Commerce-CB, Magnum-CB & KLK-CB- new CWs issued

Tomorrow, 3 new CWs will be traded. They are Commerce-CB, Magnum-CB & KLK-CB. For main terms & conditions as well as how they compared with the existing CWs of the same underlying share, go to Table 1 below.


Table 1: Commerce-CB, Magnum-CB & KLK-CB compared to the existing CWs of the same underlying shares.
Note: Warrant's price for the new CWs is the CWs' Issue Price

The 2 important things to note are as follows:

1. their price-fixing date was on January 25 (i.e. 9 days prior to their listing), and
   
2. their exercise ratio are higher than their existing counterpart.
   

Since the price-fixing date of January 25, the underlying shares have gained between 7 to 13% (7% for Magnum, 11% for Commerce & 13% for KLK). Obviously, those who subscribed for these CWs earlier would reap the reward of the improvement in the underlying share.

The high exercise ratio of these CWs would improve affordability but an 10-for-1 exercise ratio for a share trading in the RM10-20 bracket and an 4-for-1 exercise ratio for a share trading below RM5.00 is really pushing the limit. Are we likely to see a CW issued one day for Genting with an exercise ratio of 25-for-1? If you cannot afford to buy too many a high priced CW, then you should buy less. After all, one can buy in multiples of 100 units. This lowering of the price of CWs would only induce retail players to throw caution into the wind; the result of which is only too predictable.

I expect the new CWs to trade at premium of about 20%. At that premium and assuming the underlying share prices remained unchanged, Commerce-CA, Magnum-CB & KLK-CB would trade at about RM0.30, RM0.23 & RM0.55, respectively. See Table 2 below, for other possible value for these CWs.


Table 2: Potential value of Commerce-CB, Magnum-CB & KLK-CB at different premium level.

I believe that one must have a very good reason to buy any CW trading at premium above 10%. Take Commerce-CB as an example. If you buy 10 units of Commerce-CB at RM0.20 (i.e. at a premium of 10%), you are wagering that within the next 6 months Commerce share price would go up above RM11.00 (i.e. exercise price of RM9.00 plus [10 X RM0.20]). If that happens, you will only breakeven. Assuming, you pay RM0.30 per unit for the Commerce-CB, Commerce share price must go up to RM12.00 in order for you to breakeven. While nothing is certain in the stock market, the issuer feels confident enough to take the other side of that wager.