The share price of Public Bank has been rising significantly since the beginning of July 2009.  From a price of about RM9.00 in early July, the share price of Public Bank has risen more than 12% to RM10.10 at the closing on July 17 2009.

Public Bank is expected to announce its half year results soon and investors who wish to speculate on further upside of Public Bank upon announcement of its results can consider the call warrants of Pulblic Bank that are listed on Bursa Malaysia.  There are three Public Bank call warrants which are still trading in Bursa Malaysia now.  There are PBBANK-CH and PBBANK-CJ issued by CIMB and PBBANK-CK issued by OSK.  With the exception of PBBANK-CH which is an American style warrant, the two other warrants are European style where holders can only exercise the warrants on expiry.  The following tables are the prices and indicators of all three Public Bank warrants.

From the table above, we note that PBBANK-CJ is actually trading at a slight discount.  Is there an arbitrage opportunity for Public Bank shareholders?

The answer is no because this is an European style warrant and its holder cannot exercise the warrant immediately.  Given the generous dividend payout of Public Bank in the past and expected in the near future, PBBANK-CJ holder will lose out by not getting any dividend benefit and hence it is trading at a discount although a very small one.  If you plan to hold PBBANK-CJ until expiry, there is actually no discount because the expected annual dividend yield of Public Bank is closer to 5% and the warrant has more than one year to expiry.

For punters who wish to punt on results rally, PBBANK-CH is the best choice of the three due to its much higher effective gearing and low implied volatility.  Based on an effective gearing of 23.6 times, if the mother share rises 10%, the warrant should rise 2.36 times in theory.  This warrant has just become in the money after the big rise in mother share the last few weeks and is now the most attractive punt of the three warrants.  However, it can also be the riskiest if Public Bank share drops back soon on possible correction.  If the retracement is substantial and the mother share drops below the exercise price, holder of PBBANK-CH may not have enough time to recapture intrinsic value since the warrat is expiring in a little more than 1 month.  High Risk High Gain!

PBBANK-CK is probably the least favoured.  Its valuation is not excessive but in terms of premium and implied volatility, it is the most expensive of the three.

Alan Voon

Warrants Specialist
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July 18 2009

This article is for information and education only.  It is not a recommendation to buy or sell any securities mentioned in the article. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.