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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).

 

 

IJMLAND-WA

 

IJMLAND-WA – Started Trading Under Weak Market Condition

 

Warrant Price :

RM0.225

Share Price : RM0.970
Exercise Price : RM1.350
Warrants Expiry Date : 11/9/2013
Premium : 62.3%
Gearing : 4.3
Underlying Historical Volatility : 46.5%
Warrant’s Implied Volatility : 32.6%
Delta : 0.56
Effective Gearing : 2.4

 

The warrant of IJM Land Berhad, formerly known as RB Land Holdings Berhad, (IJMLAND-WA) started trading last Tuesday on Bursa Malaysia when the stock market was suffering a severe drop. This warrant was issued free to subscribers of IJM Land’s recently completed rights issue at an issue price of RM1.35 on the basis of 4 rights shares and 2 free warrants for every 5 existing ordinary shares held.  At the last traded share price of 97 sen and warrant price of 22.5 sen, the subscriber of the rights issues is now suffering a big loss from the exercise.

IJM Land is the property development arm of IJM Corporation Berhad, the premier construction company in Malaysia. This property company was born out of a merger between RB Land and IJM Properties. According to media report, the merger of the two entities has created one of the largest property companies locally with landbank of 10,000 acres and other assets with total market value of RM 3 billion. IJM Properties owns 7,000 acres while RB Land has 3,000 acres. The total land has a potential gross development value (GDV) of more than RM 20 billion to be realised over the next 20 years.

The rights issue which was carried out recently by IJM Land is part of the rationalization exercise which was undertaken to consolidate IJM group’s property operations under the company to create a larger and stronger property-based listed entity with higher sustainable earnings base. At the same time, IJM Land also acquired the remaining 30% interest in RB Land from the vendor Reco Homebuilder (M) Sdn. Bhd. via the issuance of 80.5 million new shares. Following the completion of the rights issue and acquisition, the total paid up capital of IJM Land increased to just over 1.1 billion shares.

In the first quarter ended 30/6/2008, IJM Land reported net profit of RM8.1 million which is some 85% higher than RM4.4 million reported a year ago. After the rationalization exercise, IJM Land is expected to be much bigger in size and the group is expected to show much better performance for the year ended 2009 according to the notes accompanying the quarterly report.

According to the company’s announcement recently, the rights issue only attracted a subscription rate of 71.62%. As IJM Corporation held 69.96% in the company before the rights issue, there were virtually no other subscribers to the rights issue. This is understandable as the share price of IJM Land was trading below the rights issue price of RM1.35. As part of this rationalization exercise, IJM Corporation would subscribe for all unsubscribed rights shares with warrants not taken up by way of excess application. This has resulted IJM Corporation holding 76.5% of the company. This resulted in the company not meeting the public shareholding spread of 25%. IJM Land indicated would apply to Bursa Malaysia for the recognition of a percentage lower than 25% and for an extension of time to comply with its public shareholding spread requirement.

It is of interest to note that IJM Corporation rewarded its shareholders with free distribution of IJM Land warrants on the basis of 1 IJMLAND-WA for every 10 IJM Corporation shares.

IJMLAND-WA at 22.5 sen is trading at a premium of 62.3%. This appears to be expensive but from a trading perspective, IJMLAND-WA can be considered attractive as its implied volatility of 32.6% is lower compared with the mother share short term historical volatility of some 46.5%. However, implied volatility only measures the warrant’s attractiveness at the current underlying price. If the share price declines and sentiment remains depressed, trading in the warrant may not be profitable.

Alan Voon

Warrants Specialist

alan@warrantscapital.com

 

18/9/2008

 

This article is for information and education only.  It is not a recommendation to buy or sell any securities mentioned in the article. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.

 

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