Tuesday, April 03, 2007

You Have Been Warned
New Covered Warrants

Genting-CD the new covered warrant went ballistic this morning to go from an issue price of 13 sen to a high of 43 sen on huge volume. Its issue price was just 13 sen, and you would need 50 ... repeat ... fifty of these to convert into ONE Genting share. The general public must learn quickly the importance of conversion ratio, and not just look at the very low absolute covered warrant price. Cry also no tears!!!

Assume mother share at RM40. You would be buying 50 x say 38 sen = RM19. RM19 plus you would then pay the conversion price of RM39 = RM58. Premium would be RM58/RM40 = 45%. Gearing would be RM40/RM19 = 2.1x

... my gawd, that is so unrealistic. The premium is high for a warrant maturing in 28th Sep 2007, but the worst thing is the gearing 2.1x. If mother share is at RM40, the fair value for this Genting-CD is only 20-22 sen, not anywhere near 40 sen!!! If you are really bullish on Genting, just buy Genting-CC or Genting-CB even, both have premiums of less than 15% and gearings of between 6-8x. Its like buying a Rolex at Sincere and a Rolex for RM200 at Petaling Street!

3 comments:

sopskysalat said...

Dali,

Can you explain how covered warrant issued by banks make money? Is it good to have the majority of the issues to be in hands of public?

I am still puzzle by how they make money except they sell the warrant to the public, just like an ipo after the floatation. Initially, they hold everything and eventually, they sell to the public. Thank You.

Salvatore_Dali said...

They make money by selling the warrant to public or institutions - the issue px is the premium and goes straight into their books as profits. Assuming they have a good hedging policy (access to shares), they can then mitigate their risks on a daily basis, either buying/selling shares or the covered warrants.
Suspiciously, when covereds are issued during bullish markets, it would not surprise me if they hold back a large block of the covereds only to be released later (of course placements could be done to spvs first).
Why then would other houses not issue covereds other than CIMB abd Ambank, no expertise and don't even know who to recruit, where to recruit, what hedging is ... some houses tried issuing covereds naked (no shares), lost like shit man... (remember Tenaga covereds).
Can hire me to set up the team la...

sopskysalat said...

Dali,

Thanks for the quick education!

Why would they hold back the shares during bullish market to what advantage will they gain. I guess this enables them to get a larger premium after the market had ran up so they can market make the wrt at a higher price.

Further, i remember you quoting genting warrant last year saying if the house is issuing call warrant, it is likely that they are neutral or bearish about future price movement. You did qualify that this may not be so if they had hedge the issue.