Friday, April 28, 2006

AirAsia & Tenaga Covered Warrants
Fairly Valued?

Covered warrants have been going great guns in HK and Singapore, and now is only starting to shift out of first gear in Malaysia. Both issues were brought to the market by CIMB. AirAsia's call warrants closed at 28.5 sen, a 6.5 sen premium over its offer price of 22 sen on a volume of 22.91 million. It opened at 23 sen and traded an intraday high of 31.5 sen. Tenaga's call warrants ended the day at 51.5 sen or 5.5 sen over its 46 sen offer price, after being traded at between 47 sen and 62 sen. A total of 8.99 million units changed hands.

At 28.5 sen, AirAsia-CW trades at a premium of 0.18 + 0.285 / 1.78 = 26%, with a gearing of 6.2x. The CW expires in October 2007. On such a healthy gearing, the CW can be termed as fairly to slightly undervalued. The danger is the short time to expiry of about 15 months. Investors should start discounting the premium they would want to pay as the time to expiry gets closer. Generally, avoid CWs with less than 6 months to expiry unless the premium is below 10% and gearing is still more than 3x. Just some useful rules of thumb.

As for Tenaga, the CW trades at a premium of 48 + (51.5 x 2) / 860 = 17.5%, with a gearing of 8.3x. The CW expires in October 2007 also. Naturally, the AirAsia-CW is more expensive, probably due to its higher beta (volatility). However, in my opinion, the Tenaga-CW is grossly undervalued, considering its gearing of 8.3x and an undemanding premium of 17.5%. Even if the share price does not budge from RM8.60, the covered warrant should trade closer to RM0.63 and not RM0.515. Coupled with the fact that it is a good "GLC revamp play" and chances for a tariff hike is quite inevitable within the forseeable future (probably after the fuel hike/subsidy removal protests have died down). Strong buy and medium term hold (for 8 months) on Tenaga-CW.

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