Foreigners have remained net buyers in our equity market for a 15th consecutive week, while the benchmark FBMKLCI continues to hover close to a two-year high. As the benchmark index retests its major long term downtrend resistance (1787-points stretching back as far as July-2014), the positive undertone has been dampened by the string of negative news flows on the global front, including the latest report on the Trump administration, and more recently this week a suicide bomb attack in the UK. Under the risk-on scenario, we still like beta-plays such as i) Building materials, ii) Construction and iii) Property sectors and iv) index linked counters. On the flipside, we believe that the previously out-of-favour defensive sectors such as Power utilities could potentially attract some trade should market sentiment turn more cautious. In today’s batch of Naga Warrant issuance, Equity Derivatives will be listing 11 Structured Warrants, comprising of AFG-CT (strike: RM4.60), ASTRO-C3 (strike: RM2.90), DIGI-C20 (strike: RM5.20), IOICORP-C14 (strike: RM4.80), KLK-CZ (RM25.00), MAHSING-C10 (strike: RM1.30), MALAKOF-CZ (strike: RM1.60), MPI-CG (strike: RM13.10), MATRIX-CH (strike: RM2.70), YTL-C10 (strike: 1.60) and YTLPOWR-CZ (strike: 1.60).

Structured Warrants Commentary

Within this batch of Naga Warrant issue, we like MAHSING-C10, IOICORP-C14, and YTLPOWR-CZ. Recent news flows for

MAHSING (OP; TP:RM1.66) include its proposed 3.56 ac freehold residential land in Titiwangsa, KL for RM60m, which is earmarked as an affordable serviced apartment project with a GDV of RM650m. Earlier in March, MAHSING also raised RM650m from perpetual bond, which will be partly used for its aggressive landbanking which would imply a potential GDV replenishment of up to RM3.3b according to our back-of-the envelope calculations. Since the group has announced this first deal while the land prices have somewhat stabilized, we foresee more landbanking news to materialize which could be added catalysts for the share price.

As for IOICORP (OP; TP: RM5.50), we recently increased our target price from RM5.15 after its 3Q17 earnings came in slightly above our expectations last week. Stronger than expected downstream performance and higher CPO prices attributed to this earnings beat and post earnings, we remain optimistic on IOICORP’s prospects with production recovery on track to meet our 7% FFB growth estimate for FY17E. As production recovers, we also expect cost per tonne to decline, for upstream margin improvement. As for the downstream segment, we expect to see lower input cost particularly on PK prices, which should benefit sector margins going forward.

On defensive sectors such as Power Utilities, the dispute between YTLPOWR and TENAGA over Paka’s PPA Extension and Land Lease Agreement has finally been resolved with the signing of new agreements to enable the IPP to start operation from Sep 2017. We see this as a huge positive for YTLPOWR (MP; TP: RM1.50) in terms of earnings as well as price catalyst. Although we kept our ratings and target price unchanged in our report earlier in the month (11-May), YTLPOWR’s upcoming earnings release later this month should offer more direction to its share price movement ahead.

These 11 structured warrants are priced with a range of +/-8% 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 5.5x to as high as 11.3x and the conversion premium ranges from 13.2% to 24.0%. Call-warrants are leveraged instruments. For instance, by participating in AFG-CT, an investor is exposed to a gearing of 9.7x. To be more precise, this call warrant offers up to 5.1x effective gearing for investors.

We are projecting a short-term technical target price of RM4.49 for AFG. This implies a potential upside objective of 8.2% based on a closing price of RM4.15. Theoretically speaking, a 8.2% increase in the underlying price to RM4.49 should translate to ~42% gain in AFG-CT. This general estimate is applicable to other Naga Warrants as well.

Source: Kenanga Research - 24 May 2017