Warrants Update: Cheaper bet on an AirAsia lift-off

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This article first appeared in Capital, The Edge Malaysia Weekly, on January 16 - 22, 2017.

CLOSING at RM2.16 last Monday, AirAsia Bhd shares had fallen 33.5% from their 52-week high of RM3.25 in mid August last year. On Jan 11, however, the counter added 19 sen, or 8.7%, to close at RM2.38.

Seventeen of the 22 analysts tracking it have a “buy” call, three have “hold” calls and two others are saying “sell”. But even those with a “buy” call are split on how much the stock should be worth, with target prices ranging between UOB Kay Hian Research’s RM2.60 and CIMB Research’s RM4.15 apiece. Only the lowest price target of RM2.30 by JP Morgan was below the market price, Bloomberg data showed at the time of writing.

UOB Kay Hian, when upgrading the stock to a “buy” in a Jan 10 note, said the selldown on the ringgit’s depreciation from end-November was “excessive, given strong underlying demand, and that AirAsia has locked in the bulk of its fuel costs for 2017”.

As at 9M2016, AirAsia’s forward sales rose 48% year on year,” UOB Kay Hian said, adding that, “AirAsia is also one of the few airlines to demonstrate pricing power in 2016 with average fares having risen by 7% y-o-y as at 9M2016.”

In a Jan 5 note, Maybank-IB Research, which has a RM3.17 target price on AirAsia, told clients that it was “in the final stages of divesting its aircraft leasing unit to a third party” in a deal “purportedly to be priced at US$1 billion” and could “result in a hefty premium over its book value” as the ringgit to greenback exchange rate is now 4.50 compared with 3.40 to 3.60 when the unit was purchased.

Any bullishness on AirAsia could also lift the bevy of 14 cash-settled AirAsia structured warrants. Those trading at smaller premiums are AirAsia-C35 and AirAsia-C34, which are expiring in about a month’s time in mid and at end-February.

AirAsia-C47, which closed at 11.5 sen last Wednesday, has the longest expiry date of Oct 31, 2017. It has a 3:1 conversion ratio and a RM2.60 strike price, being UOB Kay Hian’s target price.

There is only 9.2% upside potential to UOB KayHian’s target price but 33.2% upside potential to Maybank IB’s RM3.17 target price from last Wednesday’s RM2.38 close.

If AirAsia rises to RM2.60, AirAsia-C47 should theoretically be worth nothing, assuming zero premium to the underlying securities but would be worth 50% more at 17.3 sen if continues to fetch a 20% premium.

If AirAsia can rise 33.2% to RM3.17, AirAsia-C47 would be worth 65% more at 19 sen at zero premium to the underlying stock but 157% more at 29.57 sen if it can fetch a 10% premium.