SCIENTX-CD the only structured warrant providing leveraged exposure to underlying price movements

KUCHING: SCIENTX-CD, the only structured warrant in the market which provides a leveraged exposure to the underlying share price movements at the moment, currently offers an effective gearing of 4.3-fold and is trading In-The-Money with more than three months till expiry.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), it is however, sufficient for the research arm’s trading strategy to play out with ample buffer against time decay.

“Regardless, investors should bear in mind that Structured Warrants are not meant to be held to expiry and carry with them the possibility of expiring worthless,” the research arm said.

“Rather, they should be traded based on the short-term volatility of the underlying stock.”

Kenanga Research noted that Scientex Bhd’s (Scientex) share price rallied for a second day after it posted record earnings for FY16.

It further noted that at the closing bell on Wednesday, the share price was up by 23 sen (3.5 per cent) at RM6.75, building upon the previous day’s 22 sen gain.

Kenanga Research recapped on earnings, the strong full year numbers which were driven largely by manufacturing improvements, both on top line and earnings before interest and tax (EBIT) level on new contribution from the group’s Ipoh acquisition, favourable USD and lower resin costs, which increased EBIT margins from six per cent to eight per cent.

“Meanwhile, revenue from the property segment improved 26 per cent but EBIT rose by only 7 per cent as its focus on affordable housing reduced EBIT margin from 34 per cent to 29 per cent,” the research arm said.

Going forward, Kenanga Research expected the manufacturing segment to remain the engine of growth, underpinned by the new biaxially oriented polypropylene (BOPP) plant which is set to contribute to earnings in the coming quarter (1Q17).

The research arm noted that at the same time, expansion is underway from the Rawang and Ipoh plants, each adding 25 per cent to 60,000 metric tonne (MT) per year and 43 per cent to 24,000 MT per year to total capacity, respectively, which are expected to bring earnings to greater heights.

Based on the research arm’s charting, Scientex has broken out of a “Symmetrical Triangle” pattern, and is poised to climb towards RM7.36 (up 7.4 per cent) over the coming weeks.

“Investors who wish to gain a leveraged exposure may consider SCIENTX- CD ( strike RM6.50) which offers a high effective gearing of 4.3-fold.

“This means that a 7.4 per cent gain in the underlying price would, ceteris paribus, translate to an approximate 32 per cent increase in SCIENTX-CD to RM0.13,” it said.