Despite gains in regional markets and the US markets climbing to fresh record highs, the Malaysian market has continued to trade in a lackluster fashion these recent weeks. Notably, the benchmark FBMKLCI is now hovering close to its two-month low while the 20-day SMA has just completed a “Death Cross” with the 50-day SMA. Already, we have seen a reversal in buying interest as per our “Accumulated Volume-Price Study” (see Market Strategy report dated 4th July), and although we would not discount the possibility of a near-term oversold relief rebound, the overall technical outlook is signalling further risk on the horizon. Fundamentally, we remain NEUTRAL on the 3Q17 market prospects as it is seasonally the weakest quarter. This comes despite our upwards revision of earnings estimates and index target to 1,850 (from 1,775 in the previous quarter), of which we see an uninspiring upside potential of ~5%. As such, we prefer to adopt a more conservative approach or defensive strategy ahead. Timing-wise, we prefer a “Buy on Weakness” approach, if and when the index corrects to our B.O.W zone of 1,720-1,750. Over the next two days, Equity Derivatives will be listing 11 Structured Warrants as additional tools for traders who wish to gain a leveraged position for such trading strategy. They consist of SEM-CG (strike: RM1.55), BIMB-CV (strike: RM4.60), CIMB-C25 (strike: RM7.00), HARTA-CZ (strike: RM7.50), IJM-C7 (strike: RM3.80), KAREX-C3 (strike: RM1.90), MUHIBAH-CE (strike: RM3.30), TOPGLOV-C19 (strike: RM6.10), WPRTS-CS (strike: RM4.10), and twin listings LCTITAN-CA (strike: RM6.80) and LCTITAN-CB (strike: RM7.80) tomorrow.

Structured Warrants Commentary

From this batch of Naga Warrant issuance, we like rubber glove markers and see the potential in HARTA-CZ and TOPGLOV-C19. At the same time, a stream of news coverage on the recent listing of chemical giant LCTITAN is also likely to keep the company in the limelight, potentially attracting some trading interest in LCTITAN-CA and LCTITAN-CB. Traders who wish to position for technical pullbacks in index-linked counters may also consider CIMB-C25 and WPRTS-CS, both of which have already seen their share prices moderating.

For HARTA (OP; TP: RM7.70), we are more optimistic on its growth prospects and outlook in subsequent quarterly earnings, with our conviction being reinforced by new capacities from the gradual ramp-up of Plant 3. Further along, we also expect higher FY18 and FY19 net profits as a result of higher utilisation and stronger-than-expected demand, which has necessitated our recent earnings revision and target price upgrade from RM6.00.

Meanwhile, TOPGLOV (OP; TP: RM6.10) ranks among our top picks for 3Q17. As with HARTA, we expect subsequent quarterly earnings to improve, driven by re-stocking activities following the lower input latex cost underpinning lower ASPs. Added catalysts may also include the Group’s plans to venture into the condom business, in addition to the construction of three new manufacturing facilities, which will collectively add another 128 production lines and 11.7b pieces/p.a. in capacity over a period between end-2018 and FY19.

For LCTITAN (NR; TP: RM9.05), its return to the local equity market has been heralded as one of the largest in recent years. With its TE3 and PP3 and the ambitious USD3.5b Integrated Petrochemical Facility coming on-stream over the next five years, we see the Group boosting its capacity by 73%, which would enable it to ride on the huge demand potential in the region. In our recent IPO Note, we value LCTITAN at 13.2x CY18 PER, which comes at a 20% discount to our targeted 16.5x PER for PCHEM.

Of the twin LCTITAN-CA and LCTITAN-CB listings, we favour LCTITAN-CA (strike: RM6.80) for trading shorter term movements given its high effective gearing of 5.6x. This structured warrant is also closer-to-the-money, making the unit price more sensitive to changes in the underlying share price and facilitating smoother entry and exit. Conversely, LCTITAN-CB (strike: RM7.80) is more suited for longer-term investors who see high upside potential in the underlying share price. Although LCTITAN-CB is far out-of-the-money, effective gearing is still decent at 4.5x while the main advantage lies in its comparatively low delta of 0.42 (vs 0.52).

These 11 structured warrants are priced with a range of +/-13% 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 3.1x to as high as 12.5x and the conversion premium ranges from 12.8% to 49%.

Call-warrants are leveraged instruments. For instance, by participating in LCTITAN-CA, an investor is exposed to a gearing of 10.8x. To be more precise, this call warrant offers up to 5.6x effective gearing for traders. Given our fundamental target price of RM9.05, this implies a potential upside objective of 42% based on a closing price of RM6.36. Theoretically speaking, a 42% increase in the underlying price should translate to ~235% gain in LCTITAN-CA! This general estimate is applicable to other Naga Warrants as well.

Source: Kenanga Research - 18 Jul 2017