YTLPower nearing its long-term uptrend line

On May 5th, I have posted about the rally in the share price of YTLPower (go here). This coincided with the issuance of a 10-year warrant on the basis of 1 warrant for every 3 shares held, at an exercise price of RM1.25 (or, at a discount of 48.8% to the 5-day weighted average market price of YTLPower share on price fixing date). The offer of such an attractive warrant created a sudden surge in demand for the stock, leading to a rally in YTLPower share price. I believe that the increased demand came mostly from retail players, who were either not aware of the adjustment in the share price after the entitlement has lapsed or thought that they could be safe due to the operation of the Bigger Fool Theory. Whatever it is, we have now passed the entitlement date & are witnessing an adjustment in the share price.

In my earlier post, I have attempted to value the share & the warrant and arrived at a theoretical ex-right value for the share of RM2.20 & an estimated warrant price of RM1.39 (which includes a conversion premium of 20%).

The right for this new warrant started trading in the market on May 21st. After 2 days of trading, that warrant right has dropped to RM0.65 as at yesterday. This valued the warrant at RM0.75 (i.e. the price of the warrant right plus the subscription cost of RM0.10 per warrant). The share has in turn dropped to RM2.15 as at yesterday. Those who bought 3 shares at RM2.66 on the last day of the entitlement (i.e. May 12th) would have suffered a setback of RM0.88 {[(2.15 x3) + 0.65] - [2.66 x 3]}.

Before we go any further, I must say that the trading of the warrant right for 5 business days, started on May 21st & ending on May 28th, is not a good gauge of the value of the warrant or the share. This trading of any entitlement right is intended for shareholders, who do not wish to subscribe for their entitlement, to dispose of their rights. In a quiet & volatile market (like now), there is a high probability that supply may overwhelm demand, leading to a drop in the warrant right price beyond its fair value. At some point, arbitraging would come into play, leading to a drop in the share price. Thus, a vicious circle would set in. Our interest is to ascertain whether the warrant right price or the share price had dropped to a level worth considering.

Assuming that a person were to buy 3 shares at RM2.66 (the closing price on the last cum date), he would be entitled to subscribe for 1 warrant at RM0.10. If he were to convert his warrant immediately to share by paying RM1.25, he would end up with 4 shares (original 3 shares plus the new 1 share) at a total cost of RM9.33 [(2.66 x 3) + 0.10 + 1.25]. Thus, his shares will cost RM2.33 apiece. Now, another person buying the 3 shares at the same time might choose to exercise his warrant conversion to share at the end of the 10-year maturity period. The net present value of the exercise price would be RM0.48 (based on a discount rate of 10%). As such, his 4 "shares" would cost RM8.56 [(2.66 x 3) + 0.10 + 0.48], or RM2.14 apiece. So, the theoretical value of the share could range from RM2.14 to RM2.33.

Based on this price range for the share, the value of warrant would be RM0.89-1.08 (without any conversion premium), or RM1.32-1.51 [with any conversion premium of 20% (say, RM0.43)]. The warrant right would then be trading at RM0.79-0.98 (without factoring in conversion premium).

As such, YTLPower share & the warrant right are fairly attractive at the present price of RM2.14 & RM0.685 (as at 9.30 am).

Finally, the long-term uptrend line support for YTLPower is at RM2.00. As such, the downside risk is not high.

Chart: YTLPower's monthly chart as at May 22, 2008 (source: Quickcharts)