For readers to know more as there is a comment given above suggesting on using Options Pricing to do a calculation of Fair Value for the company warrant:

If the subject of my sharing was referring to Call Warrant and not Company Warrant for Dancomech, then the idea of using Options Pricing is doable. Let's look at Black Scholes Merton:

Difference:

1. Call Warrants in Malaysia consists of European Style. So it fulfill the required condition by Black Scholes Merton Model.

2. When Call Option is exercised, there is no effect of dilution. Company warrants yes.

By using Black Scholes (Option Pricing) to calculate for the FV of Call Warrants is not perfect but it do eliminate 2 additional parameters required for analysis compared with using Black Scholes to analyze Company Warrants.

Most analysis that went wrong mainly because the user used the Wrong Base and the Wrong Multiple to build the Model and calculated wrongly for the Fair Value. The standard deviation will be high and the result will be less reliable. So, we have to be careful with using certain models to calculate. When we are not sure, it would be better not to forcefully build a model just to get a targeted FV.

Thank you

Cox-Ross-Rubinstein Method

The CRR model makes certain assumptions, including:

No possibility of arbitrage; a perfectly efficient market
At each time node, the underlying price can only take an up or a down move and never both simultaneously


Question to ponder: Is Malaysia Warrants are perfectly efficient that leaves no room for arbitrage? Each calculation of pricing is either up or down vs the price.

Suitable to be used in company warrants analysis in Malaysia?

Put/Call Parity Options Pricing defines the relationship that must exist between European put and call options with the same underlying asset, expiration and strike prices (it doesn't apply to American-style options because they can be exercised any time up to expiration)

- Company Warrants Eg. Dancomech is American Style as it can be exercised any time-

Let's look at one of the famous Options Pricing Model available:

The Black-Scholes-Merton model makes certain assumptions:
• The option is European and can only be exercised at expiration
• No dividends are paid out during the life of the option
• Efficient markets (i.e., market movements cannot be predicted)
• There are no transaction costs in buying the option
• The risk-free rate and volatility of the underlying are known and constant
• That the returns on the underlying are normally distributed

You may refer more on: Options, Futures, and Other Derivatives, 8th Edition, Copyright © John C. Hull 2012 (pages 313-315).



There are few challenges by using Black-Scholes-Merton for Dancomech:

1. Company warrants is American and not European – Item 1 Not fulfilled
2. There is 30% dividends pay out committed by the Management – Item 2 not fulfilled
3. The Implied Volatility of an option is the volatility for which the Black-Scholes-Merton price equals the market price. Traders and brokers often quote Implied Volatilities rather than prices in RM.
4. When a regular Call Option is exercised the stock that is delivered must be purchased in the open market but when a warrant or executive stock option is exercised new Treasury stock is issued by the company. After the Options have been issued it is not necessary to take account of dilution when they are valued but company warrant yes.

With the limitations mentioned, to get a good FV is rather difficult. The price can be calculated once the warrant is already IPO. Options Pricing is more suitable in Trading Options.

Thanks imoogi99

For my own general rule of thumb:

Borrow money/placement of shares/rights issue for upstream or down stream biz expansion - Acceptable.

Raise money to pay debts - No Go

I believe as long as one is willing to learn the right way to analyze stocks and market, he or she should be able to earn some decent monies in the stock market.

To add on on your details stated, from the Annual Report we see few more details to gauge the efficiency of the Management Team. Just to share some ideas you may use to screen through the companies you are following:

1. Chairman / MD's statement - If the statement is in contrast of what he says (year after year, he has no ability and sincerity to honor his words - RED FLAG)

2. Remuneration to the Directors - If the remunerations goes up much faster than the company's P&L, he is more interested to rewards himself than the shareholders -RED FLAG

3. ESOS & Placement of Shares - a lopsided ESOS quantity and exercise price. The Management rewarding themselves more than their effort given - RED FLAG

4. A higher profit recorded but worse of off cash flow / free cash flow and higher account receivable. Know how to do business but don't know how to collect money and later will appear as write off - RED FLAG

5. Active Right Issues with Free Warrants and Placement of Shares - Always raise but EPS, ROI, ROE does not move up in tandem - RED FLAG

6. Management appointed involved in unhealthy activities before; Bad track record ,Cook the share price, Cook the book, Problems with Authorities and Solicitors and Regulators - RED FLAG


There are many others to look at in the Annual Report but those are the serious one. In a nut shell, look at the Management Team and their track record before proceeding further. If they are tainted before for bad reasons there will be a chance they will do it again.

Hi Yeo,

There is no way retailers can know how the company submit the tender, price, margin etc. Even you are a staff with the company you may not be aware on the tender details. Only a handful of Senior Management Staffs have the information. If you are talking about Research Analyst having more information, this argument is valid . The information given to analyst is from Analysts Briefing or Company Visitation. Those info given also on the surface manner and Analysts have to come out with their own models to forecast the P&L.

Desa,

Agree on your point. Some owners do not honor/mismanage their company. When they want your monies, presentation will be done very well. When they get your monies, the table turned.

Generally I will use a mixture of 3 elements before deciding:
i. Fundamentals Analysis (health and pricing analysis).
ii. The Listed Company's Management Team (background, success stories and trustworthiness)
ii. Theme Play (are they on the right rotational play & Fund Manager's Radar)

If the Management have bad track record/cook their books and share price/inconsistent with their promises, I will avoid them irregardless on how good their Fundamentals to me.

Thank you for pointing out.

Now the boss also disposing. Hope the keyboard warriors after this would know their posting must be made genuine and truthful rather than guessing and speculating. Thank you speakup.

thank you lookingaround for your kind words.

Yes. No dilution in eps. Cw currently is cash settlment. No longer conversion to mother price. Old time yes. Dilution only happens for company warrants.

Hi duit, thank you for your comment. I am just a small bilis. We learn together

There is no clear to say which ine is better, the trading method will be different as american can be exercised anytime before expiry, you may have the chances to so arbitrage trading if it moves to your favor. American requires more monitoring.

Soon, american or european style is stated in the term sheet. You may check at bursa malaysia or if easier may use ur broking house online trading system and choose the warrants section.

hi city, recommended to do so. The Call Warrant will not have effect to the mother price but what happen is when during the CW near to maturity(theta), traders/investors tends to sell down the mother share. They are expecting the mother price should goes down so that the CW holders will not be able to exercise their CW and expire worthless.

thank you Probability

no prob soon9913. =)

thank you Peter Chen

No worries. Thank you

Agree ozzie, thank you for your input. Many investors rely too heavily on the numbers alone to do their financial analysis. They have forgotten the listed company is run by their management.

Yes, RM1m Facility needs to be secured against collateral. Looking at current market scenario, you might able to catch to good dividend counters soon with SMF Account.

Will share about Single Counter Financing and Why Investors / Promoters use it. It will gives us another perspective of the usage of SMF account (despite the higher fees and roll over).