaming assets as well as plantation arm performed within expectations. Going forward, we believe that 2017 will be an exciting year given the new Japan market opportunity and its home turf operations should also see fruitful results from its GITP expansion program. Post earnings release, we upped our FY17E net profit by 4%, necessitating an increase in target price from RM9.14 to RM10.19. Meanwhile, TENAGA (OP; TP: RM17.50) is our Top Pick under the power utilities sector. Under the current uncertain times, one should appreciate the earnings stability offered by the industry players. TENAGA, in particular, is free from fuel cost risk under the ICPT framework while the IPPs are backed by long-term PPAs. Earnings are set to grow this year with 2.1% in demand growth expected.

These 12 structured warrants are priced with a range of +/-23.1% moneyness. All the warrants issued are European Styled Non-Collateralised Cash Settled Warrants with a tenure of 7 months. The gearing ranges from as low as 2.4x to as high as 6.8x and the conversion premium ranges from 10.7% to 46.1%. Call-warrants are leveraged instruments. For instance, by participating in TENAGA-C37, an investor is exposed to a gearing of 13.0x. To be more precise, this call warrant offers up to 6.8x effective gearing for investors.

We are projecting a short-term technical target price of RM14.62 for TENAGA. This implies a potential upside objective of 6.4% based on a closing price of RM13.74. Theoretically speaking, a 6.4% increase in the underlying price to RM14.62 should translate to ~44% gain in TENAGA-C37. This general estimate is applicable to other Naga Warrants as well.

Source: Kenanga Research - 25 Apr 2017