Tenaga extends losses as funds buy KLCI-linked put warrants on weak sentiment

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KUALA LUMPUR (May 25): Negative sentiment on Tenaga Nasional Bhd has not subsided. The state-controlled utility's shares extended losses, dropping as much as 56 sen or 4% to RM13.14 before paring losses at afternoon market break.

Tenaga (fundamental: 1.3; valuation: 1.8) had fallen amid concerns the company may take over 1Malaysia Development Bhd's (1MDB) power-generation assets, according to remisiers. They also said
Tenaga had fallen in tandem with the FBM KLCI after hedge funds bought more index-linked put warrants.

At 12.30pm, Tenaga settled at RM13.22 with some eight million shares changing hands. Tenaga was the second-largest decliner across Bursa Malaysia.

Tenaga shares extended losses after falling 30 sen last Friday on speculation the company would take over the electricity-generation assets of 1MDB. Investigations on 1MDB's highly-publicised  financials are on-going.

Today, Tenaga shares' decline compared with the KLCI's 17.53 point or 1% drop at market break.

A remisier told theedgemarket.com that the drop in Tenaga shares could be due to hedge funds trading KLCI-linked put warrants heavily. The put warrant prices have an inverse correlation with the underlying index, hence, allowing investors to hedge against losses in the broader market today.

According to the remisier, Tenaga, being a KLCI component stock, was affected by the hedge funds' trading strategy.

He said "when the KLCI went down, hedge funds will trade more put warrants and when the KLCI rebounds, the put warrant (trades) will come down."

“The hedge funds are trying to trade (for a) profit," he said.

(Note: The Edge Research's fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)