NAGA Warrants 2016 Final Issuance

Transcription

1 NAGA Warrants 2016 Final Issuance Positioning for Year-end Window Dressing By the Kenanga Research Team l research@kenanga.com.my Unless the FBMKLCI miraculously climbs beyond the 1,692 mark next week, the local benchmark appears set to register its third consecutive year of decline. On last Friday, the FBMKLCI finished at 1,637.79, registering points YTD losses (or -3.2%). The recently concluded 3QCY16 corporate earnings season offered no reprieve to the local bourse, burdened further by the prospect of rising interest rates in the US luring funds away from the region in the quest for higher yields in US dollar-denominated assets. We have lowered our end-2016/17 target to 1,682/1,732 from 1,715/1,755 which reflects a downward revision to our FBMKLCI earnings growth estimates to -4.0%/6.0% (from 1.6%/7.2% earlier) post 3QCY16 earnings season (see Market Strategy report dated 2-Dec). That being said, the FBMKLCI is currently trading close to our ideal Buy On Weakness levels of <1,625. We believe that the underlying reward-to-risk ratio is getting attractive, and see the potential for three trading themes developing over the coming weeks; namely: (i) Oil & Gas sector could be a Dark Horse in the making underpinned by a rebound in crude oil prices (Brent crude: USD 54.50/ barrel), ii) year-end window dressing activities among the blue-chip counters, and iii) export-related counters given the Ringgit volatility. Structured Warrants Commentary In today s batch of Naga warrant issuances, Equity Derivatives is issuing 12 (Twelve) Structured Warrants, comprising of AXIATA-C16 (strike: RM4.50), CBIP-CD (strike: RM2.00), JCY-C1 (strike: RM0.55), KAREX-CS (strike: RM2.55), KOSSAN-CQ (strike: RM6.80), MISC-C9 (strike: RM7.50), MMCCORP-C5 (RM2.40), MYEG-C9 (strike: RM2.40), PCHEM-C10 (strike: RM7.10), POS-C6 (strike: RM4.00) SIME-C12 (strike: RM8.50), and WPRTS-CQ (strike: RM4.45). 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 see index components AXIATA-C16, PCHEM-C10 and SIME-C12 as trading candidates for the year-end window-dressing theme. Just last week, we published a company update on AXIATA (OP, TP: RM4.81), highlighting the company s plans to sell a minority stake in wholly-owned tower infrastructure unit edotco for up to USD600m proceeds of which could potentially fund its growth strategies within the Asian region. We also like AXIATA as a recovery-play, following the sharp drop these past two months. For SIME (MP, TP: RM8.20), 1Q17 earnings came in at 11% of our full-year forecast. Nevertheless, we expect a stronger contribution in the quarters ahead, with near-term catalysts being higher CPO prices and the delivery of the 1 st phase of the Battersea project. Meanwhile, investors looking for export plays can consider JCY-C1, KAREX-CS and KOSSAN-CQ. While we do not have active coverage on JCY and KAREX, both have a consensus HOLD rating with target prices of RM0.54 and RM2.56, respectively. For KOSSAN, although we have a Market Perform call on the stock, our target price of RM6.90 implies a 46 sen (7.1%) upside from Friday s closing price of RM6.44. Furthermore, investors can look forward to the new plant at Jalan Meru (Site 1) which is expected to be completed in the third quarter of 2017 and is capable of producing 3.0b pieces of gloves per annum. These 12 structured warrants are priced with a range of +/-7.1% moneyness. The gearing ranges from as low as 5.0x to as high as 13.1x and the conversion premium ranges from 11.2% to 27.2%. Call-warrants are leveraged instruments. For instance, by participating in KOSSAN-CQ, an investor is exposed to a gearing of 7.2x. To be more precise, this call warrant offer up to 4.0x effective gearing for investors. Based on our charting, we are projecting a short-term target of RM7.20 for KOSSAN. This implies a potential upside objective of 11.8% based on a closing price of RM6.44. Theoretically speaking, an 11.8% increase in the underlying price to RM7.20 should translate to ~47% gain in KOSSAN-CQ. This general estimate is applicable to other Naga Warrants as well. Table 1: Warrant Parameters Name Time to Expiry % of Ratio Warrant Effective Conversion AXIATA-C16 8 months % % CBIP-CD 8 months % % JCY-C1 8 months % % KAREX-CS 8 months % % KOSSAN-CQ 8 months % % MISC-C9 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 MMCCORP-C5 8 months % % MYEG-C9 8 months % % PCHEM-C10 8 months % % POS-C6 8 months % % SIME-C12 8 months % % WPRTS-CQ 8 months % % Daily Charting Axiata Group Bhd (AXIATA) Name : Axiata Group Bhd : AXIATA R2 : RM 5.00 (Psychological level) R1 : RM 4.83 (38.2% FR) Closing : RM 4.68* S1: : RM 4.40 (20-day SMA) S2: : RM 4.11 (Nov reaction low) Theoretical Warrants (AXIATA-C16) TWR 2 : RM0.275 TWR 1 : RM0.245 TWS 1 : RM0.17 TWS 2 : RM0.12 Since its RM5.99 high on 16-Aug, AXIATA s share price had retreated to as low as RM4.11 (29-Nov) within just 3 months. While the overall trend remains bearish, the momentum indicators show that selling momentum is tapering off note that the MACD and Stochastic indicators in particular have now breached above their respective downtrends. Furthermore, AXIATA s share price has staged a strong breakout above the downtrend line at RM4.60 (R1), and we believe that this will enhance further conviction among the bulls. Overhead resistances beyond R1 are RM4.83 (R1) and RM5.00 (R2) while downside support levels are RM4.40 (S1) and RM4.11 (S2). PP7004/02/2013(031762) Page 2 of 5

3 Daily Charting JCY International Bhd (JCY) Name : JCY International Bhd : JCY R2 : RM 0.58 (July-Aug resistance) R1 : RM 0.56 (November high) Closing : RM 0.525* S1: : RM 0.51 (4-month floor) S2: : RM 0.48 (Multi-year lows) Theoretical Warrants (JCY-C1) TWR 1 : RM0.195 TWS 2 : RM0.105 Daily Charting Karex Bhd (KAREX) JCY commenced its downtrend in March, and has since lost as much as 32.4% from RM0.755 (16- Apr) to RM0.51 at its worst (2-Sep). Nevertheless, the share price is now showing signs of bottoming out at RM0.51 (S1), evidenced by 3 separate rebounds from this support level in recent months. The MACD and RSI indicators have also begun to sport a rising trend since early September. Hence, investors may consider bargain hunting now with the view for a rebound towards overhead resistances RM0.565 (R1) and possibly RM0.58 (R2). Downside appears limited with solid floor at the aforementioned RM0.51 (S1), failing which, additional support should be present at the multiyear low of RM0.48 (S1). Name : Karex Bhd : KAREX R2 : RM 2.77 (Channel resistance/ 61.8% FR) R1 : RM 2.62 (November High/ 50% FR) Closing : RM 2.47* S1: : RM 2.40 (Channel support) S2: : RM 2.13 (June lows) Theoretical Warrants (KAREX-CS) TWR 1 : RM0.185 TWS 2 : RM0.09 Earlier in June, KAREX s share price bottomed out at RM2.13, and has since been trading in a choppy manner within an uptrend channel. However, any dips towards the channel support appear to be bought back up fairly quickly. More recently this month, the share price staged a sharp rebound after briefly notching a RM2.36 low. With the MACD now in a bullish crossover with the Signalline and RSI back on the climb, we expect bias to favour the upside from here. Immediate resistance levels to target are RM2.62 (R1) and RM2.77 (R2) while investors may consider buying on weakness closer to the RM2.40 (S1) support. PP7004/02/2013(031762) Page 3 of 5

4 Daily Charting Kossan Rubber Industries Bhd (KOSSAN) Name : Kossan Rubber Industries Bhd : KOSSAN R2 : RM 7.20 (Channel resistance) R1 : RM 7.00 (November highs) Closing : RM 6.44* S1: : RM 6.40 (Channel support) S2: : RM 6.20 (August low) Theoretical Warrants (KOSSAN-CQ) TWR 1 : RM0.195 TWS 2 : RM0.12 KOSSAN s share price has been trading within a mild uptrend channel which stretched back to March. Upcycles and downcycles were also more apparent which makes for a more visible trading band. Now with the share price hovering close to the channel support at RM6.40 (S1), some bargain hunting activities have begun to emerge. The Stochastic indicator has also hooked upwards from oversold levels to signal the likely start of the next upcycle. From here, we reckon that KOSSAN could rebound towards the recent highs of RM7.00 (R1), and then RM7.20 (R2) further up. Downside support is the abovementioned RM6.40 (S1) level, although a break below would be highly negative. 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