Rhythm-WA rises after off-market trade
The Star, BizWeek. Saturday, December 9, 2006
By Alan Voon
The warrants of second board-listed Rhythm Consolidated Bhd (Rhythm-WA) became active last Wednesday when a block of 2.714 million warrants was traded off market the day before. This block of warrants is believed to have come from the major shareholder of the company as only the top two warrant-holders possess a block of such size. The underlying share was also actively traded last Wednesday and both the mother and Rhythm-WA closed higher at 48.5 sen and 19.5 sen respectively.
Rhythm is originally involved in the publishing business. However, the group is scaling down its traditional business as part of its internal reorganization plan to focus on the information communication technology (ICT) business.
Rhythm was endorsed by the Government a couple of years back to act as the sole “terminal migration organization” in the country. This refers to the supply and management of new payment terminals that conform to the Europay-MasterCard-Visa standard. However, the company has yet to see much contribution from this initiative.
Nevertheless, Rhythm has developed a Secured Transaction and Electronic Payment System (STEPS) which was used by EON Bank new mobile distribution card payment service for business-to-business transactions launched recently. STEPS was developed by Rhythm Technologies Sdn Bhd, a subsidiary of the company, to replace cheques and cash transactions with the distribution card.
Rhythm suffered a net loss of RM2.7mil in the first quarter of FY06/07 ended in September. It attributed the loss to lower margin products sold in its traditional business. Looking forward, the board of directors indicated in the notes accompanying the quarterly report that it expects the printing and publishing business to remain challenging, while positive contribution is expected from the ICT business in the current financial year.
There have been some exercises of Rhythm-WA recently by the company major shareholder and group executive chairman Ahmad Redza bin Ahmad Khairuddin. In its announcements to Bursa Malaysia, the company declared that its executive chairman had in November and September exercised a total of 59,000 warrants. While the amount is not big, it does not make sense for him to exercise the warrants at RM1.00 when the mother share is trading at half its value. Ahmad Redza had in July 2006 bought 155,000 warrants in the market to increase his warrant holdings to 3.15 million representing 12.9% of total warrants outstanding.
Rhythm-WA is trading at a hefty premium of 146%. This is not low for a warrant trading around 20 sen with a gearing of only 2.5 times. The warrant is also not attractive from a short-term speculative perspective given that its implied volatility of 106% is much higher than the share price's short-term historical volatility of 61%. A warrant’s implied volatility is a volatility figure derived from the price of the warrant based on Black-Scholes warrants pricing model. It represents the market expectation of the share price volatility in the future. Implied volatility is best used to compare the valuation of a chain of warrants on the same underlying security.
Comparing implied volatility with the share price's historical volatility is one way of ascertaining whether the warrant is fairly priced. Nevertheless, this assumes that there is a close relationship between past and future price behaviour patterns of the underlying share, which may not always be true.
At the current price level, Rhythm-WA is priced for a sharp expansion in the share price's volatility. Unless one expects the price and volatility of the underlying share to expand in the short term, the risk of trading in this warrant is high. Trader has the option to buy Rhythm-WA to participate in the share price movement of the underlying share.
As Rhythm-WA has a gearing of 2.5 times (x) and delta of 0.63, its effective gearing is 1.6x. Effective gearing gives a more accurate measure of actual leverage provided by the warrant. In Rhythm-WA's case, an investor investing in the warrant can expect it to go up by 1.6x the percentage move of the mother share price when it goes up. Similarly, the warrant's price performance would be worse off by the same margin theoretically it the share price goes down.
[9 Dec 06 at 08:27 AM]
...Back
|
