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?

Continue reading “Divergence = Opportunity?”

Year 2023

Today, the FBMKLCI¬† dropped below the crucial threshold of 1,700 points due to prevailing negative sentiments surrounding the default of Government-linked investment fund, 1MDB in paying its interest due. Ringgit closed lower too. There is simply too much volatility in the current investing environment. Personally, I foresee that the volatility will continue to increase over the next 1-2 years in view of growing uncertainties with domestic and international front. Nevertheless, we can’t stop investing because of fear. We should always take a longer term view when comes to investing. One such instrument that may be considered by investors for the purpose of long term investing is the call warrant issued by Malaysian-listed BIMB Holdings Berhad. This long-dated call warrant will expire in the year of 2023 and some of its terms are summarised as follows:

Exercise Price (MYR) 4.7200 Implied Gearing a 7.647 Conversion Ratio 1 Share : 1 Warrant(s)
Premium (%) 32.115 Simple Gearing 11.265 Expiry Date b (Countdown) 04 Dec 2023 (2,777 days)
Outstanding Warrants c 426,715,878 Underlying (Price) BIMB (3.830)
Exchange Code 5258WA.MY ISIN Code MYL5258WAXC6

Let’s do a quick desktop analysis to assess whether BIMB’s warrants (“BIMB-W”) are relatively overvalued or undervalued. A simple regression analysis is performed between the price of BIMB-W and its mother share, BIMB:

BIMBW-model.png

Based on the above statistical relationship:

Const -1.74
BIMB 0.54640
-25% -20% -15% -10% 0% 10% 15% 20% 25%
BIMB 2.87 3.06 3.26 3.45 3.83 4.21 4.40 4.60 4.79
BIMB-W (forecast) 0.00 0.00 0.04 0.15 0.36 0.56 0.67 0.77 0.88
BIMB-W (actual) – 26 April 2016 0.34

BIMBW_forecast.png

Currently, BIMB-W appears to be fairly valued with a forecast value of RM0.36 against actual value of RM0.34. The 95%-confidence interval for forecast value of BIMB-W is between 0.160 and 0.552.

From a different perspective, this desktop analysis shows that that when BIMB (mother share) ever reaches RM3.18, the value of BIMB-W is expected to approximate zero or in another word, the capping warrant premium for BIMB-W is 48.2% (based on the exercise price of RM4.72). We should expect BIMB-W to reverse downward when its warrant premium approximates 48.2%.

The good thing about using longer-dated warrants (or options) is that the value will not be impacted significantly by its time decay property.

What are analysts’ current target price on BIMB?

Date Open Price Target Price Price Call Source
25/03/2016 3.75 4.10 HOLD RHB-OSK
08/03/2016 3.65 3.68 HOLD ALLIANCE
03/03/2016 3.69 4.10 BUY RHB-OSK
03/03/2016 3.69 4.22 BUY MIDF
03/03/2016 3.69 3.90 HOLD MAYBANK
03/03/2016 3.69 4.30 HOLD KENANGA
03/03/2016 3.69 3.85 HOLD ALLIANCE
01/03/2016 3.60 4.22 BUY MIDF
29/02/2016 3.57 3.90 HOLD MAYBANK
29/02/2016 3.57 4.07 HOLD KENANGA

 

 

 

 

DISCLAIMER: THIS SITE IS 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. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE.

It Is All About ROE

Malaysian banks have recently announced their latest financials for the quarter. It is important to consider the impact of return on equity (“ROE”) on the valuation multiple (e.g price-to-book) of listed Malaysian banks.

What do we see?

ROE is generally on a downward trend for the Malaysian banking sector

IndividualBanksROE2015.png

IndividualBanksROE2015 2.png

Why is ROE declining?

If compared to matured markets, Asian banks (e.g Malaysian banks) are involved for a large part in economies that have shown good growth, higher margins and new opportunities brought about by advancing demographics. This should continue over the medium term but pressures from increasing competition, capital requirements and growing cost base will mean it is difficult to maintain the same growth. As banks are becoming more capital intensive, it would be increasingly tougher for Malaysian banks to sustain the current high returns future ROE.

European banks have been reporting single-digit ROE over the last few years.

ROE & Valuation

There is a statistical relationship between the price-t0-book (“PBR”) valuation multiple of banks against its ROE:

PBR vs ROE_ Banks

As shown above, with a relatively higher ROE, Public Bank is trading at a premium to its banking peers whilst Affin is trading at the lowest PBR due to its low ROE.

The above statistical relationship is defined as follows:

PBR (x) = 11.2089*FY15 Roe + -0.026807, r-squared of 0.767 and p-value of 0.0019597

Based on the defined formula, the predicted value may be derived for each listed Malaysian bank and be compared to its current share price:

Banks vs ROE table.png

From the above analysis (including a sensitised ROE scenario), it appears that only RHB Capital is trading lower than its predicted value of RM6.87 (base) and RM5.81 (sensitised).

Key Implications

This is a simple desktop statistical analysis. This shall not substitute the need for a detailed fundamental analysis for each of the banking stocks. Nevertheless, the defined formula based on the use of ROE enables us to form a broad range of predicted values for the banking stocks.

DISCLAIMER: THIS SITE IS 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. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS.