VSolar-WA: To hold, to sell or to convert?

Today, we saw Pesona gained 4 sen to RM0.925 while Pesona-WC was unchanged at RM0.50. The discount for the warrant has widened to 24.3%. This matches the discount for VSolar-WA, which closed at RM0.145 while the share closed at RM0.35. The exercise price for VSolar-WA is RM0.12 and the warrant 's expiry is in December 2017.

Let's take a close look at VSolar & its warrant's price movement over the past 1 month. The movement in these share & warrant may hold a clue as to how Pesona & its warrant may perform in the near future.


Chart 1: VSolar's daily chart as at Apr 20, 2015_ (Source: ShareInvestor.com)

 
Chart 2: VSolar-WA's daily chart as at Apr 20, 2015_ (Source: ShareInvestor.com) 

Let's assume that you had 10000 VSolar-WA purchased earlier at lower prices, say RM0.05. When the warrant closed at its highest (closing) price of RM0.18 on April 6, the share (closing) price was at RM0.31. If you have chosen to convert the warrant on that day, you would receive the share today (10 business days later) and you would have a chance to sell at RM0.345. However at the time of exercising the option to convert, you wouldn't know what the share price would be like today. It could stay at RM0.31 or it could be higher or lower than RM0.31. You would be taking a gamble to convert to earn the extra 1 sen (assuming the share price stays at RM0.31 - [warrant price of RM0.18 + exercise price of RM0.12]). It would be logical that if you had wanted to take profit, you would sell the warrants straight away. However, you could have chosen to ride with stock as it goes higher.

Strangely, while the stock continued to go higher after April 6, the warrant began to drift downward. On April 14, the gap had widened to RM0.205- with share price at RM0.36 while warrant price at RM0.155. Still we can see warrant holders who chose to sell instead of converting their warrants to shares. Their logic is that the risk is high and if the share price were to drop, you could end up with a loss. Some of the warrant holders may have decided otherwise and opted to convert and they would be getting their shares soon. This enlarged shares outstanding would put selling pressure on the share prices going forward.

Let's look back at the choice made by warrant holders who sold on April 14. They did it because they were worried that the share prices may drop. But, if the stock is really "good", shouldn't the insiders be buying when the warrants were trading at a discount. You may ask, How do you know that the insiders did not buy when the warrants were and still are trading at a discount. Only the insiders would know whether they are buying or not; who had converted their warrants; & how many warrants had been converted to shares.

By logical deduction, you would know that the insiders did not buy or did not buy aggressively. If there is a mispricing in the market giving rise to an arbitrage situation, you can always expect the insiders to take advantage of the arbitrage situation. You can do so by selling your shares in hand and buying the warrants & converting them to shares (which will be receivable in 10 days time). This action will close the gap which led in the glaring discount in the warrant.

It is also possible that insiders would also be warrant holders in addition to being shareholders. If that's the case, the incentive to convert the warrants would be too juicy to pass by. This would result in an increase in shares supply and downward adjustment in the share price relative to the warrant price. Over times, the discount in the warrant would vanish.

For VSolar & Pesona, this glaring discount in their warrants gives rise to serious concern. In my experience, such anomaly must correct itself quickly. Normally, this would lead to a nasty surprise. Thus I am always very cautious when I see a discount in a warrant.

Note:

In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Pesona & Pesona-WC as well as VSolar & VSolar-WA.