Wednesday, August 6, 2014

Keuro's warrants: Why 2 years exercise period

I have posted several times about the different traits of a Warrant here. There are cases where warrants act as a sweetener for the shareholders to subscribe to the rights. Warrants can also be used as a tool for companies to raise more funds - not immediate but within the exercise-able period. This is especially true when the warrants is in the money. Usually the exercise period for warrants in Malaysia is either 5 years or 10 years, hence allowing the shareholders time to exercise it.

If it is for the management and controlling shareholders tool as a play, they may issue the warrants to be used as a unit just for sale. Why would one have more dilution to their stocks if they do not meant to exercise it? In this cases, one can see that the warrants have very little value but since it is tradeable and usually it is low in price. Recently, with the trading charges so low, at every 0.5sen, the traders are already profiting. That's precisely what I was pointing at in one of the articles. If the warrants in the eyes of the shareholders is not worth the money, and they do not want to cough up more to pick up more shares, they usually sell. Let the fools have it, why not!

In the case of Keuro's warrants, I believe it is used as a sweetener as well as a tool to raise additional funds - funds that Keuro does not need now but over the next 2 years it will need. As most know Keuro is raising funds for its WCE project which is costing RM5.9 billion now. Usually, these projects the cash needed are not immediate but will be needed on progress over the next 4 -5 years of the project duration. This is precisely why the exercise period is 2 years and not 5 years as if it is 5 years, it may be too late to raise the cash anyway. In 5 years time, Keuro does not need the cash. It needs it earlier. This is also probably why the exercise price is put at a lower price - RM1.18, closer to the parent price.

Whether the warrants will be exercised will depend on whether it is in the money. As it is the exercise price is RM1.18. Today, Keuro's price RM1.10 where it is pretty close to the exercise price.

18 comments:

Piny Zone said...

hi felicity,

whats the price of the warrant will it be when we subscribe their rights? the OR seems to be at low price today hence its not attractive to sell it.

might be thinking of dumping more cash to get the rights. what do you think

felicity said...

this is very hard to answer. either you buy parent or Keuro-OR, I am not sure which is better. What I know is that at current price, both are pretty good price.

With OR, you get 1 for 2 warrants. If one has confidence on the warrants and share price, over the next 2 years, go ahead.

Malaysia Stock Talk said...

Let's say KEURO rise to RM1.50 in 2 years' time.

1) Buy mother share at RM1.10
Gain = (1.50 - 1.10) /1.10 = 36.4%

2) Keep/buy OR and subscribe
Cost = 1.08 + 0.18 = 1.26
Warrant price at expiry = 0.32
Gain = [1.50 + (0.5 x 0.32) - 1.26 ]/(1.26)
= 31.7%

Unless you think the mother share will be much higher than RM1.50 when the warrant expires in 2 years' time, it is cheaper to sell OR, switch to mother share. Also save the trouble of subscribing the rights shares.

paperplaneinc said...

Mother shr better

Alaunus koh said...

Logically the Keuro shld price the exercise of the Keuro warrant at 1.08. Same price as the rights issue. Guess the Keuro management is greedy.

felicity said...

Many companies actually price the warrant exercise price higher than the rights

Bn911 said...

Hi Felicity, mind to share your tips in buying Keuro's share, will u think it is wise to top up slowly (dollar cost averaging) this share until project completed? Thanks.

felicity said...

Hi Bn911

I have many postings on Keuro. I think the parties involved and building the highway is the right party although I am being critical of how some of the properties are transferred over.

I will just give you a scenario. If you are a construction company with projects come and go, what would a typical company like this do? They will go into projects that have sustainable income for many years. This however comes with a catch - you will need to build it yourself, find the funding yourself, operate it. Would you do it? No income for the next 5 years though. But the income will flow over the next 50 years.

Now the next step, is to look at the potential. WCE is the second longest highway in Malaysia - PLUS being the longest. It is in the west part of Malaysia, higher traffic than anywhere else with PLUS as the competition. Then, they have one of the larger property project being Rimbayu with very low costs. Recently, many developers have been concentrating on buying land in those areas - name it Tropicana, Gamuda, Mah Sing, Eco World.

One thing though, if one is looking for quick return, this is not the stock.

Piny Zone said...

felicity, so did you sold you KEURO-OR and exchanged to mother share or you prefer to keep it and pay extra to subscribe it?

felicity said...

I am staying put

Bn911 said...

Hi Felicity,let say BN lost and Pakatan won in coming election, will u think it will affect Keuro since Pakatan want to provide free highway to Malaysians?
Thanks a lot.

felicity said...

I don't think politics have impact to contracts. Any government will fulfil contractual obligations

Piny Zone said...

felicity,

I still haven't receive my letter regarding the purchased of rights. do I have to contact my reminder or just patiently wait them to send me the letter to subscribe the rights?

felicity said...

I have yet to receive as well. You can call your remisier or dealer rep.

Piny Zone said...

just got called by cimb reminser, they will email me the steps.

Piny Zone said...

Hi Felicity,

Do you know when will the warrant be listed and what's the exercise price of the warrant? Seems like I cant find any information about it online.

felicity said...

The Warrant exercise price is RM1.18. I think it will be listed on 3 Sep

Piny Zone said...

Felicity, base on current KEURO asset and projects on hand, how much do you think KEURO worth in paper price?

It seems undervalued a lot base on all the projects they have on hand now.