UNIMECH-WA: Overvalued with short time to expiry
Alan Voon 
With about 200 days left to expiration, UNIMECH-WA is trading at a very high premium of 50%

THE company warrant of Unimech Group Bhd, UNIMECH-WA, topped the active list for the first time on Feb 28 after the company reported stronger fourth quarter (Q4) profit on Feb 27.

UNIMECH-WA saw 93.31 million units traded on Feb 28. This represents more than 154% of the total warrants outstanding of 60.41 million.

The price of UNIMECH-WA also experienced a wild swing between four sen and 10.5 sen before closing the day up 150% at 7.5 sen from three sen the previous day. The mother share only rose three sen or less than 3% to RM1.05.

Unimech is one of the leading value-add engineering business group in Malaysia. The initial business activities include designing, fabrication, installation, testing and commissioning of industrial equipment and plants for steam generation, heating and combustion systems, fluid conveyance piping works, as well as maintenance and overhaul of engineering equipment and equipment parts replacement services.

Unimech has subsequently diversified into designing and manufacturing various kinds of industrial and residential valves, strainers, steel flanges, pipe-fittings, rubber expansion bellows, vibration absorption sheets, roller, gaskets, polyurethane casting and extrusion products.

Unimech recorded a net profit of RM11.89 mil for the year ended Dec 31, 2017. This is up 37% from the net profit of RM8.67 mil achieved in 2016. Revenue for the group increased a little more than 1% to RM242.82 mil last year from RM239.05 mil in 2016.

In Q4, Unimech managed to turn around from a net loss of RM1.65 mil in the same period a year ago to a net profit of RM1.63 mil. The previous year's result was affected by impairment losses on inventories and receivables written down.

In the notes accompanying the financial results, Unimech stated that this year will likely be challenging as there remains uncertainties which is the greatest threat to the world economy at the present with escalation of costs due to inflation, volatility of global steel prices and fluctuation of exchange rates.

Barring a drastic change in the global economic conditions, Unimech’s core business is not expected to be significantly affected. The group will remain focused and continue with its competitive strategies to strengthen and grow further on its own brands to enhance its market positioning and concentrate on improving its operations efficiency to further enhance its competitiveness.

The Unimech board is cautiously optimistic that the group will report a satisfactory performance and growth for the financial year ending Dec 31.

With about 200 days left to expiration in September this year, UNIMECH-WA is now trading at a very high premium of 50%.

With an underlying share’s historical volatility of only 19.7%, UNIMECH-WA is theoretically overvalued as its implied volatility is much higher at around 62%.

Traders speculating on UNIMECH-WA must be very brave to bet the mother share price will rally more than 50% in the next seven months or so.

If investors are bullish on Unimech, it is better to buy directly into the mother share as the company had just declared a final dividend of three sen which the warrant holders will not receive.

The writer is CEO of Warrants Capital Sdn Bhd

This article first appeared in Focus Malaysia Issue 274.