Low premiums on Gamuda warrants worth a look

A POTENTIALLY higher order book and new property projects are just some of the reasons why analysts are quite positive on Gamuda Bhd. While Gamuda's share price has seen weakness and subsequently bounced back, the low premiums on some of its warrants may be worth a look.

Gamuda's share price was trading at RM3.69 at the time of writing, and has been hovering between RM3.57 and RM3.66 over the past two weeks.

There are currently nine Gamuda warrants in the market, eight of which are structured call warrants issued by investment banks. The company's warrant, Gamuda-W, was trading at RM1.02 at the time of writing.

Gamuda-W has a strike price of RM2.66 and is convertible for one Gamuda mother share. As it is an American-style warrant, this means it can be converted at any point until its expiry on May 25, 2015.

Based on the current share price, Gamuda-W is trading at a slight discount of 0.27%. According to analysts, when a warrant trades at a discount to the mother share, it allows an arbitrage opportunity, as it would be cheaper to convert the warrant than buying the underlying shares on the open market.

"However, as it is only a slight discount and the warrant still has two years to go, investors may hold on to the warrant on the possibility that the underlying share moves," says an analyst.

Of the eight structured call warrants, only two are due to expire in the latter half of 2013. As a rule of thumb, the longer the warrant is to expiry, the more valuable it is.

Gamuda-C1 is due to expire on July 31, 2013, while Gamuda-C3 will expire on Sept 30, 2013.

Gamuda-C1, which was issued by CIMB Investment Bank, was trading at 10.5 sen at the time of writing, and has a strike price of RM3.40. The conversion basis is four warrants for one mother share. Based on the current underlying share price, this gives Gamuda-C1 a premium of 3.52%.

Gamuda-C3, which was issued by Maybank Investment Bank, was trading at 11 sen at the time of writing, and has a strike price of RM3.30. The conversion basis is also four warrants for one underlying share. Based on the recent mother share price, this gives Gamuda-C3 a premium of 1.35%.

Gamuda's share price went through a weak spot in mid-October while a few substantial shareholders were selling down their stakes.

However, the share price bounced back once Gamuda's long-term managing director Datuk Lin Yun Ling raised his stake to 3.25% on Nov 5. Normally, when a member of management ups his stake in the company, it is seen as a sign of commitment.

AmResearch recently upgraded its recommendation on Gamuda to "buy" with a fair value of RM4.40.

This story first appeared in The Edge weekly edition of Nov 19-25, 2012.