SUNWAY-WB comes with step-down pricing mechanism
Alan Voon 
Having a step-down pricing mechanism encourages long-term holding of SUNWAY-WB

SUNWAY-WB, the new warrant of Sunway Bhd, started trading on Bursa Malaysia on Oct 6. It was a bonus warrant issued to shareholders. As the warrant is out of money, its debut reference price was 0.5 sen but it immediately surged to a limit-up price of 30.5 sen on its first day of trading.

SUNWAY-WB has since fluctuated between 60 sen and 73.5 sen. On Oct 25, it closed at 66.5 sen and the mother share at RM1.68.

SUNWAY-WB was issued free to shareholders on the basis of three warrants for every 10 shares held. Sunway had at the same time made a bonus issue of four bonus shares for every three shares held.

This had ballooned Sunway’s shares outstanding to 4.92 billion shares while a total of 629.97 million warrants were issued under this exercise.

A peculiar feature of SUNWAY-WB is that the exercise price would be adjusted downwards by 7 sen every year until expiration. The current exercise price is RM1.86.

The warrant will thereafter be subject to a fixed annual step-down of 7 sen on each of the anniversary dates from the date of issuance. By the end of the seventh year, SUNWAY-WB’s exercise price would be RM1.44.

Sunway Group is a conglomerate with diversified businesses in property, construction, healthcare, trading and manufacturing, leisure, hospitality, building materials and quarry.

According to the circular to shareholders for its bonus issue, one of the key strategic initiatives going forward is for the group to grow its healthcare business to become the top healthcare provider in the country.

Such initiative will be spearheaded by Sunway Medical Centre, the group’s flagship hospital in Sunway City, which will be progressively expanded to more than 1,000 beds within the next three to five years.

The group has allocated more than RM1 bil in capital to finance the construction of new hospitals which are strategically located within its other integrated developments.

In the first six months of this year, Sunway recorded a 5% growth in revenue to RM2.33 bil while its net profit rose by 19% to RM304.86 mil.

Sunway explained in its circular on the warrant issue that the  step-down pricing mechanism would encourage long-term holding and promote confidence and continuous support as it is more attractive to exercise SUNWAY-WB in the later part of its tenure.

The step-down pricing mechanism deters immediate dilution to the equity shareholdings arising from the exercise of the warrants. With this in mind, it is more appropriate to use the exercise price at the end of the tenure to value SUNWAY-WB.

Based on the exercise price of RM1.44 at expiry, SUNWAY-WB is now trading at a premium of 25.3% which is not expensive for a warrant with a seven-year tenure.

The warrant’s implied volatility is also lower than the mother share’s historical volatility, suggesting the warrant is theoretically undervalued. Investors who are bullish on the long-term prospects of Sunway can consider switching to the warrant instead of holding the mother share.

The writer is CEO of Warrants Capital Sdn Bhd

This article first appeared in Focus Malaysia Issue 256.