Strong surge by covered warrants

  • Business
  • Tuesday, 19 Aug 2003


THE covered warrants in three of the KLSE's largest companies issued by Khazanah Nasional Bhd have surged spectacularly since their Aug 4 debut but some analysts are now becoming more cautious as the covered warrants have surpassed earlier pegged fair values. 

“Investors ought to exercise some caution when considering investing in these three covered warrants. They are at least 20% higher than my fair value,'' said the head of research from a local stockbroking house. 

“Furthermore, the prices of the underlying securities are still below the exercise price of the warrants,'' he added. 

Khazanah had offered 31 million packages of covered warrants consisting of four MALAYAN BANKING BHD (Maybank) covered warrants, one Malaysia International Shipping Corp Bhd (MISC) covered warrant and one Tenaga Nasional Bhd (TNB) covered warrant. 

Covered warrants, which are also call warrants, are convertible into existing shares at a specified price, compared with normal warrants which involve the issue of new shares at a pre-determined price. 

The performance of the covered warrants has surpassed almost everybody's expectations since they were listed on the KLSE two weeks ago and have provided more than solid returns to the original owners when they were first offered by Khazanah. 

The biggest gainer among the three covered warrants is undoubtedly the MISC covered warrant (MISC-CW) which has more than doubled in value since its listing. The warrant has soared nearly 200% to RM2.02, against its retail reference price of 68 sen. 

TNB covered warrant (TNB-CW) gained 43% to RM1.81 against its retail reference price of RM1.27, while the Maybank covered warrant (Maybank-CW) has risen 61% to RM1.83 against its retail reference price of RM1.14 yesterday. 

As for the underlying securities, MISC closed at RM8.30 and TNB at RM8.95. Maybank was last traded at RM8.90. 

The exercise price for MISC-CW is RM8.42, TNB-CW RM9.95 and Maybank-CW RM9.72. 

An investor who bought a Maybank-CW at RM1.83 yesterday will only break even when Maybank's share price hits RM11.55. The breakeven price for the MISC and TNB covered warrants at yesterday's closing prices are RM10.44 and RM11.76, respectively. 

Some analysts are puzzled by the stellar performance of the warrants, which they attribute to the small number issued. There are 31 million units each of MISC-CW and TNB-CW, and 124 million units of Maybank-CW. 

“Warrant prices could easily swing given such small number of units available,'' said a dealer.  

Nonetheless, the three covered warrants have come in useful as a hedging tool for fund managers in the current bullish market sentiment which had enjoyed a sharp upturn over the past three months, said analysts. 

They also offer investors a “cheaper” exposure to the three heavyweight stocks. 

“It's like a small price for a big exposure (to heavyweight stocks),'' said OSK Research assistant general manager Pankaj Kumar. 

Another factor for the strong demand for the covered warrants is their nature as a hedging tool since the investment risk is limited to the effective cost of purchasing the warrants, said a fund manager. 

The return on the warrants, which expire on Jan 28, 2008 (4½ years from now), could be lucrative as the warrant prices would gain in tandem with the share prices should the bullish sentiment continue, he added. 

Some analysts have long maintained that the prices of those three heavyweight stocks would have to be significantly higher from where they are now for the KLSE Composite Index to ever reach the 1,000-point level again. 

The warrant holders can exercise the option to buy the underlying securities at the fixed price any time before the expiry period. 

Dealers note that institutional investors, who might have failed to subscribe to Khazanah's original covered warrants, were snapping up the warrants in the open market as they allow cheaper entry for the heavyweight blue chips.  

For latest KLSE indices and other information click here

 Stock Watch On MAYBANK Stock Watch On MISC Stock Watch On TENAGA

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