Which warrant should I buy, Jaks-WB or Jaks-WC ?
I was approached with the above question many times. So, I decided to do a write-up.
Premium = (Warrant price + conversion price - mother price ) / mother price
Leverage = mother price / warrant price
|Number of Unit Issued||171 millions||540 millions|
When Jaks is RM0.70,
At RM0.425, Jaks-WB is trading at 9.3% premium and 165% leverage
At RM0.405, Jaks-WC is trading at 27.8% premium and 173% leverage
General Market behavior
Warrants normally will not be converted to mother shares unless they are trading at discounts which offers arbitrate opportunities.
Given the choice between 2 warrants of the same stock, retailers often do not care about the premium attached to the warrants. They are more interested in the warrant which they can buy more with the same amount of funds. In other words, the warrant which offers higher leverage.
What about Jaks-WB vs Jaks-WC ?
Both warrants offer about the same leverage (165% vs 173%)
It is a choice between lower premium of Jaks-WB and longer maturity of Jaks-WC.
Now let us consider the scenarios when Jaks is at RM1.00, RM1.50 and RM2.00
When Jaks is RM1.00,
With the same premium, Jaks-WB will be RM0.755 and Jaks-WC will be RM0.788.
Jaks-WC will be 4.4% higher than Jaks-WB. Though this is unlikely as Jaks-WC has higher conversion price than Jaks-WB, but acceptable as Jaks-WC has 2 years longer maturity than Jaks-WB. Nonetheless, investors are likely to shift to Jaks-WB which offers higher leverage yet lower premium. So, it is not likely for Jak-WC to trade above Jaks-WB.
When Jaks is RM1.50,
With the same premium, Jaks-WB will be 1.30 and Jaks-WC will be RM1.427.
Jaks-WC will be 9.8% higher than Jaks-WB. This is no longer likely as Jaks-WC merely offers a leverage of 105% over mother share and has a higher conversion price and premium than Jaks-WB. Even at RM1.30, Jaks-WC has a premium of 19.3% which is still higher than the 9.3% premium of Jaks-WB.
When Jaks is RM2.00,
With the same premium, Jaks-WB will be RM1.846 and Jaks-WC will be RM2.066.
I also found Jaks-WB unattractive at RM1.846 as it merely offers a leverage of 108%. Historically, Jaks-WB's lowest leverage was 125% which means Jaks-WB will trade at RM1.60. However, this is unlikely as it would be trading at 3% discount. Therefore, Jaks-WB at least will trade above RM1.66 with no or minimal premium.
I found Jaks-WC at RM2.066 impossible as the price is higher than the mother share. Using the same leverage of 125%, Jaks-WC will also trade at RM1.60 with 4.5% premium.
It seems that Jaks-WC is likely to trade on par with Jaks-WB for all of the above scenarios. Then, is Jaks-WC a better choice as it has longer maturity ?
We can't be sure until we consider the present situation where Jaks is only RM0.70.
It only takes Jaks to move to RM0.765 for Jaks-WB to be "In the Money", but it requires RM0.895 for Jaks-WC to be "in the money".
Jaks-WC does not have much leverage advantage over Jaks-WB but it has 2 extra years of tenure.
Hence, the consideration here is really whether the longer maturity of Jaks-WC is worth the extra 18.5% premium over Jaks-WB.
Considering Jaks-WB still has 3 remaining years before maturity, it is sufficiently long dated to witness Jaks power plant going into full earnings potentials. The low "in the money" target price of RM0.765 for Jak-WB makes it a safer choice over Jaks-WC.
Therefore, Jaks-WB is a safer choice in my opinion. Personally, I prefer mother share.
Disclaimer : This article is purely for information and opinion sharing purposes. You should not make your decision based on the writing. You are strongly advised to seek independent verification and advice.