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Punting Expiring Company Warrants – Speculating why AFFIC-WC surged 50% while Underlying only rise slightly

The company warrant of Affin Holdings (AFFIN-WC) staged an over 50% rally yesterday with the mother share only up 4 sen or 1.5%.

 

AFFIN-WC is one of the company warrants expiring this year which is out-of-money.  Nevertheless, the exercise price of this warrant is only about 11% more than the current share price.  There is much more liquidity at AFFIN-WC than Affin mother shares.  Given the speculation on Affin Holdings being one of the merger candidates in the consolidation of Malaysia’s banking landscape.  It is not unreasonable to assume a potential acquirer or a “vulture” fund can be collecting the warrant.  The “acquirer” or “vulture” fund should be able to collect much more warrants and exercise it into shares later on than buying mother shares directly from the market.  Even though they may be paying some premium, the possibility of being able to accumulate a much larger stake than collecting the underlying share alone can make the exercise feasible.

 

Nevertheless, the theory of a party accumulating out-of-money warrants at very cheap absolute price and converting it into ordinary shares to build a meaningful stake in the company may not be applicable in the case of AFFIN-WC as the total number of AFFIC-WC outstanding is only 153.77 million vs. Affin mother share total number of shares of some 1.5 billion.  Full exercise of all warrants only represents slightly over 9% of enlarged share capital.

 

However, if the total warrants outstanding is about 50% of number of shares outstanding, the story may be different.  There may be some warrants in the list of expiring warrants below that may fit into the above description.  Assuming the underlying company is in good financial health and may be under appreciated by the investment community, a “vulture” fund can come in via buying and exercising the warrants and “threaten” the existing major shareholders if they are not careful.

 

 

Punting on Company Warrants Expiring This Year

Punting warrants can bring investor big gain when the gearing is high.  And the gearing of warrants is highest when the warrants are expiring soon and are trading out-of-money.

 

A good way to derive big gains from company warrants is to buy those warrants within striking distance of being in-the-money with expiry a few months down the road.  These types of warrants typically trade at very high gearing so that a significant move in the underlying share price can bring about gains in excess of 100% in warrants price.

 

A case in point is the warrants of Golden Frontier Berhad (GFB-WB).  At the beginning of the year, the underlying share was hovering just above RM1.00 and the exercise price of the warrant is RM1.44.  As the mother share was not very actively traded and its volatility was very low, there was not much interest in the warrants.

 

Nevertheless, the share price of Golden Frontier staged a significant rally in the last few months, chalking gains of over 50% as the company reported a substantial rise in profit.  This is a 10-year high for the stock and now some chartists are even targeting much higher price to come.  The price of GFB-WB rose from below 10 sen to about 30 sen at the time of writing during the period when the mother share made a big move.  Now the warrant is in-the-money and any further rise in the underlying share will be tracked quite closely by the warrant.

 

Are there any more of such gems available?

 

No Need to Buy Loan Rights to Get Redtone-WA ?

The loan rights of Redtone International Berhad (Redtone-LR) was trading at about 2.5 sen today. Redtone-LR will cease trading on 12/2/2009 meaning tomorrow 11/2 is the last day of trading for Redtone-LR.

If investors buy Redtone-LR at 2.5 sen, what does he get?

This Redtone rights issue of loan stocks is done on the basis of 10 loan stocks (at nominal value of 10 sen) for 10 shares held.  The subscription price is at nominal value which is 10 sen.  Subscribers of 10 loan stocks will get 4 free warrants.  This means that investors who buy 10 Redtone-LR at 2.5 sen and subscribe for the loan stocks at 10 sen each will effectively pay RM1.25 to get 10 loan stocks (Redtone-LA).

The conversion price of the loan stock is at 25 sen and it can only be converted by tendering equivalent nominal value of loan stocks.  This means that investor needs 2.5 loan stocks to convert to 1 share.  To make the calculation simpler, investor will need 25 Redtone-LA to convert to 10 Redtone shares.  As Redtone last traded share price today is 26.5 sen, you pay RM2.65 to get 10 Redtone shares.

GFB-WB – High Gearing Vs High Premium

The shares and warrants of Golden Frontier Berhad attracted some interest recently as investors find value in this low profile company. The underlying share has been rising steadily over the past few weeks despite the general lackluster market. At the close of last Friday, Golden Frontier was trading at RM1.27 while its warrant, GFB-WB closed at 14 sen.

 

Golden Frontier’s operation is divided into two divisions: packaging and property development. However, its property division is not very active at the moment after it has completed its previous project. Packaging is the main business and principal profit contributor to the group. Golden Frontier’s corrugated cartons operations are conducted both in Malaysia and Vietnam. With the rapid expansion of the Vietnam economy, the packaging operation in Vietnam has surpassed that of Malaysia both in terms of revenue and profitability.


SCOMI-WA implied value at 2 sen

Scomi Group’s renounceable rights of its issue of up to RM164,863,605 Nominal Value Of Three (3)-Year 4% Irredeemable Convertible Secured Loan Stocks (“ICSLS”) At 100% Of Its Nominal Value (of 10 sen) together with up to 219,818,140 free detachable warrants starts trading today under the symbol SCOMI-LR.

 

The holder of 15 units of SCOMI-LR who subscribed for the ICSLS at RM0.10 will receive 2 free warrants.  At its mid-morning price of 3 sen, investors who purchase 15 units of SCOMI-LR will cough up 45 sen and they have to come up with RM1.50 to subscribe for the 15 units of ICSLS in order to get the two free warrants.  The total outlay will be RM1.95 and investors end up with 15 ICSLS (most likely will be traded under SCOMI-LA when it starts trading) and 2 warrants (likely under SCOMI-WA).

 

 

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