Warrants/Loan Stocks Update: IOI-CJ, KLK-CH draw interest

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Crude palm oil (CPO) prices climbed past the RM2,000 per tonne mark last Monday, giving plantation counters such as IOI Corp Bhd (IOI) and Kuala Lumpur Kepong Bhd (KLK) and the structured call warrants issued on these two stocks a boost.

The closing price of RM2,030 per tonne for CPO that day marked the highest price for the commodity year to date. It had been  trading at between RM1,000 and RM2,000 per tonne since October 2008. CPO’s three-month contract closed at RM1,990 per tonne last Friday.

Trading in IOI-CJ and KLK-CH, two American-style cash settled call warrants issued by OSK Investment Bank, picked up alongside the rise in CPO prices.

IOI-CJ expires on June 3, 2010, while KLK-CH expires on July 29, 2010.

IOI-CJ closed last Friday at 17.5 sen apiece, up one sen from the previous day’s close and 67% higher than its issue price of 10.5 sen at  its listing last December. The warrant’s exercise price has been set at RM2.88, with an exercise ratio of eight warrants for one IOI share.Based on IOI-CJ’s closing price of 17.5 sen last Friday, the break-even price is when IOI hits RM4.28 (eight warrants times 17.5 sen plus the strike price of RM2.88). IOI closed at RM3.98 last Friday, exceeding Bloomberg’s consensus target price for the stock of RM3.57.

Those who had purchased IOI-CJ at its issue price of 10.5 sen would make a decent profit from selling the warrant at its last traded price of 17.5 sen, representing a gain of 67%. It would make more sense for them to cash out of the warrant than exercise it, which would give lesser returns.

For instance, had warrant holders exercised IOI-CJ last Friday, they would have received a cash settlement of RM1.10 or 13.75 sen per warrant (RM1.10 divided by eight warrants). The profit would have been only 3.25 sen per warrant or about a 31% gain from the warrant’s issue price of 10.5 sen.

Trading in IOI-CJ has been active, with an average daily trading volume of 1.5 million warrants per day. Some 1.11 million units were traded last Friday.

Analysts expect IOI to benefit the most from any further uptick in CPO prices, due to the fact that the company has the highest production yields in the local oil palm plantation sector. Investors who are bullish about the plantation sector would favour IOI-CJ to leverage potential gains in IOI’s share price.

Interest in KLK-CH also picked up recently along with the rise in its mother share price. The warrant closed unchanged at 12.5 sen last Friday, up half sen from its issue price of 12 sen at its listing on Feb 4.

KLK-CH hit a high of 14.5 sen shortly after it was listed, but it surrendered the gains after KLK reported poorer-than-expected 1QFY2009 results. The plantation outfit reported a 60.5% drop in pre-tax profit on a yera on year basis, owing to writedowns, poorer retail earnings and realised foreign exchange losses. Nevertheless, KLK’s share price has recovered some 11.3% from its low of RM9.70 on March 3.

The exercise ratio of KLK-CH has been set at 20 warrants per KLK share, with a strike price of RM9.35. Based on the warrant’s closing price of 12.5 sen last Friday, the break-even price is when KLK’s stock hits RM11.85. KLK went up 10 sen to close at RM10.80 last Friday,  exceeding Bloomberg’s consensus target price of RM8.96.

KLK-CH’s average trading volume has been  thinner than that of IOI-CJ, with an average of 380,831 units traded since it was listed. The warrants saw thin trading last Friday with only 25,000 units exchanging hands.

This article appeared in The Edge Malaysia, Issue 748, March 30-April 5, 2009