Analysis of various warrants listed on CSE

Monday, 31 January 2011 00:14 -     - {{hitsCtrl.values.hits}}

The Research Team at Asia Wealth Management has come up out with a brief analysis of various warrants listed on the Colombo Stock Exchange (CSE).

The move is on account of investor interest on 13 warrants currently trading on the Colombo bourse. Analysts have opined that some investors don’t have adequate knowledge of the value dynamics of warrants hence the analysis by Asia Research team will be helpful. Late last year the Securities and Exchange Commission also issued new guidelines to companies in terms of declaration and listing of warrants.

The SEC directed the CSE to impose the following conditions when granting approvals to the issue of share warrants by public listed companies.

1. Only the following listed companies shall henceforth be qualified to issue share warrants.

a) Main Board Companies having a minimum public float of 25 % at the time of application; and

b) Diri Savi Board Companies having a minimum public float of 10% at the time of application.

2. The total number of shares that could be purchased by the unexercised warrants issued by a listed company qualifying under the above criteria (including the total number of shares that could be purchased by the exercise of the warrants for which the application is made) shall not exceed 15% of the entity’s total number of voting shares issued at the time of the application.

3. The maturity date of warrants shall not exceed two years from the date of issue.

Asia Research in its analysis (See table) compared the listed warrants trading price with its intrinsic value (derived through the Black Scholes Call option valuation method).

The 6th column to the right depicts the difference between the intrinsic value and the traded price. Asia said the positive figures would explain the potential for the respective warrant to further appreciate. Thus, the negative value would denote that the warrant is overvalued at the current price (assuming the underlying stock price to be constant).

“However, it is noted that the intrinsic value is derived based on the current value of the underlying stock price, its volatility, period to maturity and the risk free rate,” Asia said. Hence, any adverse movement of the mentioned assumptions would have an adverse impact on the warrant value, and any favourable movement would positively impact the warrant value (Eg: if in case the asset price appreciates from the existing, it would invariably increase the value of the warrant.)