Divergence = Opportunity?

Malaysia’s BIMB Holdings Berhad is a dynamic financial holding company with an extensive portfolio of diversified businesses across the Islamic financial industry. Its long-dated warrant, BIMB-W (maturity: 2023) was issued / listed in 2013. Since the listing date of BIMB-W, the underlying BIMB had recorded a marginal gain of 0.70%, whilst its warrant BIMB-W’s price has dropped as much as 66%. Are we seeing a divergence? Is this a potential opportunity to consider BIMB-W?

BIMB_Divergence.jpeg

From a statistical view (without employing an option valuation model), it may be possible to employ regression analysis to derive a predictive range for BIMB-W based on the three key variables, namely: 1. Underlying price 2. Days To Maturity 3. Historical Volatility of Underlying

Bimb Forecast Range_2.png

The above regression analysis shows the statistical significance of the three variables or coefficients on price movements of BIMB-W. Based on the statistical relationship, the current price of BIMB-W appears to be fairly valued as it equals the predicted value for BIMB-W of RM0.295 per warrant. The 95%-confidence interval ranges from RM0.191 – RM0.400 per warrant.

Graphically, it can be depicted as follows:

Bimb Forecast Range.png

Should I consider BIMB-W at RM0.295 per warrant?

Point 1 Statistically (as shown above), it appears to be fairly valued at this juncture, and more importantly, the risk of overvaluation of BIMB-W appears to be relatively lower at this juncture.

Point 2 In respect of the underlying instrument (i.e BIMB), it is doing not too bad (relatively if compared to other banking stocks). Some positive price targets by analysts may support the share price in the short-medium term.

Target Price.png

Point 3 The instrument has a long tenure. Maturity of the instrument is in 2023. There is sufficient time to ride through the turbulent cycles of business environment. More importantly, a longer-dated option will suffer less than a shorter-dated option with respect to time decay.

Point 4 – Theoretically, one may consider using an appropriate option valuation model to value this American option in order to compute the implied volatility of BIMB-W. Thereafter, this implied volatility can be benchmarked against the actual volatility of the underlying to ascertain whether there is any potential overvaluation or undervaluation. Keeping things simple – the following graph shows the distribution of the historical 10D-volatility for the underlying (BIMB) of which currently, it has a 10D-volatility of approximately 17%, which is fairly close to historical mean of volatility (i.e not excessive high in terms of historical volatility). Personally, I will not consider options that are trading at high implied volatility / high underlying’s volatility.

HVols.png

Point 5 – The following graph shows the distribution of premium / discount of the BIMB-W since it was listed. It is currently trading at a warrant premium of approximately 17%, at a lower end (i.e left tail) of the distribution. Potentially, the premium of BIMB-W may go up.

premium_normalitytest

Point 6 – A simple technical perspective. Three moving averages are pointing upward, signifying a potential support for the underlying to move further up.

BIMB_Upward.jpeg

What is the downside risk?

Banking industry in Malaysia. Growing NPLs. Slowing business / loan growth.

Concluding remarks

As with other warrants, it is a trading instrument which may offer potential trading opportunity.


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Michael Sincere is a full-time columnist, writer, and author of numerous books, including Understanding Stocks and All About Market Indicators. Click the above image for further reference.


DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES OR RELATED INSTRUMENTS MENTIONED ABOVE.

Author: Ken Utau

Data Scientist, Markets Analyst and Food Lover

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