Sentiment has been more upbeat post the recently concluded 1Q17 reporting season, as seen by the FBMKLCI’s ascent to a fresh two-year high this week. Although the corporate earnings season continued to show overall signs of improvement, we note that the momentum of improving trends has been visible slower from the previous quarter (4Q16). Out of 137 stocks under our core coverage, 31 stocks (22.6%) delivered earnings, which were below expectations in contrast to the broader 4Q16’s 34.4%. On the flipside, only 19 stocks (or 13.4%) performed betterthan-expected in comparison to the 34 stocks in 4Q16 (25.4%).

While we see higher upside from here, the risk-to-reward ratio may not be attractive at this juncture as we are cognizant of two potential risk factors; namely (i) weaker sentiment, and (ii) tougher quarter ahead. Hence, we prefer to “Buy On Weakness” (B.O.W.), if and when the FBMKLCI dips below the 1,735- level. At the same time, (i) laggards and (ii) defensive plays could be our themes for now. That being said, we also see the potential for some trading themes developing in the near term, some sectors of which are featured in today’s batch of Naga Warrant issuance.

Today, Equity Derivatives will be listing 12 Structured Warrants comprising of AIRASIAC57 (strike: RM3.20), AAXC9 (strike: RM0.45), BAUTO-CS (strike: RM2.10), EKOVEST-CB (strike: RM1.40), FGV-C29 (strike: RM2.10), GTRONIC-CK (strike: RM6.00), JTIASA-CO (strike: RM1.20), KSL-CH (strike: RM1.30), SKPRES-CF (strike: RM1.40), SUNCON-CK (strike: RM2.20), UNISEM-CY (strike: RM4.00) and WCEHB-CB (strike: RM1.70).

Structured Warrants Commentary

Within this batch of Naga Warrant issuance, we like airline companies AIRASIAC57, and AAX-C9 which should benefit from a weak oil price environment. We remain positive on AIRASIA (OP, TP: RM3.82) on the back of its capacity expansion in FY17 and targeted increase in aircraft utilisation rates from 12.5 hours to 14 hours. Meanwhile, we currently have a Trading Buy call on AAX (TB, TP: RM0.49), in-line with the consensus target price of RM0.50.

We also like the technology sector, of which GTRONIC-CK, SKPRES-CF, UNISEM-CY fall under. The overall industry continued to show improvement as the global semiconductor sales in February 2017 increased by 16.5%, marking the seventh consecutive YoY growth which is also the largest YoY growth since November 2010. Meanwhile, our channel checks also revealed that the equipment manufacturers are seeing higher demand from their end-customers. Taking these as positive signs, we believe the spill-over effect will also be reflected in the Malaysian back-end Semiconductor players.

In fact, UNISEM's (MP; TP: RM3.55) management is guiding for stronger sequential growth which we believe is highly possible; to be supported by the potential volume ramp up for wlCSP amidst the launching of new flagship smartphones in 2H17. As for EMS players such as SKPRES (MP; TP: RM1.40), medium-term prospects are still bright underpinned by contracts that have been/are being awarded by major customers.

Although we have been more conservative with regards to the construction sector (Neutral), we anticipate newsflow or contract awards from LRT3 to the tune of RM9.0b to be dished out over the coming 1-2 months. At the same time, market talk is that the ECRL contract award may be expedited to Sept/Oct, far earlier than our expected timeline of 1H18. Should these materialise, we see the potential for spillover effects towards EKOVEST-CB, SUNCON-CK and WCEHB-CB.

These 12 structured warrants are priced with a range of +/-14% 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 2.8x to as high as 7.8x and the conversion premium ranges from 12.3% to 39.6%. Call-warrants are leveraged instruments.

For instance, by participating in GTRONIC-CK, an investor is exposed to a gearing of 6.3x. To be more precise, this call warrant offers up to 3.5x effective gearing for investors. We are projecting a short-term technical target price of RM6.91 for GTRONIC. This implies a potential upside objective of 13.7% based on a closing price of RM6.08. Theoretically speaking, a 13.7% increase in the underlying price to RM6.91 should translate to ~48% gain in GTRONIC-CK. This general estimate is applicable to other Naga Warrants as well.

Source: Kenanga Research - 8 Jun 2017