A downside to the structured call warrants issued on IOI Corp Bhd could be that some analysts have turned bearish on the plantation giant’s near-term share price performance. Sixteen, or 59%, of the 27 analysts polled on Bloomberg have a “sell” on IOI Corp, versus seven who have a “buy”.

IOI Corp closed at RM4.74 last Thursday. Target prices for the seven brokers who are still bullish ranged from RM4.30 to RM6.08. Brokers who are bearish have target prices of between RM2.55 and RM4.40.
Maybank Investment Bank Research has the counter as its “top sell” in the plantations sector, valuing the stock at RM3.50 as it reckons crude palm oil (CPO) prices is “due for an imminent correction” in 2H2009.

AmResearch is more bullish on IOI Corp’s earnings, valuing the stock at RM5.25 apiece, based on 15 times its estimated 2009 plantations earnings. Similarly, RHB Research Institute on May 18 maintained its “outperform” recommendation, with a fair value of RM5.10, expecting stronger earnings for 4QFY2009, ending June 30. RHB noted that IOI Corp had sold forward close to 90% of its FY6/2009 crop at RM2,700 to RM2,800 per tonne.

The generic three-month CPO contract closed at RM2,493 last Thursday, off a recent high of RM2,735 on May 13.

There are three outstanding structured call warrants issued on IOI Corp. IOICorp-CI expires on Aug 3 while IOICorp-CJ expires on June 3, 2010, and newly listed IOICorp-CK expires on Nov 26, 2010.

Of the three, IOICorp-CJ is trading at the smallest premium to its underlying securities, at last Thursday’s prices. An investor would need eight IOICorp-CJ units to equal one mother share, with the strike price set at RM2.88.

At its 25.5 sen close last Thursday, IOICorp-CJ was trading at only an 18 sen, or 3.8%, premium to the mother shares, which means the warrant holder will only make money if the underlying securities are above RM4.92 (25.5 sen times eight, plus RM2.88 strike price), should the warrants be exercised.

But if one were to take the trading perspective, warrant holders could have made some money. From a low of 19 sen on April 29, IOICorp-CJ rose to 26.5 sen on May 25, adding 7.5 sen or 39.5% over three weeks. The underlying securities rose 66 sen or 16%, from RM4.10 to RM4.76. But that’s on hindsight. All three structured warrants hardly moved last week when the underlying securities gained 10 sen, or 2%, to RM4.74 last Thursday.

IOICorp-CI and IOICorp-CK have a five-to-one conversion ratio, with their strike prices set at RM5.50 and RM4.48 respectively. IOICorp-CI, which closed at 2.5 sen last Thursday, was trading at an 18.67% premium to the underlying securities. IOICorp-CK, which ended at 29.5 sen, was trading at a 25.6% premium.

Palm oil counters have climbed in recent weeks on expectations that demand for the commodity may increase due to news that the drought in Argentina, the largest exporter of soyabean oil, was the worst in 43 years. Soyabean oil and palm oil are substitutes.

IOI Corp’s share price has already gone up RM1.18, or 33.15%, year to date. The question is whether there are catalysts to spur the stock to rise further.

CIMB Research, which recently upgraded IOI Corp to “neutral”, with a higher target price of RM4.48 (from RM4.38) reckons IOI Corp will be among the stocks to benefit from higher weighting in the new FTSE Bursa Malaysia KLCI Index that is set to replace the existing bellwether Kuala Lumpur Composite Index (KLCI) on July 6.

CIMB, however, expects CPO prices to pull back in 3Q before recovering towards the year-end. If CIMB is proven right, and prices of plantation stocks — notably IOI Corp — retreat to a lower level, that could be a better time to consider these structured warrants.

This article appeared in Capital page of The Edge Malaysia, Issue 759, June 15-21, 2009