Warrants Update: As PRG Holdings rallies, PRG-WA catches up

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This article first appeared in Capital, The Edge Malaysia Weekly, on February 8 - 14, 2016.

PRG Holdings Bhd’s shares have been rallying over the last one year, riding the company’s diversification into the construction and property development business and its bread and butter webbing, yarn and furniture component businesses.

While PRG Holdings’ construction and property development business has yet to mature, it provides significant growth to group revenue and earnings.

Since launching its first property project, Picasso Residences, in late 2014, revenue from the real estate sector has more than tripled. As at Sept 30, 2015 (3QFY2015), revenue from the property and construction business was RM25.5 million, or almost 30% of group revenue.

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Due to the company’s diversification into construction and property development and the strong US dollar, which benefits exporters including PRG Holdings, its share price has doubled to RM1.14 since late August 2015.

In the nine months ended Sept 30, 2015, PRG Holdings’ net income grew by more than 11 times to RM2.8 million, from just RM250,000 in the previous corresponding period. Before venturing into real estate, PRG Holdings was a furniture webbing manufacturer.

PRG Holdings’ fruitful diversification has led to investor interest in the counter. The shares continued to rally this year, adding 22.6% since January. They closed at RM1.14 last Tuesday after hitting a 52-week high of RM1.15 earlier in the day.

The current share price of more than RM1 is at least 20% higher than the 80 sen target price set by Mercury Securities late last year.

However, investors planning to buy into PRG Holdings should do so with caution as the stock is trading at a high valuation of 33.5 times its historical earnings. By comparison, textile manufacturer Yong Tai Bhd is trading at about six times its historical earnings.

Nevertheless, for investors who missed the boat, the group’s warrant, PRG–WA, offers a cheaper option to play the counter. PRG–WA was trading at 34 sen as at last Tuesday. It has a conversion ratio of one share for every warrant held with a strike price of 75 sen each. It matures on July 6, 2019.

Based on PRG Holdings’ share price of RM1.14 last Tuesday, PRG–WA is trading at a discount of 4.4% to the mother share.

While PRG Holdings’ share price has surpassed the target price set by Mercury Securities, the warrant offers an alternative for those who believe that the stock and warrant can move higher due to strong earnings growth from both the property development and construction as well as webbing businesses.