Wednesday 16 September 2015

Option Pricing for Beginners


Option Pricing for Beginners

For a complete list of Beginners articles, see Financial Crisis for Beginners.
I’ve had two posts so far on the terms under which Treasury sold back to Old National the warrants on Old National stock that Treasury got in exchange for its TARP investment, so I thought it was time for an introduction to warrant/option pricing.
The warrants received by Treasury give Treasury the right to buy common stock in the issuing bank under predefined terms. Buying the stock is calledexercising the warrant. The warrant specifies how many shares Treasury can buy; the price that it must pay to buy them (the exercise price); and the term of the warrant, meaning how long Treasury has to decide whether or not it wants to exercise the warrant. If Treasury never exercises the warrant, then it expires and nothing happens. For our purposes, a warrant is the same as a call option; there are some differences I will ignore, which are outlined here.
Warrant terms
These warrants were part of the terms of the TARP Capital Purchase Program, which is what Treasury used to recapitalize banks last fall, starting in October. The warrants have value for Treasury – how much, I’ll get into later. Therefore, they make it possible for Treasury to be more generous with other terms of the transaction. Arguably, the warrants helped compensate for the fact that Treasury was buying preferred stock with a very low dividend yield – only 5%. There is no way that most banks would have been able to issue new preferred stock with only 5% dividends back in October-November. Probably the more important reason the warrants were mixed in was that they made it easier to justify the transaction politically; through the warrants, the taxpayer could “participate in the upside” if things went well, because if the stock price went up, the warrants would become more valuable.
As part of the Capital Purchase Program, banks had to give Treasury warrants on common stock equal in value to 15% of the amount of money invested. Treasury invested $100 million in Old National, so it needed warrants on $15 million worth of common stock. So it got warrants to buy 813,008 shares at an exercise price of $18.45; 813,008 * 18.45 = 15 million, or something very close to it. $18.45 represented the value of the common shares at the time of the investment. The idea is that the warrants were supposed to be “at the money;” if the stock went up, Treasury could exercise the warrants and make money; but if it went down, Treasury would get nothing (at least not from exercising the warrants). 
Actually, that isn’t quite accurate, for two reasons. First, according to the original term sheet, the exercise price was set not at the share price on the investment date itself, but as the average of the closing price for the twenty previous trading days; the idea here, which is common, is to protect both sides against day-to-day swings in stock prices. In Old National’s case, that would have been $16.35. However, in early April the Wall Street Journal reported that Treasury changed the terms to base the exercise price on the date that the bank’s application to participate in the CPP was approved, which was an earlier date. Because November-December was a period of falling bank stock prices, in the large majority of cases the change in dating had the effect of increasing the exercise price of the warrants, thereby reducing the value of the warrants to Treasury (because it would have to pay more for each share). In Old National’s case, it produced an exercise price of $18.45 instead of $16.35.
(Ilya Podolyako actually drafted a post about this at the time, but I chose not to publish it because I didn’t want to be hammering Treasury for every little thing they did that helped the banks. But I think it’s an important part of this story. Ilya also pointed out that when private companies do this kind of thing – setting the exercise price based on market prices in the past – it’s called backdating, and it’s illegal. My apologies to Ilya for not publishing the post then.)
Those warrants have a term of 10 years, meaning that Treasury has until 2018 to decide whether or not to exercise them. They also have an unusual “Reduction” feature, which says that if the bank raises more money than Treasury invested by the end of 2009, through sales of new common or perpetual preferred stock, half of the warrants will instantly evaporate. 
Warrant pricing
So how much are these things worth? On the date of the sale, Old National’s common shares were trading at $14.70 – $3.75 below the exercise price of the warrants. So if Treasury had done the crazy thing and exercised the warrants, it would have paid $18.45 for a share of stock worth $14.70, for a total loss of about $3 million.
However, the warrants themselves, like all options, always have some positive value, as long the term has not expired. You never have to exercise the warrants, so in no scenario will you be forced to lose money on them; and there is always some chance that the stock price will go above the exercise price, at which point you could exercise them and make money. The question is how much.
Conceptually speaking, you are trying to figure out the chances that the stock will someday be worth more than $18.45, times the profit you will make from exercising the warrants at that point. This clearly depends on the following parameters:
  • Exercise price: The higher the exercise price, the less likely your warrant is to make you money.
  • Current stock price: The higher the current price, the more likely you are to make money.
  • Time to maturity: The more time you have, the higher the chances that the stock price will climb above the exercise price.
And it depends on one more parameter: volatility or, roughly speaking, the tendency of the stock price to move up and down. In the case of Old National, the stock price has to go up by $3.75 (25.5%) before the warrant can be exercised at a profit; the more volatile the stock, the more likely this is.
Making some additional assumptions, like zero transaction costs and zero dividends, Fischer Black and Myron Scholes worked out a formula to calculate the value of an option from these parameters (and the risk-free interest rate, since you are looking at the future and money loses value over time), which is now known as the Black-Scholes formula, and has been described as the central pillar, for better or worse, of modern finance. (Nassim Taleb strongly disagrees.) I think I had to derive the formula in a micro class a long time ago, but my memory of that year is a bit fuzzy, perhaps because I met my wife in that class.
In any case, the formula incorporates this useful intuition: To calculate the value of an option, you only need to know the expected value of exercise on the maturity date. This is because, theoretically, that is the only day on which you should ever exercise an option. Even if your option is $10 “in the money” (market price exceeds exercise price by $10), there is always a little bit of extra option value, because the potential upside is infinite, and the potential downside is bounded by $10. 
Note that the formula says you can price an option without even having an opinion about the fundamental value of the underlying stock – all you need are its current price and its volatility. This is consistent with a general (though not necessarily correct) principle that stock markets always efficiently price assets, so any opinion you may have about the stock’s fundamental value is foolish.
Also note that the key assumption in the formula is that stock prices will move randomly with constant volatility, and the key parameter in the formula is volatility. The other inputs are basically observable (though not quite in the case of the risk-free rate), but volatility is not. You need to know the volatility of the stock price between now and the maturity date, but all you can see is its volatility in the past. This makes option pricing especially difficult right now, because stock price volatility has been much higher over the last eight months than over the previous eight years. (The chart is the implied volatility of the S&P 500 since 2000.)
VIX
So if you use the volatility over the last eight months, you will get a much higher warrant value than if you use the volatility over the last eight years. More fundamentally, using any volatility assumption based on past data falls into the trap of assuming that the future will be like the past. This is never a foolproof assumption, and the longer the timeframe you are looking at, the worse the assumption becomes. It usually may not matter a lot for typical short-dated options (30 days, 60 days, etc.) – unless the world changes during those 30 days – but it matters a lot for long-dated warrants, like the 10-year warrants that Treasury got.
Real stocks also pay dividends, and the higher the future dividends, the less your warrant will be worth – because those dividends essentially come out of the future stock price. So your formula has to have some estimate of what dividend payouts will be. Again, this is especially hard right now, because many banks – including Old National – have drastically cut their dividends recently, and it’s difficult to predict when they will go back to paying higher dividends. 
Finally, the “Reduction” feature of the TARP warrants throws another wrench into the works. To value the warrants, you have to take into account the fact that half of them could vanish if Old National raises $100 million by issuing stock before the end of the year; and as long as the warrants were outstanding, they had an incentive to raise that money. That involves making guesses about the overall funding climate, and the corporate strategy of Old National, neither of which can be statistically estimated.
So now you should know enough to understand the three key assumptions behind the estimates in Linus Wilson’s paper. (However, the Bloomberg story does not provide its option pricing assumptions.) You should also be able to follow the discussion over assumptions between q and Sandrew in the comments to my previous post, beginning here.
What should Treasury have done?
q, a regular commenter here, concludes that the price Treasury got is within the range of reasonableness, given his preferred set of assumptions. However, he also says (agreeing with Nemo) that Treasury should not have negotiated a sale to Old National, but should have simply held onto them until maturity (remember, you don’t want to exercise them early); if the real issue was restrictions placed on TARP money, the government could have rolled them back (for banks that bought back their preferred shares). Or, if Treasury didn’t want to hold onto them, they could have auctioned them off.
While these are economically superior to simply negotiating a sale in a market with a single potential buyer (Old National), it gets us into the complicated world of TARP terms and conditions. First, the original term sheet said that Treasury could not sell more than 50% of the warrants before the end of 2009, because, remember, 50% of the warrants would vanish if the bank made a qualifying equity offering. Still, Treasury could have sold half and then held the rest; this would have had the salutary effect of giving Old National an incentive to raise new capital.
Second, assuming Treasury did not sell the warrants, when Old National bought back its preferred shares, it got the right to buy back the warrants at “fair market value” – but there is no market. (You can get a quote on short-dated options, but not long-dated ones – these are typically over-the-counter.) I haven’t found the implementation rules, but an article in Fortune said this:
February’s stimulus legislation – which gave TARP recipients the right to repay funds without raising new capital or observing any waiting period – specified that Treasury must liquidate a bank’s warrants at the current market price after it repays its TARP preferred stock.
    I gather from bits and pieces I remember reading that there is some sort of appraisal process where the bank and Treasury first try to agree on a value, and I believe if that fails then there is supposed to be an auction. Auction participants would know all about option pricing, of course, and would apply a range of assumptions; presumably the sale would go to the buyer with the highest volatility assumption, which would probably (but not certainly)  yield a higher price than Treasury got. 
    Of course, the banks have their opinion about all this (from the same Fortune article):
    The American Bankers Association trade group last week sent Treasury Secretary Tim Geithner a letter calling for the government to eliminate the warrant-repayment provision altogether. The ABA said repurchasing the warrants amounts to an “onerous exit fee” for banks that have already repaid in full the funds they got from Treasury. . . .
    Treasury must attempt to liquidate the warrant, the stimulus legislation says. But the ABA decries this as well, saying in its letter that selling the warrant to a third party could unfairly dilute a bank’s shareholders.
    In other words, Treasury should just rip up the warrants – even though the warrants were one reason why the banks got investments on such generous terms in the first place. How times have changed since last fall.
    By James Kwak

    http://baselinescenario.com/2009/05/22/option-pricing-for-beginners/

    Warrants: Premium

    Premium is a measure of how much the underlying price has to move for the warrant to break even if it is held until maturity.

    The premium for a call warrant

    = [Strike Price + (Warrant Price x Conversion Ratio) - Underlying Price] x 100% / Underlying Price


    (1)  Cost of buying a warrant = Warrant Price x Conversion Ratio
    (2)  Breakeven point of the warrant = Strike Price  + Cost of component
    (3)  Premium = [(Breakeven point of warrant - Underlying Price ) / Underlying Price]  x 100%


    In this formula, we first calculate the difference between the breakeven point and the underlying price and then divided it by the underlying price to find out the premium as a percentage.


    Likewise, the premium for a put warrant 

    = {Underlying Price - [Strike Price - (Warrant Price x Conversion Ratio)]} x 100% / Underlying Price


    For example:

    Company ABC Call Warrant currently trading at $0.54, with a strike price of $12 and a conversion ratio of 5:1.  If the underlying price is $14, how much is the premium?

    Cost of buying the warrant = $0.54 x 5 = $2.70
    Breakeven point = Strike Price + Cost = $12 + $2.70 = $14.70
    Underlying price = $14.00
    Difference between Underlying price and Breakeven point = $14.70 - $14,00 = $0.70
    Premium = ($0.70/$14.00) x 100%  = 5%.

    In other words, if the investor intends to hold the warrant until maturity, it takes a 5% increase in the underlying price from its current level of $14 to breakeven.

    In this example, what we have is an out-of-the-money (OTM) warrant, and the underlying must make a bigger climb to reach the breakeven point.

    In the case of an in-the-money (ITM) warrant, a modest increase in the underlying price would be enough.




    Summary:

    Step 1:   First, calculate the breakeven point of the warrant. This is done by using the formula:  [(price of warrant x conversion ratio) + strike price]

    Step 2:  Work out the difference between the breakeven point and underlying price and divide this by the underlying price to get the premium in percentages.



    The premium only measures the percentage increase in the underlying price that will allow the warrant investor to break even upon maturity.

    It does not tell us whether the price of a warrant is too high or too low.

    Hence, unless you are prepared to hold the warrant until maturity, premium is not a relevant indicator for you.




    Tuesday 15 September 2015

    Warrants: Option Pricing Model



















































    An example:










    Warrants: Turnover versus Outstanding Quantity

    Turnover is the total units of a warrant bought and sold on a day.

    Outstanding quantity refers to the accumulated units, or the accumulated overnight positions, held by investors (other than the issuer) at the close of trading.

    Outstanding percentage is the portion held by investors of the total units of the warrant in issue.



    Various scenarios and interpretations of the market.

    Day Trader >>> Overnight Traders  -  Turnover >>> Outstanding quantity

    On a trading day when the market is dominated by day trade investors rather than overnight traders, the turnover can be way above the increase in outstanding quantity.


    All new positions held overnight - Turnover = Increase in outstanding quantity 

    In contrast, if all the new positions of the day are held overnight, the increase in outstanding quantity will be equal to the turnover.


    Day trade market - High turnover + Flat outstanding quantity

    Normally, when a high turnover meets a flat outstanding quantity, what we have is a day trade market.
    This may be a sign of a lack of confidence in the outlook for the warrant.


    Market dominated by sell orders - High turnover + Fall in outstanding quantity

    When a high turnover meets a fall in outstanding quantity, then the market is dominated by sell orders.
    This may mean that the holders of a call warrant are selling on expectation that the underlying is topping out (or bottoming up in the case of a put warrant).


    Players are upbeat about the market outlook - High turnover + Increase in outstanding quantity

    When a high turnover meets an increase in outstanding quantity, the investors here are probably long-term players who are rather upbeat about the market outlook.

    Saturday 12 September 2015

    Warrants: Historical Volatility

    Historical volatility reflects the historical price of a stock within a given period of time.

    If Stock A is trading at $10 with a volatility of 10%, then based on the theories of statistics, there is

    -  68% of the time that the stock will be trading within the range of $9 to $11 ($10 +/- 1 S.D.),
    -  95% of the time within the range of $8 to $12  ($10 +/- 2 S.D.)and
    -  99.7% of the time within the range of $7 to $13  ($10 +/- 3 S.D.).

    In other words, the higher the historical volatility of the underlying, the higher the level of its future volatility will be in a given period of time.


    For the investors
    Investors can use historical volatility to predict the future volatility and price direction in order to formulate their investment strategies.

    For the issuer
    For the issuer, historical volatility is one of the factors they need to take into account in determining the price of a warrant.
    Where the historical volatility of its underlying is high, a warrant is likely to be issued at a higher price. However, past performance may not indicate future trends.
    Hence, in the pricing process, an issuer will alos find out what the markte expects of the future volatility of the underlying, that is what we call the "implied volatility" of the warrant.


    Warrants: Implied Volatility and Warrant Price

    Apart from the underlying price, the most important factor that affects the price of a warrant is implied volatility.

    It is the expected volatility of the underlying in a given future period of time and is positively related to the warrant price.

    When the implied volatility of a warrant increases, its price may go up.

    When the implied volatility decreases, the warrant price may go down.




    An example:

    Stock A is currently trading at $10.  The market expects that the range of fluctuations of the stock will be within $1 for most of the time in the future.

    Stock B is currently trading at $10, and the market expects that its range of fluctuations will be within $5 for most of the time in the future.

    What is the probability that stock A will climb to $20 within 6 months?

    Which one, between Stock A and Stock B, will have a better chance of hitting $20 in 6 months?

    Obviously, the answer is Stock B.


    If for some reasons, the market expects a drop in the volatility of  stock B (say from $10 to $1 in terms of the range of fluctuations) in a given period of time, then the price of a related warrant may go down as well.

    This is due to the lower probability that the price of Stock B will exceed the strike price of the warrant upon maturity.

    Hence, there is less chance for the warrant to be exercised upon maturity, and the investor will also have a less chance to get a higher return.  As a result, the warrant price is likely to fall.


    American Warrants versus European Warrants

    Warrants can be divided into American or European types, based on the way they are exercised.

    American Warrant - Holder can exercise the right to buy (or sell) the underlying at any time between the listing date and the expiry date.

    European Warrant - Holder can exercise the same right only at maturity.



    American Warrant

    American Warrants can be exercised at any time between the listing date and the expiry date.

    They seem to be more flexible.  However, in practice, few investors choose to exercise their warrants and hence, this feature does not matter much.

    It is often more beneficial to sell the warrant back to the market before expiry rather than holding it until the date to exercise (the issue of "time decay").


    European Warrant

    European Warrants are settled by cash rather than physical delivery.

    This means that if the warrants are in the money, the issuer will calculate and pay the difference between the settlement price of the underlying and the strike price of the warrant.

    Cash settled warrants are automatically exercised, there is no need for the issuer to serve any notice of exercise.


    Friday 11 September 2015

    Warrants: Conversion Ratio

    The conversion ratio determines the number of warrants required for conversion into one share of the underlying stock or one point of the underlying index at maturity.

    For example, where the conversion ratio is 10:1, 10 units of warrants will be required to be exchanged for each share of the underlying stock.

    Even for warrants with identical terms (same strike price, maturity and implied volatility), their prices may vary hugely.

    These warrants are worth exactly the same.  Their prices vary in proportion to the difference in their conversion ratios.

    The price of one may be a few cents while the other a few dollars.  This is due to their conversion ratios.

    The bigger the conversion ratio, the lower the warrant price.



    Conversion Ratio is Insignificant as a performance indicator

    Psychologically, investors tend to prefer warrants with a lower face value.

    After all, warrants of different price ranges do differ in tick movement.

    In theory, the difference in the conversion ratio will not affect the price performance of warrants.

    When you are picking a warrant, do not be bothered with insignificant data such as the conversion ratio or premium.  

    Unless you want to hold the warrant until maturity, these data should not be a matter of concern.

    Rather, to make sure that you are picking the right choice, you should check out carefully the other terms of the warrant, such as implied volatility and effective gearing.

    (In calculating the value at maturity and the effective gearing of a warrant at any time, the conversion ratio is always taken into account.)




    Technical Parameters of Warrants: Vega, Gamma and Rho

    Vega

    Vega measures the rate of change in the warrant price for each point of movement of its implied volatility.

    No matter it is a call warrant or a put warrant, vega is always positive, indicating that the warrant price and its implied volatility always move in the same direction.

    Vega can be an absolute value or a percentage relative to the warrant price.


    Gamma

    Gamma measures the sensitivity of the delta of a warrant to the price movements of its underlying.

    The higher the gamma, the bigger the change in delta will be in reaction to a movement in the underlying price.

    Gamma = Rate of Change of Delta / Rate of Change of Underlying Price

    No matter it is a call warrant or put warrant, gamma is always positive.



    Rho

    Rho measures the sensitivity of warrant price to changes in the market interest rate.

    Call warrants have a positive rho, meaning that the price of a call warrant moves in the same direction as the market interest rate.

    In contrast, put warrants have a negative rho, and this shows that the price of a put warrant moves in the opposite direction to the market interest rate.

    Given that changes in interest rates tend to be limited in the short term, their effect on warrant prices is minimal.

    Technical Parameters of Warrants: Theta

    Theta, also called time decay, measures the rate of change in the price of a warrant as its maturity is running short while all other things being equal.

    It can be expressed as an absolute value or a percentage relative to the warrant price (theta / warrant price).

    Unless in some special circumstances, the value of theta is usually negative, reflecting the declining value of a warrant as time passes.

    Depicted in a chart form, the slope of the curve of time value becomes steeper as the warrant gets closer to its maturity.
















    This shows that time decay accelerates as time passes.


    Additional notes:

    In percentage terms, time value has the biggest impact on out of the money (OTM) warrants.

    The value of a warrant consists of intrinsic value and time value.

    They vary in absolute and relative terms for warrants with different strike prices and maturity dates.

    In the case of OTM warrants, their intrinsic values are negligible.

    In other words, time value makes up most of their values.

    Hence, they are more sensitive to the passage of time.

    As for in the money (ITM) warrants, given that a large part of their value is made up of intrinsic value, they are less sensitive to the passage of time, and such sensitivity decreases as the maturity date gets nearer.


    Warrants: Effective Gearing versus Gearing

    The biggest appeal of warrant trading lies in the leverage effect.

    Investors only need to invest a small sum to earn a potential return close to or even higher than that from directly investing in the underlying.



    Gearing

    Gearing only reflects how many times the underlying costs versus the warrant.  

    Its calculation formula is:

    Gearing = Underlying Price / (Warrant Price   x  Conversion Ratio)



    Effective Gearing

    However, the rate of increase/decrease in the warrant price relative to the underlying price is not the same as gearing.

    To estimate the increase/decrease in the warrant price relative to the underlying price, we should look to the effective gearing.

    Effective gearing reflects the relationship between changes in the warrant price and in the underlying price.

    Its calculation formula is:

    Effective Gearing = Gearing  x  Delta

    For example, the effective gearing of a warrant is 10 times, then, other things being equal, for every 1% change in the underlying price, the warrant price will in theory move by 10%.

    Put simply, delta measures how much, in theory, the warrant price will move for a $1 change in the underlying price.

    When you invest in warrants, you should look to their effective gearing, not gearing, as a reference for their risk/return performance.

    Warrants: Days to Maturity

    Warrants can be classified accordingly to the length of their remaining days to maturity.

    Short term warrant:  Warrant with less than 3 months to maturity
    Medium term warrant:  Warrants with 3 to 6 months left to maturity
    Long term warrant:  Warrants with more than 6 months running to maturity.


    Whether it is long-term or short-term, ITM or OTM, a warrant is after all a leveraged investment instrument.
    Be cautious in funds allocation and stop-loss arrangements.

    Do not get carried away by the potential return without considering your risk tolerance.


    For example:

    A general investor may consider a medium-term warrant with around 3 months running to maturity and a strike price around 5% above or below the underlying price.

    More aggressive investors may go for OTM warrants with a shorter maturity.

    For conservative investors, they may choose ITM warrants with a longer maturity.



    The warrant price tends to be positively related to the length of maturity.

    In theory, the longer the maturity, the more room for changes in the underlying price will be.

    Given the greater chance for the warrant to be exercised, the warrant price will tend to be higher.

    No matter for call warrants or put warrants, the warrant price tends to be positively related to the length of maturity.

    Besides, a warrant expiring in 6 months is less affected by time decay than one expiring in 3 months.

    Warrants with a longer maturity will see their time values fall slower, while those with a shorter maturity will see their time values fall faster.

    Thursday 10 September 2015

    Deep in the money (deep ITM) and far out of the money (far OTM) warrants

    If we take into account the extent of difference between the strike price and the underlying price, warrants can be further classified into:

    ITM
    deep ITM
    OTM and
    far OTM.

    Generally, where there is a 15% or above difference between the strike price and the underlying price, a warrant will be considered far OTM or deep ITM.

    However, this 15% mark is merely a rough idea, not an absolute threshold.

    One must also look in the volatitlity of the underlying.

    Some warrants may be considered deep ITM or far OTM even if the difference between strike price and the underlying price is only 10% or more.

    Warrants - In the money, at the money and out of the money

    A warrant is described as in-the-money (ITM), at-the-money (ATM) or out-of-the-money (OTM), depending on the relationship between its strike price and its underlying price.

    A call warrant is OTM when its strike price is higher than its underlying price.

    It is ITM, when its strike price is lower than its underlying price.

    The situation is just the opposite for put warrants.

    When its strike price is higher than its underlying price, a put warrant is ITM; and when its strike price is lower than its underlying price, it is OTM.

    No matter it is a call or put, if the strike price is equal to the underlying price, the warrant is said to be ATM.


    Summary

    Call Warrant

    ITM Strike Price < Underlying Price
    ATM  Strike Price = Underlying Price
    OTM  Strike Price > Underlying Price

    Put Warrant

    ITM   Strike Price > Underlying Price
    ATM  Strike Price = Underlying Price
    OTM  Strike Price < Underlying Price



    Additional Notes

    Call Warrant
    An investor can buy a call warrant if he is optimistic about the outlook for its underlying.
    When the underlying price does go above the strike price, in theory, the investor can exercise the warrant to buy the underlying at the strike price.
    Then he can sell it in the market to earn the difference.
    In practice, warrants are traded on a cash settlement basis, and investors will be paid the difference directly.

    Put Warrant
    In the case of a put warrant, an investor can go for it when he is pessimistic about the market outlook.
    If the underlying price is lower than the strike price, in theory, the invstor can exercise the warrant and buy the underlying from the market for delivery to the issuer at the strike price to earn the difference.
    In reality, investors will be paid the difference directly.
    If it turns out that the underlying price is higher than the strike price, the investor will lose the cost of the warrant.

    (The above assumes that the investor will hold the warrant until maturity.  Indeed, investors can also "buy low, sell high", and trade warrants just like stocks.)

    Covered Warrants

    Covered Warrants are mainly issued by investment banks.

    They are issued to offer a leveraged investment tool for investors.

    Cash settlement is the norm for Covered Warrants; thus companies will not face any changes in their shareholding structures as a result.

    In other words, Covered Warrants will not dilute a company shareholding.


    Unlike Company Warrants, Covered Warrants have good liquidity due to the market making system.

    Their pricing mechanism is more transparent (statistics such as effective gearing is readily available).

    It is possible to track changes in the theoretical prices of Covered Warrants.

    Investors should study the relevant information carefully and bear in mind their own risk tolearance in making the decision whether to invest in Covered Warrants.

    Penny Warrants are very risky.

    Warrants with only 1 - 2 weeks left to maturity and over 10% out-of-the-money (OTM) are called penny warrants.

    They are very risky and their odds are low.  The reasons are as follows:

    1.  The bid/ask spreads of penny warrants are rather wide.

    2.  Penny warrants have a very high rate of time decay.

    3.  It is easy to lose money with penny warrants.

    4.  Penny warrants may be not that price sensitive.  

    5.  Penny warrants can hardly edge up but easily plummet.


    Company Warrants

    The basic concept of warrants is to give investors the right to buy or sell the underlying at the pre-determined strike price on the pre-determined date.

    Company Warrants are issued by companies to raise funds or to reward employees or shareholders.

    Upon maturity of a Company Warrant, provided that the stock price is higher than the strike price at the time, the holder is entitled to buy a certain number of shares of the company at the strike price.

    When the holder does exercise the warrant, the company must issue new shares to meet the promise.

    So, when Company Warrants are exercised, the shareholding of the company will be diluted.

    Company Warrants normally have lower liquidity, and there is no way to compare their prices.

    This is because the price of a Company Warrant is mainly determined by the board of directors.

    Therefore, the warrant price is very likely to deviate from the underlying price.

    Put another way, Company Warrants are less transparent and, sometimes, more speculative.  

    Investors should study the relveant information carefully and bear in mind their own risk tolerance in making the decision whether to invest in Company Warrants.

    Warrants versus Stocks

    If you are optimistic about a stock, the most direct investment strategy is to buy the stock.

    However, some investors may choose to buy a related warrant instead.


    Pros:  Limited investment amount.

    The biggest advantage of warrants is the leverage effect, which allows you to invest with less capital for the same return, as compared with stock trading.

    The lower capital required for warrants means that, in case there is a market downturn, the loss will be limited as compared with investing directly in the stock.

    In fact, in a number of major setbacks in the past, even giant blue chips fell sharply.  Buying warrants instead of stocks can help minimize one's exposure to such market risks.


    Cons:  Time constraint

    Of course, warrants are not without their shortcomings.

    It takes a lot of time to understand the factors that may affect warrant prices before one can master the leverage effect to one's advantage.

    Investors must get to know that warrants are subject to the time constraint.

    The price of a warrant may change along with the implied volatility and dividend payout of its underlying and interest rates.

    Even if you get the underlying direction right, you may still fail to reap the expected return.  

    In case you get it wrong, you should stop the loss.

    Never sit on your holdings like a stock investor does to wait for a rebound.  The price of a warrant will be dragged down by not only a falling underlying price, but also a declining time value.



    Additional notes:

    Warrants are derivatives.
    They are an alternative investment to their underlying, and vice versa.
    Warrants can never be an absolute substitute for their underlying.
    Do manage your portfolio flexibly by investing in warrants and/or their underlying in light of the market conditions and outlook, as well as your own risk tolerance.
    If one gets the market wrong, one will lose more from warrants (actual loss over investment cost) than from stocks.
    That means the leverage effect of warrants is a double-edged sword.  (Investors must take caution.)
    The investment cost for warrants is lower than that for stocks, but they are more volatile.
    Hence, their rate of potential gain or loss is much higher than their underlying.

    Summary:
    Warrants are a leveraged investment tool.
    Don't foreget that the leverage effect can mean more profit, but also more loss.
    So do limit your investment amount in warrants.



    Index Futures

    In terms of trading, index futures are more straightforward.

    When the index rises by a certain percentage, an index future buyer will gain while an index future seller will lose, exactly the same amount.

    Trading in index futures is a zero sum game, and buyers and sellers gamble against each other.

    Regarding capital requirement, a margin is payable upfront for an index future contract.

    The investor has to pay the shortfall (margin call) to maintain the account balance at not less than the maintenance margin level.

    An example:  The initial margin required for a particular Index futures contract is $688 and the maintenance margin required is $550.  Each point of the index is priced at $16.  The investor will face a margin call if the particular index drops by more than 13 points, as the investor has to pay the shortfall to maintain the account balance at not less than the maintenance margin level.


    Wednesday 9 September 2015

    Currency plays - Foreign Currency Deposit, Foreign Exchange Futures and Currency Warrants.

    Foreign Currency Deposit

    The easiest way to invest in foreign exchange (FX) is to switch your Ringgit dollar deposit for a foreign currency deposit.


    FX futures or leveraged FX

    To capture short term movements, some investors may choose to invest in FX futures or leveraged FX products.  (However, foreign exchange spreads charged by banks vary from one to another.  Besides, for futures trading, investors are required to open a futures account.  There is also the risk of margin calls.  This is obviously not every investor's cup of tea.)


    Currency Warrants

    The trading mechanism of Currency Warrants is much the same as other warrants.  Investors only have to pick a suitable warrant in terms of price and maturity, as well as implied volatility, which should be relatively low as compared with others with similar terms.

    Foreign exchange is a relative game.  For a Currency Warrant, investors must always make sure which one in the currency pair is the positive play and which on the negative play.



    Additional notes:

    Compared with other investment instruments, Currency Warrants are more flexible.  They can give a higher potential return without the risk of margin calls in futures trading.  So, they are suitable for investors who want to profit from foreign exchange, but have relatively low tolerance for high risks.

    Currency Warrants have limited downside, but unlimited upside.  So, if one gets the market wrong and is wise enough to stop loss, the loss will be just a portion of the capital  Yet, no matter how small the investment amount is, one should always stop loss if one gets the market wrong.

    Options - Trading mechanism

    If you are optimistic about the underlying, you can buy a call option or write a put option.

    If you are negative about the underlying, you can choose to buy a put option or write a call option.



    If you are positive about the underlying

    If an investor wants to buy a call option, he needs to pay a premium upfront.  In case the underlying price does rise above the strike price, the investor can exercise the option to earn the difference.

    If the investor chooses to write a put option, he will receive a premium.  If the underlying price climbs above the strike price, the put option will become worthless (and not exercised), leaving the premium safe in the hands of the investor.  In writing a put option, the investor is required to deposit a margin and face the risk of unlimited loss (in theory), the underlying price can drop to zero).

    If you are negative about the underlying

    If the investor chooses to buy a put option, he needs to pay a premium upfront.  In case the underlying price does fall below the strike price, the investor can exercise the option to earn the difference.

    If the investor chooses to write a call option, and if the underlying price falls below the strike price, he will pocket the full amount of the premium.  On the other hand, if the underlying price is higher than the strike price, he will face the risk of unlimited loss (in theory, the underlying price can go up indefinitely).


    Warrants versus Options

    In the case of warrants, the investor can only be a buyer, and choose between call warrants or put warrants.  The seller is always the issuer.

    While options offer more possibilities, the risk is also much bigger.  In contrast, warrants are only subject to limited risk exposure.






    Five Major Factors influencing Warrant Price

    1.  Underlying price

    2.  Days to Maturity.

    3.  Implied Volatility

    4.  Interest Rate

    5.  Dividend.

    How to trade warrants?

    1.  Select a bank or broker.

    2.  Open a securities account.

    3.  Monitor warrant trading through a stock quote terminal.

    4.  Study carefully the underlying stock and the terms of the warrant.

    5.  Trade warrant.

    Saturday 15 August 2015

    "I'm in prison, but I'm on just the same playing field as Warren Buffett,"

    Curtis Carroll discovered the stock market in prison. Through friends and family on the outside, he invests from San Quentin State Prison in Northern California, and he's also an informal financial adviser to fellow inmates and correctional officers. Everyone in prison calls him Wall Street.

    "I couldn't believe that this kind of access to this type of money could be accessible to anybody. Everybody should do it. And it's legal!" he says.
    He pores over financial news: the Wall Street JournalUSA TodayForbes. Business is like a soap opera, he says, and he's always trying to anticipate what will happen next. "I like to know what the CEO's doing," he says. "I like to know who's in trouble."

    Read more here.

    Wednesday 12 August 2015

    Chinese central bank under pressure to weaken yuan further

    Sources say China's move to devalue its currency reflects a growing clamour within government circles for a weaker yuan to help struggling exporters, ensuring the central bank remains under pressure to drag it down further in the months ahead. – Reuters pic, August 12, 2015.

    China's move to devalue its currency reflects a growing clamour within government circles for a weaker yuan to help struggling exporters, ensuring the central bank remains under pressure to drag it down further in the months ahead, sources said.
    The yuan has fallen almost 4% in two days since the central bank announced the devaluation yesterday, but sources involved in the policy-making process said powerful voices inside the government were pushing for it to go still lower.
    Their comments, which offer a rare insight into the argument going on behind the scenes in Beijing, suggest there is pressure for an overall devaluation of almost 10%.
     "There have been internal calls for the exchange rate to be more flexible, or depreciated appropriately, to help stabilise external demand and growth," said a senior economist at a government think-tank that advises policy-makers in Beijing.
    "I think yuan deprecation within 10% will be manageable. There should be enough depreciation, otherwise it won't be able to stimulate exports."
    The Commerce Ministry, which today publicly welcomed the devaluation as an export stimulus, had led the push for Beijing to abandon its previous strong-yuan policy.
    Reuters could not verify how much influence Commerce Ministry officials had wielded in the decision to drive the yuan lower, but the sources said its officials were claiming victory after a long lobbying campaign against what some of them regarded as over-zealous reform led by the central bank.
    The People's bank of China (PBOC) had been keeping the yuan strong to support the ruling Communist Party's goal of shifting the economy's main engine from exports to domestic demand.
    A stronger yuan boosts domestic buying power, helps Chinese firms to borrow and invest abroad, and encourages foreign firms and governments to increase their use of the currency.
    Until the devaluation, the currency had appreciated overall by 14% over the past 12 months on a trade-weighted basis, according to data from the Bank for International Settlements.
    Premier Li Keqiang had repeatedly ruled out devaluation, but increased risks to economic growth, exacerbated by recent stock market turmoil, increased pressure to reverse course, the sources said.
    At the weekend, China posted a shock 8.3% slump in July exports.
    "Exporters face very big pressure, and China's economy also faces very big downward pressure," said a researcher at the commerce ministry's own think-tank, which recommended earlier this year that the government should unshackle the yuan.
    "The yuan depreciated only slightly versus the dollar, but it has gained sharply against other currencies. China's economy and trade are no longer strong; why should the yuan be strong?"
    He said he believed the yuan could fall to 6.7 by year-end, which would represent a near 9% decline since the eve of the devaluation. It traded around 6.43 against the dollar today, its lowest since August 2011.
    The PBOC described its devaluation as a one-off move designed to make the currency more responsive to market forces.
    The central bank guides the market daily by setting a reference rate for the yuan, from which trade may vary only 2%. Yesterday, it said it was setting the midpoint based on market forces, which have been willing the yuan lower.
    Beijing is determined to achieve its economic growth target of 7% for this year. Top leaders will chart the course for the next five years at a meeting in October, and they are likely to continue targeting annual growth of around 7%.
    "They (top leaders) are determined to hit 7% target. The downward pressure is big (but) so is the determination," said an economist inside the cabinet's think-tank.
    Beijing prefers a gradual devaluation because a single, big move could spark capital flight and undermine its goal of fostering global use of the yuan in trade and finance, sources said.
    China has been lobbying the IMF to include the yuan in its basket of reserve currencies, known as Special Drawing Rights, which it uses to lend to sovereign borrowers. This would mark a major step in terms of international use of the yuan.
    The IMF said today that the central bank's new way of managing the exchange rate appeared to be a welcome step.
    "There is definitely downward pressure on the economy, but we cannot rely (alone) on currency depreciation," said Zhu Baoliang, chief economist at the State Information Centre, a top government think-tank. – Reuters, August 12, 2015.
    - See more at: http://www.themalaysianinsider.com/business/article/chinese-central-bank-under-pressure-to-weaken-yuan-further#sthash.dx7bFam1.dpuf

    Monday 10 August 2015

    My Check Lists



    Here is a Ben Graham Checklist for Finding Undervalued Stocks

    Criterias


    Valuation
    Risk
    1. Earnings to price (the inverse of P/E) is double the high-grade corporate bond yield. If the high-grade bond yields 7%, then earnings to price should be 14%.
    2. P/E ratio that is 0.4 times the highest average P/E achieved in the last 5 years.
    3. Dividend yield is 2/3 the high-grade bond yield.
    4. Stock price of 2/3 the tangible book value per share.
    5. Stock price of 2/3 the net current asset value.


    Quality of Balance Sheet and Management
    Financial strength
    6. Total debt is lower than tangible book value.
    7. Current ratio (current assets/current liabilities) is greater than 2.
    8. Total debt is no more than liquidation value.


    Quality of Growth
    Earnings stability
    9. Earnings have doubled in most recent 10 years.
    10. Earnings have declined no more than 5% in 2 of the past 10 years.


    If a stock meets 7 of the 10 criteria, it is probably a good value, according to Graham
    If you're income oriented, Graham recommended paying special attention to items 1 through 7.

    If you're concerned about growth and safety, items 1 through 5 and 9 and 10 are important.

    If you're concerned with aggressive growth, ignore item 3, reduce the emphasis on 4 through 6, and weigh 9 and 10 heavily.

    Again, these checklists are a guideline and example, not a cookbook recipe you should follow preciselyThey are a way of thinking and an example of how you may construct your own value investing system.  :thumbsup:

    The criteria mentioned above are probably more focussed on dividends and safety than even today's value investors choose to be. But today's value investing practice owes an immense debt to this type of financial and investment analysis.  :thumbsup:

    Spreadsheet for finding Undervalue Stocks
    http://spreadsheets.google.com/pub?key=tZGNWHLD2d2nTgCcxSKyoCA&output=html



    If you're income oriented, Graham recommended paying special attention to items 1 through 7.
    Quote
    Criterias


    Valuation
    Risk
    1. Earnings to price (the inverse of P/E) is double the high-grade corporate bond yield. If the high-grade bond yields 7%, then earnings to price should be 14%.
    2. P/E ratio that is 0.4 times the highest average P/E achieved in the last 5 years.
    3. Dividend yield is 2/3 the high-grade bond yield.
    4. Stock price of 2/3 the tangible book value per share.
    5. Stock price of 2/3 the net current asset value.


    Quality of Balance Sheet and Management
    Financial strength
    6. Total debt is lower than tangible book value.
    7. Current ratio (current assets/current liabilities) is greater than 2.
    8. Total debt is no more than liquidation value.


    Quality of Growth
    Earnings stability
    9. Earnings have doubled in most recent 10 years.
    10. Earnings have declined no more than 5% in 2 of the past 10 years.



    --------------------------

    If you're concerned about growth and safety, items 1 through 5 and 9 and 10 are important.

    Quote
    Criterias


    Valuation
    Risk
    1. Earnings to price (the inverse of P/E) is double the high-grade corporate bond yield. If the high-grade bond yields 7%, then earnings to price should be 14%.
    2. P/E ratio that is 0.4 times the highest average P/E achieved in the last 5 years.
    3. Dividend yield is 2/3 the high-grade bond yield.
    4. Stock price of 2/3 the tangible book value per share.
    5. Stock price of 2/3 the net current asset value.


    Quality of Balance Sheet and Management
    Financial strength
    6. Total debt is lower than tangible book value.
    7. Current ratio (current assets/current liabilities) is greater than 2.
    8. Total debt is no more than liquidation value.



    Quality of Growth
    Earnings stability
    9. Earnings have doubled in most recent 10 years.
    10. Earnings have declined no more than 5% in 2 of the past 10 years.

    ---------------------------

    If you're concerned with aggressive growth, ignore item 3, reduce the emphasis on 4 through 6, and weigh 9 and 10 heavily.

    Quote

    Criterias


    Valuation
    Risk
    1. Earnings to price (the inverse of P/E) is double the high-grade corporate bond yield. If the high-grade bond yields 7%, then earnings to price should be 14%.
    2. P/E ratio that is 0.4 times the highest average P/E achieved in the last 5 years.
    3. Dividend yield is 2/3 the high-grade bond yield.
    4. Stock price of 2/3 the tangible book value per share.
    5. Stock price of 2/3 the net current asset value.



    Quality of Balance Sheet and Management
    Financial strength
    6. Total debt is lower than tangible book value.
    7. Current ratio (current assets/current liabilities) is greater than 2.
    8. Total debt is no more than liquidation value.


    Quality of Growth
    Earnings stability
    9. Earnings have doubled in most recent 10 years.
    10. Earnings have declined no more than 5% in 2 of the past 10 years.

    Risk-reward Does Not Make Sense At The Moment

    Stan Druckenmiller: Bloomberg Encore (04/24)

    8:01 AM MYT
    April 25, 2015

    April 24 -- Legendary money manager Stan Druckenmiller speaks to Bloomberg's Stephanie Ruhle. The exclusive interview covers topics including Federal Reserve policy, oil prices, the Greek debt crisis and much more. The founder of Duquesne Capital Management shares insights, predictions and in-depth analysis of global markets and the U.S. economy in 2015.

    http://www.bloomberg.com/news/videos/2015-04-25/stan-druckenmiller-bloomberg-encore-04-24-


    Friday 31 July 2015

    The Oil and Gas sector is prone to intense cyclicality.

    Oil and Gas sector

    Commodity prices (oil) are cyclical, as are the sector's profits.

    The energy sector is prone to intense cyclicality.

    Small changes in available supply and market demand tend to have an oversized effect on commodity prices and profits.

    However, neither cyclical peaks nor valleys tend to last very long.   It is important to realize this before investing in the sector. Otherwise, you might be tempted to sell when the sector is doing relatively poorly (when things are about to begin looking up again) or buy at the peak when the companies are reaping a windfall (when growth is about to go into reverse).

    It is better to buy when prices are at a cyclical low than when they are high and hitting the headlines.


    From the ground. Upstream - Exploration and production (finding and mining the oil and gas.)

    To the Pipelines.  Ships and pipelines (transporting the oil and gas to refineries and then again to the end users.)

    To the Refineries. Downstream - refining (breaking apart crude oil into its component parts and refine it into end products, such as gasoline, jet fuel, and heavy lubricants.)

    To the Consumers.  Downstream - marketing (operating petrol and convenience stations, as well as marketing fuels for industrial uses and electricity production).



    -----

    http://klse.i3investor.com/blogs/PublicInvest/80441.jsp

    Oil & Gas - Pause and Replay…

    Author: PublicInvest   |   Publish date: Tue, 28 Jul 2015, 09:59 AM 

    …from 2HFY15 onwards as the market seems to have digested the shock of the oil price collapse and subsequent fluctuations, companies have continued business as usual. PETRONAS too has taken the opportunity to restructure their contract terms and award structure. They have launched a Cost Reduction Alliance, Coral 2.0, an industry-wide effort to expedite cost discipline, but are not cutting investments in innovation and research-related projects of which its CEO Datuk Wan Zulkiflee commented “stands to win in an increasingly difficult playing field”. In view of the lower oil price to be the new „normal' level, we believe the sector would be re-rated and thus retain our Overweight call. We anticipate contract types in the pipeline to include engineering, procurement, construction, installation and commissioning (EPCIC), fabrication, maintenance services and various jobs for the Refinery and Petrochemical Integrated Development (RAPID) project. Meanwhile, Iran has been keeping everyone on their toes as United Nations Security Council endorsed a deal to lift the nation's economic sanctions, but place strict limits on its nuclear programme. The agreement is still pending approval from US Congress and nuclear inspectors' confirmation that Iran is complying with the terms however, thus would unlikely be removed until next year. Assuming the successful end to the sanctions, the oil output post sanctions, is estimated to be an additional 1m bbl/day.
    Global O&G market. Sentiment in global markets is currently weak, spurred by crude oil futures hitting 4-month lows after a steep fall in China's stock markets. China currently the world's largest energy consumer could be signaling concern on its economic health, while evidence of a growing crude glut is building up. Oil price has also been pressured with rise US drilling activity with data showing 21 rigs added last week, the most in over a year. The financial pressure faced by oil majors with severe earnings dips in the latest quarter has fueled concerns further. Much of this is resulting from the lower prices that oil field service companies are charging their customers to continue its works. The situation is further heightened by capex cuts in upstream spending, which have filtered through to the oil service providers, first-hand. Our concern remains on how long oil prices would remain low (or fall lower). Further weaknesses could be seen if the rebound continues to be delayed, as smaller drillers may lose their financial support and encounter debt or liquidity crises. We urge investors to focus on companies with reliable cash flow at present and to be cautious about rapid growth at this juncture.
    The domestic O&G market is treading along in a more positive light, largely supported by PETRONAS' initiatives. The domestic market is more protected as its “contractor” is largely the country's national oil company (NOC) which continues to sustain and enhance oil production. PETRONAS will continue to spend, but to revert to the previous capex levels of c.RM40bn/year which we believe would still continue to stimulate the domestic O&G industry nevertheless. The cost of oil production for this region also averages between USD30 to USD40/bbl hence still below current oil price levels deeming operations to still be viable.
    Overweight. We had recently upgraded our recommendation to Overweight, in anticipation of upcoming contracts that was expected since 2H14 but was halted due to the oil price uncertainties. Malaysia O&G counters are trading on average at c.13x PE, vs. high double-digit PEs in the past and thus we see potential upside. Our top picks are Uzma (Outperform, TP:RM2.98), Bumi Armada (Outperform, TP: RM1.48 and Petra Energy (Outperform, TP: RM1.88).
    Coral 2.0. Under Coral 2.0, 11 key initiatives have been introduced to better implement plans and review the potential estimated savings target of between RM4.0bn and RM7.5bn, to be achieved before the end of the next 5 years in response to the decline in global oil prices. 25 petroleum arrangement contractors (PAC) in Malaysia including Royal Dutch Shell plc, Repsol S.A.'s subsidiary Talisman Energy Inc., Total S.A., Exxon Mobil Corp. and ConocoPhillips Co. have signed on to share best practices under CORAL 2.0 and are on the look-out for innovative platform designs that can be standardized across field developments to reduce capex and project delivery cycles. Key milestones include i) Proactive Demand Management, ii) Spend Consolidation, and iii) Driving Innovation. The initiative aims at instilling a cost effective approach across the industry, while uplifting the benchmark of the industry to a world-class level. This involves collaboration and operation with global best practices in Malaysian E&P.
    Outcomes of Coral 2.0 workshop. Agreed since end-March, 8 initiatives to be implemented include; i) Joint Sourcing (Material Category), ii) Joint Sourcing (Services Category), iii) Technical Standard, iv) Logistic Control Tower, v) Warehousing Centralization & Common Stocking, vi) Cost Driver Benchmarking for OPEX, vii) Cost Driver Benchmarking for CAPEX, and viii) Late Life Field Optimization. The targeted potential annual cost saving to be achieved before the end of the next 5 years is RM4.0 to RM7.5bn. Factors Affecting Oil Price
    Still-possible Greek default shadowing global equity markets, has pushed on the strength of the US dollar. The US dollar is often a form of safe haven during economic turmoil, however does not bode well for oil prices since oil is traded in dollars and thus would be more expensive. Greece's debt crisis moreover could dampen European energy demand.
    Federal Reserve interest rate “gradual” hike - a short-term variable that could send oil prices up or down. Where a quicker decision is expected to increase interest rates which could press down oil prices, a looser policy may push prices up.
    OPEC may see a change in leadership, as 79-year-old Ali al-Naimi, the Saudi oil minister is anticipated to retire and has a successor being groomed. Mr. Naimi's legacy strategy to keep output steady amidst a growing oil supply glut that caused prices to plummet, would indeed make him memorable. With Iran and Mr. Naimi's potential retirement on the table, the next OPEC meeting in November could be far more exciting. Indonesia was also seen to push to rejoin the cartel since its membership suspension in 2008 when it became a net oil importer. Indonesia wants to secure supply contracts with OPEC members, following its plans to ramp up its refinining capacity and thus would need crude supplies to fuel the production. They are seen to be aggressive in lobbying for this and could be reinstated by as early as the November meeting.
    Geopolitical escalations, in particular in the Middle East and between Russia and the US.
    IEA landmark report on recommendations to achieve “peak emissions” by the end of this decade.
    Iran’s “appealing” oil contract terms include a collection of attractive contract terms to international oil companies which would pay more for higher production. It is also rumoured that Iran may even be prepared to offer production sharing contract (PSC) terms. It is also believed that Iran needs to JV with international oil majors to share its technology. With the world powers reaching a historic agreement to lift the sanctions on Iran but place strict limits on its nuclear programme.

    Top Picks

    Uzma will be buoyed by i) full year contribution from MMSVS (Hydraulic Workover Units), ii) full year contribution from Premier Enterprise Corporation (PEC) for trading of chemical and other commodities in oil refinery, iii) increase in strategic stake in Setegap Ventures from 30% to 49%, and iv) remuneration fee when RSC production begins 2HFY15.
    Bumi Armada (BAB) will be supported by its long-term contracts coupled with its reputable execution abilities that would allow it to be enhanced by new contracts. We remain positive on BAB, considering its initiatives to stay focused and to dissolve potentially non-viable divisions such as the Oilfield Services division amidst the oil price uncertainties landscape. Earnings growth will be sustained by its RM25.6bn orderbook, comprising of long-term FPSO projects such as Kraken, 15-06, Madura and the latest Malta floating storage unit (FSU), BAB's foray into the liquefied natural gas (LNG) business.
    Petra Energy will see the i) early activation of the Topside Major Maintenance Services (TMM) contract by PETRONAS Carigali Sdn. Bhd. (PCSB) for SBO effective since 4 July 2014, and will last until 20 May 2018. ii) Higher work orders for the PANM contract. iii) The KBM cluster RSC whereby Kapal and Banang Fields have produced c.4.0mbbl of oil to-date, with an average of c.700,000bbl/quarter. The Group has taken key measures to manage costs and operation expenditures while exploring new opportunities to attain new revenue streams.
    Source: PublicInvest Research - 28 Jul 2015