The first two days of trading saw IJM-CC pick up two sen to close last Friday at 28 sen, from its issue price of 26 sen, with 260,000 units traded. IOICORP-CK also finished higher, up 3.5 sen from its issue price to close at 29.5 sen, with 51,000 units exchanging hands.
Both SWs mature on Nov 26, 2010. Thus, if the economy recovers by 2010 as some economists have predicted, both IJM-CC and IOICORP-CK may prove a profitable investment option as they offer leverage on further recovery of the stock market.
IJM-CC and IOICORP-CK are both cash-settled European-style warrants, which means they can only be exercised on the expiry date with cash settlement from the issuer. The issue size of the two SWs is 120 million units and 125 million units respectively.
A closer look at the two SWs show that there may be a lot of optimism frontloaded into the price of the underlying shares.
With an exercise ratio of six warrants per IJM Corp share and a strike price of RM5.40, IJM-CC is currently trading at a premium of 25.3% to its underlying share, based on last Friday’s closing price of 28 sen per warrant and RM5.65 per IJM Corp share.
In other words, the breakeven level for IJM-CC, based on Friday’s closing price, would be when the underlying share rises to RM7.08 (28 sen multiply by six, plus the exercise price of RM5.40). But can IJM Corp’s share price go beyond RM7.08?
IJM Corp’s 52-week average, according to Bloomberg, came in at RM4.152, while the stock last peaked above RM7.08 more than a year ago on Feb 21, 2008, before the bull run ended in March. In other words, the current pricing of IJM-CC indicates an expectation that the mother share will go on a full-out bull run come November 2010.
Analysts’ consensus, as polled by Bloomberg, has a “buy” call on IJM Corp, but they have priced it fairly at RM5.78 per share. It remains to be seen whether a recovering economy will send IJM Corp’s share price back to its bull-market levels by November 2010.
In the case of IOICORP-CK, its settlement at maturity will be determined by an exercise ratio of five warrants per IOI Corp share, plus an exercise price of RM4.48.
At its closing price of 29.5 sen last Friday, IOICORP-CK was trading at a 31.7% premium to its underlying share, which closed at RM4.52. The SW will break even when the mother share rises to RM5.955.
Warrant holders will be happy to know that IOI Corp’s share price traded above RM6 less than a year ago. It hit RM6.10 on July 17, 2008. Its 52-week average price, however, is RM4.464.
Bloomberg’s research consensus has an overwhelming “sell” call on the stock, with a target price of RM4.21.
IOI Corp’s results for its 3QFY2009 ended March 31 showed that the plantation company’s earnings had dropped a whopping 93.79% y-o-y to RM37.36 million, from RM601.64 million the previous corresponding quarter.
The biggest contributor to its losses came from foreign exchange translation owing to a weaker ringgit, which saw the company take a RM301.8 million hit in 3QFY2009, of which 23% (RM69.4 million) was realised.
Although better crude palm oil prospects should help the company recover, the chances of IOI Corp hitting the RM5.955 mark by November 2010 will largely hinge on the recovery of the economy as well as improved investor sentiment.
This article appeared in the Capital page of The Edge Malaysia, Issue 757, June 1-7, 2009.