JAKS (4723) Jaks Resources: Is it worth subscribing to the warrants? kcchongnz




This article is subsequent to my previous article recently published in i3investor here,
https://klse.i3investor.com/blogs/kcchongnz/183371.jsp

On 5th November 2018, the following announcement was made by Jaks when its share price was trading at about 92 sen.

JAKS RESOURCES BERHAD
Type Announcement
Subject NEW ISSUE OF SECURITIES (CHAPTER 6 OF LISTING REQUIREMENTS)
FUND RAISING
Description JAKS RESOURCES BERHAD ("JRB" OR THE "COMPANY")
RENOUNCEABLE RIGHTS ISSUE OF UP TO 278,164,186 WARRANTS ("WARRANT(S)") IN JRB ON THE BASIS OF 1 WARRANT FOR EVERY 2 EXISTING ORDINARY SHARES IN JRB HELD AS AT 5.00 P.M. ON WEDNESDAY, 21 NOVEMBER 2018, AT AN ISSUE PRICE OF RM0.25 PER WARRANT ("RIGHTS ISSUE OF WARRANTS")
We refer to the circular dated 3 October 2018 (“Circular”) and the previous announcements in relation to the Rights Issue of Warrants. The terms used herein shall, unless the context otherwise stated, bear the same meaning as those defined in the Circular in relation to the Rights Issue of Warrants, where applicable.
On behalf of the Board, UOBKH wishes to announce the following:-
  1. the issue price of the Warrants has been fixed at RM0.25 per Warrant;
  2. the exercise price of the Warrants has been fixed at RM0.64 per Warrant; 
  3. the Entitlement Date has been fixed as at the close of business at 5.00 p.m. on 21 November 2018; and
  4. the Deed Poll has been duly executed on 5 November 2018.
The exercise price of RM0.64 per Warrant represents a discount of RM0.27 or approximately 29.67% to the 5-day VWAMP of JRB Shares up to and including 2 November 2018, being the last trading day of JRB Shares immediately preceding the price-fixing date, of RM0.91 per JRB Share. 

Basing on the above and the price of Jaks of 91 sen, the warrant was issued in-the-money at a prospective intrinsic value (IV) then of 27 sen (91-64). At a subscription price of 25 sen, the warrants were expected to be given at a discount of 2 sen, or 2.2%.
It appeared to be a real good deal as holders were given the warrant at a discount, for which they could sell it in the market after the exercise for a profit of 2.2%, of course provided the mother share price remains the same at 91 sen.
But nobody is so stupid to exercise the warrant as there is a 5 years of maturity period. This 5-year maturity period provides additional valuable time value for the proposed warrants, on top of the above IV.
In reality it isn’t a real deal as whatever the shareholders gain from the warrant, has to come out from somewhere, in this case, from the mother share itself. No free lunch.
The “discount” given to the warrants (with the 25 sen subscription) was also the reason why the Rights-to-Subscribe of the warrant, WR was traded with a price, started with 12 sen. Unfortunately, this “discount” was gone right away when the mother share price plunged from 92 sen from the announcement date to about 70 sen on 28th November 2018, and WR was traded at just half a sen before it expired.
Jaks’ share price retreated further and closed of 50 sen on 30th November 2018. What a steep fall from RM1.80+ in about 9 months ago.
The pertinent question is; what would be the likely price of the warrant, W, once it is listed? Is it a good idea to subscribe to the W?

Valuation of Jaks warrant, W
It is usually a good idea to have a feel of the value of something before paying a price for it.
The most common model for valuation of option such as a company warrant is the Black-Scholes Option Pricing Model (BSOPM).
Black-Scholes Option Pricing Model


Factors influencing and the pricing of warrants
The six major factors influencing the price of options are:
  1. underlying share price,
  2. exercise price,
  3. expected volatility of the underlying share,
  4. time to expiry,
  5. interest rate and
  6. dividends.

Warrants with high underlying share prices, low exercise prices of course would generally be higher priced as they are generally being or close to in-the-money. The more time to expiration, the greater the time value of the option. In general, investors are willing to pay a higher premium for more time, since time increases the likelihood that the position can become profitable. Time value decreases over time and decays to zero at expiration.

Volatility of the share price movement also command a higher warrant price as it has a higher chance that the underlying stock prices can go up higher, and hence the better payoff for the warrants. The volatility of the underlying share price plays a very big part in the pricing of its warrant.

High dividend yield for the underlying stock is a damper for warrant holders as they are not entitled to the payment, and dividend payment to the common shareholders diminishes the value of the company.

For more information about options and their pricing using the Black-Scholes Option Pricing Model, please refer to the appended link.
http://www.investopedia.com/university/options-pricing/

What is the theoretical price of Jaks warrants, W?
We will use the BSOPM to estimate the theoretical value of W.
Downloading the past one-year daily share prices of Jaks from Yahoo Finance from December 1st 2017 to November 30th 2018, and computing its daily return, and then the standard deviation of this daily return using the Excel function. Then multiply the daily return by the square root of 260 days, the number of trading days in a year, the annual standard deviation of return, or volatility is obtained as 46.5%.


With the underlying share price at 50 sen, exercise price of 64 sen, 5 years to maturity, and assumed no dividend, risk-free rate of 4% and a historical volatility of Jaks at 46.5% obtained above, the option value of W is 18.3 sen.
It may not be a good idea to subscribe to the warrant at 25 sen based on the above.
The most important factor in the OPM is the volatility, but the standard deviation used is the historical one, not the future one which is the relevant one. The assumption of volatility is also a constant one, which in reality is changing all the time. However, we really don’t know about the future. Assuming the future volatility of Jaks share price is 100%, the theoretical option value of W is 36 sen.
Then it is a good idea to subscribe to W at 25 sen. But bear in mind a volatility of 100% of the underlying share prices is pretty high..
The above may serve as a guide to investors of Jaks if it is advisable to subscribe to Jaks rights issues at 25 sen.
Happy investing.

KC at
ckc14invest@gmail.com

https://klse.i3investor.com/blogs/kcchongnz/184702.jsp