Posted by kcchongnz > 2012-12-29 18:58 | Report Abuse

I start with one first, Kulim company warrant, Wc At the close on 27th December 2012, Kulim and its warrant Wc closed at RM4.82 and RM1.01 respectively. Subsequently Kulim announced a special dividend of 91 sen. The next day Kulim share price as expected jumped to high of RM5.20 before closing at RM5.00, for a gain of 3.7% for the day. On the other hand Wc jumped to a high of RM1.09 and closed at RM1.03, or a gain of just 2%. Wc has a gearing of 4.8 times, a delta of 0.67 (delta from option pricing model) and hence an effective leverage of 3.2 times. Why didn’t the price of Wc closed at approximate 12% gain, or 3.2 times the gain of Kulim theoretically? Is there a chance to profit from this anomaly? Bursa last night announced that the revision exercise price of Wc to be adjusted from 3.83 to 3.13. Now we put aside all the price performance of Kulim and Wc and analyse to see if Wc is indeed a good investment basing on the price movement of Kulim. At yesterday’s closing price of Kulim and Wc at RM5.00 and RM1.03 respectively, the intrinsic value of Wc is RM1.87 (5.00-3.13), or 82% over its present price of RM1.03! I could buy Wc on Monday, send and pay RM3.13 for conversion at a total cost of RM4.16. I would enjoy the special dividend of 91 sen. Even if Kulim share price drop back 91 sen, the amount of special dividend, the share would still worth RM4.09 (5.00-0.91)! So my gain would be 91 sen per share, or 22%! Another big fat frog jumping all around? Dream, dream, dream, dream.m.m. But then without dreams, nothing will ever come through, will it? First of all, if you are not already possessing Wc, you have no chance to enjoy the special dividend of 91 sen, because as expected, the management of Kulim has already pre-empt it. Secondly price of Kulim may have already run up even way before the announcement due to the action of insiders, and so Kulim may be, I said may be, overpriced already. Thirdly there will be an adjustment of the share price of Kulim after the ex-date of the special dividend. So everything depends on whether there will be further run up in the price of Kulim and what is the amount of downward adjustment of Kulim ex-dividend. This is because the value of Wc depends on the final price of Kulim after the adjustment. So do you think Wc is a good bet? The value of Wc consists of two parts; the intrinsic value and the time value. the intrinsic value is straight forward and is computed based on the following: Intrinsic value IV = Price of Kulim – Exercise price Premium of Wc = (price of Wc+exercise price)/price of Kulim-1 Gearing = Price of Kulim/Price of Wc Assuming that we adjust the share price of Kulim, now at RM5.00. With the special dividend, the adjusted price of Kulim is RM4.09 (5.00-0.91). Then IV = RM4.09-RM3.13 = RM0.96 Premium = (1.03+3.13)/4.09 – 1 = 1.7% Gearing = 4.09/1.03 = 4 Hence after adjustment of special dividend of 91 sen, Wc still has an intrinsic value of 96 sen, and it is traded only at a premium of 1.7%, with a gearing of 4 times. Have we forgotten something else? Yes, the time value of Wc. Using Black-Schloes OPM, with the assumption of historical volatility of Kulim at 25%, dividend yield of 3%, and the risk free rate of 3.5%, Wc is worth RM1.20. 17 sen, or 16.5% above its present price of RM1.03. The 4.5 years of time value of WC is then equal to 24 sen (1.20-0.96). The following table shows the intrinsic value of Wc (ignoring the time value) with different adjusted price of Kulim after the special dividend: Gain in Kulim -2% 2% 5% 12% 22% 34% Adjusted Kulim price 4.00 4.16 4.30 4.60 5.00 5.50 Intrinsic value of Wc 0.87 1.03 1.17 1.47 1.87 2.37 Premium 18% 0% -12% -30% -45% -57% Gain in WC -16% 0% 14% 43% 82% 130% Wc at RM1.03, Kulim at 4.09 on 29th December 2012 The table shows the effect of movement of the price of Kulim after the special dividend, assuming at 4.09. For example, if one buys Wc at RM1.03, if the adjusted price of Kulim moves up to RM4.60, the intrinsic value of Wc would be RM1.47. Investors who have bought Wc at RM1.03 would make 43% if convert to Kulim and sell in the market. Whereas people invested in the underlying share only gain 12%. If the adjusted price of Kulim goes down just 9 sen to RM4.00, or 2%, warrant holders would lose 16%, 8 times more. The breakeven point for investors who buy Wc at RM1.03 would be Kulim’s adjusted price at RM4.16 as shown. So which is the more likely scenario, and why do you think so? All opinions are highly appreciated.