We inbox our followers this write up last week.
On 6th August 2018, Only World Group (OWG) announced a bonus issue of free warrants and immediately we look at the terms in the pdf file attached along with the announcement.
We found out that this scenario is somewhat similar to CCK Consolidated Holdings where a bonus issue on warrants were given out in the 2nd half of the year. The difference is that there weren’t any subdivision of shares for OWG.
The rationale of a buy call closely relates to how the share price would move prior to the announcement and the value of the warrants issued. The free warrants would be the major component that make or break this trade.
First, let us study the case for CCK.
Case Study: CCK Consolidated
On 11 April 2018, CCK proposed a subdivision of one to two shares and for every two subdivided shares, a free warrant would be issued.
The details are as follows: –
|Announcement of CCK free warrants date
||11 April 2018
|Announcement of CCK free warrants info (Further info)
||30 May 2018
||11 June 2018
|Warrants entitlement date
||13 June 2018
|Warrants exercise price
|Mother share price
The closing price a day before Exercise Date sees CCK trading at RM2.00. (8th June 2018)
On Ex-Date (11 June 2018), we see the prices adjust for CCK from RM 2.00 to RM0.955 to account for the change in number of shares and the free warrant.
The subdivision puts, CCK at RM 1.00 per share while the free warrants adjusted the price lower to RM 0.955. This meant that the theoretical value for the warrant sits at RM 0.09.
Here’s a illustration of what happened
|Closing Price (8th June 2018)
||1 to 2
|Theoretical Price Per Share
|But… Share Price after Ex-Date
(11 June 2018)
|2 Shares for 1 Warrant
|1 Warrant Theoretically Worth
Close to two weeks later, the warrant opened trading at RM 0.205 with a high of RM 0.305. This reflects that it is much higher than the theoretical reference price of RM 0.09.
For every 10,000 warrants owned, that translates into RM 1,150.00 worth of profits just by unlocking the value of the free warrant.
Strategy on OWG This Time Around
Looking towards CCK as reference, the strategy this time around is to buy OWG on weakness within this period and hold on to it until the exercise date for free warrants.
We expect more announcements to be made such as confirmation by Bursa’s end on approval to this round’s bonus issue. Announcements such as the ex-date and entitlement date of the free warrants would be announced as well in the coming weeks.
The chart below shows the movement for CCK from the announcement date where the share price peaked on the day it went Ex.
Indeed, the rise in such a short period of time is massive and we expect the same goes for OWG this time around.
It doesn’t really matter if the warrant’s exercise price is higher or lower than the mother share. The idea here is that the warrant would always trade out of the money with high levels of premium since the conversion is roughly 5 – 6 years later. It also makes complete sense for the company to price their perceived value higher in order to impress the shareholders after those warrants get listed.
Bear in mind that timing is important in this trade, on ex-date of the free warrants, we shall find a good price to sell the mother shares or immediately sell to the buyer at any quoted price at 9 am.
As for the entitled free warrants, as soon as the new warrants are listed on the board, find a good price to sell it and you shall be able to pocket in extra money without cost to sell it.
Above all, we wish to stress that this is not holy grail or sure-profit way, as the solid fundamental reason for share price to go up still depends on the growth of the business to generate more earnings or particularly the market condition in the coming weeks.
We are giving out this as we felt that we could mirror our trade once again given that the scenario proves to be almost similar. We act based on the logical reasoning behind this corporate announcement.
The idea here is that we are expecting OWG to behave like CCK in the coming weeks leading to ex-date for the bonus issue for warrants. The initial reaction already shown that the market likes the free warrant and OWG spiked 15% after the announcement was made.
It is possible that we see a rapid rise in price when the more announcements related to the bonus issue gets posted. But bear in mind that the goal is to profit the most from the free warrants.