This article first appeared in Capital, The Edge Malaysia Weekly, on December 28, 2015 - January 4, 2016.

GD Express Carrier Bhd’s (GDEx) share price has staged a strong rally, gaining over 94% since late August to close at RM1.69 last Monday. The increase in buying interest could have been spurred by a decent set of earnings posted in late November as well as a one sen dividend per share that was announced after GDEx’s (fundamental: 2.55; valuation: 0.70) annual general meeting on Dec 2.

However, the company’s warrants, GD Express - WA, have not risen as quickly, gaining only 21.2% in the same period to close at RM1.43. With a strike price of 15 sen and a 1-for-1 conversion ratio, this values the warrants at a 6.5% discount to the mother share.

Notably, the warrants are close to expiry, with only 48 days left till they expire on Feb 7, 2016.

It is also important to note that GDEx’s dividends have not yet been disbursed, although the dilution will be small. Note that shareholders may also opt for a dividend reinvestment plan, which translates to a maximum 11 million new shares. The dividends should only dilute GDEx’s shares by a theoretical 0.59% ex-rights.

Although the warrants have relatively low leverage and little time value, there is some arbitrage. Buying the warrants, converting them, and selling the shares should net a 6.5% gain based on last Monday’s prices.

The only risk would be a drop in the share price between converting the warrants and having the new shares issued, which normally takes three days.

Meanwhile, the mother shares are trading at 8% below their all-time high price of RM1.82. This may imply that the upside for the underlying mother shares may be limited. Following GDEx’s latest set of financials (published on Nov 19) an RHB research report has a “buy” call on the counter with a RM1.73 target price.

RHB Investment Bank is the arranger for GDEx’s dividend reinvestment.

Recall that GDEx’s revenue in the quarter was up 17.66% year on year to RM51.47 million, thanks to higher express delivery volumes, while net profit grew 26.23% in the same period to RM6.29 million. Notably, profit before tax margins expanded by 1.1 percentage points y-o-y to 14% on the back of higher selling prices in the quarter.

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