Johotin: Warrant Price Movement Shows The Way

When a security performs contrary to your expectation, it is worthwhile to take a closer look. This rule applies to a selective few situations; one of which is prices of expiring warrants and their mother shares normally decline as the expiry date approaches.

Market Observation

In the past 6 days, Johotin-WA has been going higher. It climbed off its low at RM0.40 on October 25 to trade now at RM0.51. The share price has also climbed off its low at RM1.30 to at RM1.41 now. At these prices, Johotin-WA is trading at a discount of 5 sen or 3.87%. The warrant has an exercise price of RM0.85 and is due to expire on November 21, 2017.

The rebound in the share & warrant prices could be driven by some incentives announced in the recent budget. That does not change the underlying dynamic of warrant-holders selling off and/or shareholders engaging in "negative" arbitraging activities - selling the shares & buying the warrants - that creates a negative vicious cycle.

Recent Financial Result

Johotin's latest quarterly result is for the QE30/6/2017. Its next result for QE30/9/2017 should be out in late Nivember.

For QE30/6/2017, Johotin's net profit dropped 33% q-o-q or 26% y-o-y to RM6.9 million while revenue rose 20% q-o-q or 7% y-o-y to RM123 million. Johotin's PBT dropped q-o-q due to lower PBT from tin manufacturing segment - decreased from RM6.27 million to RM4.13 million - mainly due to one-time gain on disposal of machinery, and lower PBT from F&B segment - decreased from RM7.8 million to RM5.1 million - mainly due to allowance for doubtful debts in the current quarter. If these "negative" development did not happen, its profit would be maintained.


Table: Johotin's last 8 quarters' P&L


Graph: Johotin's last 31 quarters' P&L

Financial Position

As at 30/6/2017, Johotin's financial position is deemed acceptable, with high current ratio at 2.1x but elevated gearing ratio at 1.0x.

Valuation

Johotin (closed at RM1.41 as at 3.30pm) is trading at a trailing PER of 10.4x (based on last 4 quarters' EPS of 13.56 sen). Based on earnings CAGR of 45% for the past 2 years, Johotin is deemed fairly attractive.

Technical Outlook

Johotin's recent price decline has given out a negative technical outlook for the stock. It should have good support at RM1.20-1.30. The share price drop was probably due to the decline in its earning, which was brought on by non-recurring losses or write-off.


Chart 1: Johotin's monthly chart as at Nov 1,2017_3.30pm (Source: Malaysiastock.biz)  

You can see Johotin-WA prices have hooked up thsi week.


Chart 2: Johotin-WA's weekly chart as at Nov 1,2017_3.30pm (Source: Malaysiastock.biz)  

Conclusion

Based on good financial performance & position, attractive valuation and bullish market observation, I believe Johotin is a good stock to consider for long-term investment.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.