NAGA Warrants 2016 November Issuance

Transcription

1 2016 November Issuance Heightened Volatility Ahead By Lawrence Yeo Eng Chien l lawrenceyeo@kenanga.com.my Donald Trump s victory in the US Presidential Elections came as a massive shock to the investment community. As the election results unravelled during the Asian trading hours last week, the Dow Jones Industrial Average futures plunged as much 800 points at its worst. Still more unexpectedly, the DJIA staged a near-identical post-brexit rebound the very same day, totally against the majority of economists predictions of steeper market losses and protracted dollar weakness. As the market attempts to make sense of a Trump presidency, expectations are rife that Donald Trump will scrap the TPPA given his stance on trade protectionism. Increasingly apparent to investors, the Malaysian economy will be at the losing end of this notion, as evidenced by the FBMKLCI s point drop over the past four trading days. Amid the uncertainty, the FBMKLCI s 30-day average volatility has spiked to 7.7% from a two-year low of 5.6% at the start of the month. Sentiment is fragile and we believe that the heightened volatility environment is likely to remain in the months ahead. Nevertheless, this also means that there will be increased trading opportunities for short-term investors who wish to gain an exposure through structured warrants. Structured Warrants Commentary In today s batch of Naga warrant issuances, Equity Derivatives is issuing 12 (Twelve) Structured Warrants, comprising of GENM-C18 (strike: RM5.00), HARTA-CU (strike: RM5.00), IHH-C2 (strike: RM6.70), INARI-CW (strike: RM3.50), MPI-CE (strike: RM8.10), MYEG-C6 (strike: RM2.60), SKPETROC34 (RM1.80), SUPERMX-C21 (strike: RM2.30), TAANN-CH (strike: RM3.65), TOPGLOV-C10 (strike: RM5.00) TUNEPRO-CI (strike: RM1.70), UEMS-C37 (strike: RM1.20). All the warrants issued are European Styled Non-Collateralised Cash Settled Warrants with a tenure of 8 months. From this batch of Naga Warrant issuances, we like HARTA-CU, TOPGLOV-C10 and MYEG-C6, all of which our research team has OUTPERFORM call. Just last week, HARTA (OP, TP: RM5.33) announced 1H17 PATAMI which rose 3.5% YoY. While the earnings were in line with expectations, we took the opportunity to upgrade our target price from RM4.90 after rolling over our valuation base year from CY17E to CY18E. We expect near-term catalysts to include: (i) margin improvement from operating efficiency and better economies of scale, (ii) subsiding nitrile glove competition and more importantly, (iii) earnings to jump upon the gradual ramp-up of the Next Generation Integrated Glove Manufacturing Complex (NGV). Similarly, we expect TOPGLOV s (OP, TP: RM6.10) subsequent quarterly earnings to improve, driven by cost pass-through via hikes in ASPs, abating price competition and sustained demand for rubber gloves. Sustained weakness of the Ringgit is a near-term positive. And with ASPs already raised by USD0.20-USD0.30/1,000 pieces, which we expect will contain high operating costs and put the brakes on further margin compression in the quarters ahead. As for MYEG (TB, TP: RM2.80), the company is still gaining traction from its immigration-related services and we have projected the Group to register a 2-year NP CAGR of 36%. These 12 structured warrants are priced with a range of +/-13% moneyness. The gearing ranges from as low as 3.7x to as high as 10.7x and the conversion premium ranges from 14% to 36%. Call-warrants are leveraged instruments. For instance, by participating in TOPGLOV-C10, an investor is exposed to a gearing of 7.3x. To be more precise, this call warrant offer up to 4.2x effective gearing for investors. Based on our charting, we are projecting a short-term target of RM5.60 for TOPGLOV. This implies a potential upside objective of 14.3% based on a closing price of RM4.90. Theoretically speaking, a 14.3% increase in the underlying price to RM5.60 should translate to ~60% gain in TOPGLOV-C10. This general estimate is applicable to other Naga Warrants as well. Table 1: Warrant Parameters Name Time to Expiry % of Ratio Warrant Effective Conversion GENM-C18 8 months % % HARTA-CU 8 months % % IHH-C2 8 months % % INARI-CW 8 months % % MPI-CE 8 months % % MYEG-C6 8 months % % * Note that the share prices are on a closing basis. Data is as at EOD. PP7004/02/2013(031762) Page 1 of 5

2 Table 2: Warrants Parameters (Continued) Name Time to Expiry % of Ratio Warrant Effective Conversion SKPETROC34 8 months % % SUPERMX-C21 8 months % % TAANN-CH 8 months % % TOPGLOV-C10 8 months % % TUNEPRO-CI 8 months % % UEMS-C37 8 months % % Daily Charting Hartalega Holdings Bhd (HARTA) Name : Hartalega Holdings Bhd : HARTA R2 : RM 5.66 (78.6% Fib Retracement) R1 : RM 5.25 (61.8% Fib Retracement) Closing : RM 4.81 S1: : RM 4.70 (38.2% Fib Retracement) S2: : RM 4.54 (Nov reaction low) Theoretical Warrants (HARTA-CU) TWR 2 : RM0.265 TWR 1 : RM0.21 TWS 1 : RM0.135 TWS 2 : RM0.11 Earlier in the year, HARTA s share price retreated from a high of RM6.12 to as low as RM3.81 (May) before bottoming out. The share price has since retraced 50% of its declines and is now trading within a short to medium term uptrend channel. At yesterday s closing price of RM4.81, HARTA is firmly above all three major SMAs while the MACD has maintained a healthy uptrend. Unless the RM4.54 support is violated, investors can expect bias to be on the upside from here. Immediate resistances to target are RM5.25 (R1) where the channel resistance coincides with the 61.8% Fibonacci Retracement level and RM5.66 (R2) further up. Downside support levels are RM4.70 (S1) and the aforementioned RM4.54 (S2) below. PP7004/02/2013(031762) Page 2 of 5

3 Daily Charting My E.G. Services Bhd (MYEG) Name : My E.G. Services Bhd : MYEG R2 : RM 2.73 (Channel Resistance) R1 : RM 2.50 (October High) Closing : RM 2.30 S1: : RM 2.20 (November Low) S2: : RM 2.10 (August Low) Theoretical Warrants (MYEG-C6) TWR 2 : RM0.22 TWR 1 : RM0.17 TWS 1 : RM0.105 TWS 2 : RM0.085 Daily Charting Ta Ann Holdings Bhd (TAANN) Having drifted lower for the 1 st half of the year, MYEG s share price finally broke out if its downtrend in August (RM2.10). This was promptly followed by a Golden Crossover from the 20- and 50- day SMAs, while the share price has managed to sustain a health uptrend over the subsequent four months. Recent bout of profit taking (last 2 weeks) has weakened the momentum, although MYEG s share price is still biased to the upside for now. From here, investors can expect a retest of last month s high of RM2.50 (R1). Should this level be taken out next, MYEG would then have a clear path towards RM2.73 (R2) next. Downside support is pegged at RM2.20-RM2.25 (S1), although a break below would be highly negative. Name : Ta Ann Holdings Bhd : TAANN R2 : RM 3.95 (50% Fib Retracement) R1 : RM 3.75 (38.2% Fib Retracement) Closing : RM 3.74 S1: : RM 3.55 (Resistance-turnedsupport) S2: : RM 3.45 (Triangle Support) Theoretical Warrants (TAANN-CH) TWR 2 : RM0.215 TWR 1 : RM0.185 TWS 1 : RM0.155 TWS 2 : RM0.14 Since bottoming out in June (RM3.10), TAANN s share price had recovered to as high as 3.69 (Aug) before being stuck within a narrowing range over the subsequent months. Last week however, the share price finally broke out of this narrowing range to confirm a Symmetrical Triangle pattern. The MACD has also hooked upwards to reflect a shift to bullish momentum. From here, investors can expect TAANN to commence a new leg up towards RM4.00 (Symmetrical Triangle measurement objective). In between, resistance levels to look out for are RM3.75 (R1) and RM3.95 (R2). Immediate support is likely to be present at the RM3.55/3.60 (S1) resistance-turned-support, failing which RM3.45 (S2) is next. PP7004/02/2013(031762) Page 3 of 5

4 Daily Charting Top Glove Corporation Bhd (TOPGLOV) Name : Top Glove Corporation Bhd : TOPGLOV R2 : RM 5.60 (50% Fib Retracement) R1 : RM 5.25 (38.2% Fib Retracement) Closing : RM 5.10 S1: : RM 4.85 (50-day SMA/23.6% FR) S2: : RM 4.45 (Aug/Sept Support-turned- Resistance) Theoretical Warrants (TOPGLOV-C10) TWR 2 : RM0.24 TWR 1 : RM0.195 TWS 1 : RM0.145 TWS 2 : RM0.09 Recent USD strength has attracted some buying interest in TOPGLOV, resulting in the share price now trading close to 6-month highs. TOPGLOV is now in the midst of retesting the key RM (R1) confluence of resistance levels. Some profittaking activities can already be felt at these levels. Nevertheless, TOPGLOV s technical picture is positive over the short to medium term and the MACD is also on a rising trend. Hence, investors can expect bias to be on the upside. Should the RM resistance be taken out, further gains would then be expected towards RM5.60 (R2) and RM5.95 (R3) further up. Downside support is located at RM4.85 (S1) where investors may bargain hunt. Failing which, RM4.45 (S2) is next. This section is intentionally left blank PP7004/02/2013(031762) Page 4 of 5

5 Glossary The additional exposure gained on the underlying by purchasing warrants. = Underlying price Warrant price x ratio Example, gearing of a warrant is 10x, it means using the same amount of capital, you will have 10 times more exposure than if you purchased the underlying. To estimate the increase / decrease in the warrant price relative to the underlying price, we should look at effective gearing. Implied Volatility The most important indicator when assessing a warrant. It refers to the estimate of future price volatility of a specified underlying asset and is used by the market as an indicator to decide whether a warrant is cheap or expensive. All things being equal, the higher the expected volatility, the higher the warrant price. Effective Effective gearing reflects the relationship between changes in the warrant price and in the underlying price. Effective = x Delta Effective gearing of 10 times, other things being equal, means for every 1% change in underlying price, the warrant price moves by 10%. Delta Measures the theoretical movement in warrant price when the price of the underlying asset changes. Delta for Call Warrant lies between 0 and 1. Delta = Change in warrant price x ratio Change in the underlying price Example, a call warrant with an exercise ratio of 1, A delta of 0.50 implies that if the value of the underlying changes by 20 sen, then the value of the call warrant should change by 10 sen. difference between buying and exercising the warrant, compared to a direct purchase of the underlying asset. for Call warrant = [(Warrant price x ratio) + price] - Underlying price Underlying price Volatility The uncertainty in the movement of prices which will affect the return of an underlying. This document has been prepared for information purposes to our promoters only and does not constitute a recommendation for investing in our Structured Warrants nor does it constitute an offering for our Structured Warrants. Investors should read the Base Prospectus, Supplementary Base Prospectus and the relevant term sheets before making your investment decision. Any view, opinion or representation in this document cannot be relied upon to form the basis of your customer s or your investment decision making and we would not be responsible for any loss, expense or cost incurred whether directly or indirectly. Investors should rely on your own evaluation to assess the merits and risks of the structured warrants and if in any doubt when considering the structured warrants, investors should seek professional advice. You are warned that the price of the underlying financial instruments and Structured Warrants may fall in value as rapidly as it may rise and you may sustain a total loss of your investment. Published and printed by: KENANGA INVESTMENT BANK BERHAD (15678-H) 8th Floor, Kenanga International, Jalan Sultan Ismail, Kuala Lumpur, Malaysia Telephone: (603) Facsimile: (603) Website: Chan Ken Yew Head of Research PP7004/02/2013(031762) Page 5 of 5