Published October 19, 2009

New company- issued warrants worth a second look

By R SIVANITHY

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OVER the past year or so, the local warrants segment has undergone a subtle but nonetheless significant metamorphosis. Right up until this time last year, it were structured warrants which dominated the landscape and nary was there a company-issued warrant in sight.

Since the bulk of present warrants was listed only over the past 12 months, time is therefore not as pressing an issue and several still have more than four years left before expiry.

Today, it is the latter that are thriving - at the latest count, there are an amazing 57 new company-issued warrants that are listed (59 if you add two impending additions from Baker Tech and Ntegrator) which offer investors leveraged exposure to numerous sectors.

Reasons for the decline in structured warrants were already outlined earlier last week (see 'Hock Lock Siew', BT, Oct 12, 'No time to lose in arresting decline of warrants'), but equally interesting is the rapid rise of the company-issued alternatives which, although not directly comparable to the structured variety, nevertheless possess attractive features that make them worthy of consideration.

For example, company warrants have much longer lifespans, ranging from three to five years for most. Since the bulk of present warrants was listed only over the past 12 months, time is therefore not as pressing an issue and several still have more than four years left before expiry.

Structured warrants, on the other hand, suffer from rapid time decay because of their limited lifespans, and those who fail to take this into account are sometimes wrong-footed when values suddenly deteriorate as expiration dates draw closer.

Moreover, the valuation of company warrants is arguably easier to understand - for instance, rarely does valuation entail use of volatility-based option-pricing models as is the case with structured instruments. Instead, traders tend to use more straightforward measurements such as conversion premium and gearing - the first a measure of how expensive or cheap a warrant is and the second an indicator of potential percentage gains for a given percentage move in the underling shares. These numbers are not difficult to understand and are even handily tabulated in BT's Bonds, Warrants and Extended Settlement table that is published daily.

Assuming a retail player was to be interested in capitalising on the slew of new warrants in the market and understood the basic concepts, how would he or she go about making suitable choices?

As always, the main consideration would be to have a view on how the underlying shares might perform in the future and where those shares are today relative to their past levels.

The selection process should also take into account preferred sectors - if, for example, one is positive on property, there is Soilbuild's 2012 warrant to consider; if the investor is looking for Reit play, there's Saizen Reit's 2012 warrant; while anyone keen on a heavy machinery/offshore marine play could do well to look at Tat Hong's 2013 warrant or KS Energy's 2011 warrant.

The only drawback - if it can be described as such - is that there are no warrants issued by top-tier blue chips such as the banks, SingTel, CapitaLand and Keppel Corp, or the property heavyweights. Instead, most companies which have issued warrants this past year as part of their fund-raising exercises can best be described as being in the second, or even third, line. This might make their warrants less appealing to the risk averse.

However, as long as investors are cognisant of the risks and do not overtrade, the outlook is encouraging, especially when one considers that going by past performance, the vast majority of new warrants tend to enjoy at least one major run during their lifespans.

Better yet, since many of those in current circulation are freshly listed and issued by companies with depressed share prices, and provided the much-publicised economic recovery really materialises in the months ahead, it stands to reason that the chances of making money from these instruments over the next couple of years is pretty high.