Currently, Jaks is trading at RM0.84 while Jaks-WB is trading at RM0.62. As Jaks-WB's exercise price is RM0.64, conversion premium will be as follows :
Conversion premium = RM(0.62 + 0.64) / RM0.84 = RM1.26 / RM0.84 = 50%
The conversion premium in absolute term is RM0.42, being RM1.26 less RM0.84. Is this excessive ? To answer that question, we need to look at percentage.
In percentage term, as shown above, the conversion premium is 50%. This is significantly higher than the 25% to 30% we usually see in the market for Warrants. Are holders of Jaks-WB foolish by not taking profit now ?
No, they are not. Because things will look very different if Jaks price continues to go up.
For illustration purpose, let's say if Jaks price goes up by RM1.16 from the current RM0.84 to RM2.00 and Jaks-WB moves up in lock step. Jaks-WB will reach RM1.78 (being RM0.62 now + RM1.16), the conversion premium will be as follows :-
Conversion premium = RM(1.78 + 0.64) / RM2.00 = RM2.42 / RM2.00 = 21%
Can you see how the conversion premium drops as Jaks mother shares go higher ?
Lets' say if mother shares go up another RM2.00 to RM4.00, what will happen ?
Based on the same assumption that Jaks-WB goes up in lock step, it will reach RM3.78 (from RM1.78).
Conversion premium = RM(3.78 + 0.64) / RM4.00 = RM4.42 / RM4.00 = 10%
Can you see how the conversion premium has dropped to very minimal level, significantly below the market norm of 25% to 30% ?
The figures used above for illustration purpose were based on bold assumption that Jaks can one day touch RM4.00. Can Jaks ever reach there ? Lets' compare with MFCB. Based on 260 MW, MFCB's hydro project is expected to generate RM200 mil net profit (according to analysts). By extrapolation based on Jaks' effective capacity of 360 MW (being 30% stake), the Vietnam IPP can potentially generate RM276 mil. Lets' say interest expenses maintains at RM28 mil, and mall losses RM12 mil (being 50% of RM24 mil losses), net profit = RM276 mil less RM28 mil less RM12 mil = RM236 mil.
Based on 580 mil shares, EPS = 40 sen.
Based on 10 times PER, target price of RM4.00 within two to three years time is not unachievable.
Concluding Remarks
The conversion premium of Jaks-WB looked very high based on current market price of mother shares. However, in the event that Jaks really one day goes up to RM4.00, the conversion premium will drop to very conservative level. (The same applies to RM3.00, RM2.00, RM1.50 etc, but to a lesser degree).
As such, the promoters (insiders) are not foolish. By allowing Jaks-WB to trade at such hefty premium (without selling down to take profit), they are hinting that there is still plenty of upside for mother shares (and hence Jaks-WB).
In this regard, sit tight, don't even move a muscle. Just dumb dumb hold. Jaks-WB could be your ticket to forever escape from poverty.
Have a nice day.
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