Okay guys, so let me lay this down real quick. According to the Black Scholes model, Gamuda-WE (“WE”) is worth RM1.58 and I am recommending a trading BUY.
I ran a few models even from several websites and even from Universities such as NYU and got an average WE value of RM1.58! Today’s closing price at RM1.08 is a MASSIVE discount over the intrinsic value offering an upside of 46% if you buy the WE.
Okay, so I get it, you don’t believe the Black Scholes model and you call it the BS model (quite ironic) so let’s try looking at other factors. First of all, let’s try looking at Gamuda because if the mother moves, so will the son right? Let's start with the technical analysis.
First of all, it has broken two major resistance lines at RM4.70 and Rm4.80 and it looks like it’s getting ready to break the next resistance at RM5.00. Furthermore, today it up-gapped showing a strong bullish indicator. Also, if you think you’re too late, really you’re not because the share price is still lower than where Gamuda was in May 2015. Gamuda hasn’t even returned to its previous trending level of RM 5 yet.
Now I must confess that I haven’t done the fundamental analysis for Gamuda but really, the major catalyst in the short term is the award of the MRT 2 project. I think I’ve read that the announcement on the MRT2 award is due by the end of March and by the looks of the technical chart, I suspect that insiders are starting to buy (I’m guessing). If you’re unsatisfied with this, then please please please read one of the many research reports published on Gamuda and make the decision yourself.
However, what I am advocating here is not that Gamuda is an excellent buy (while it may well be), but that the WE is at such a deep discount to intrinsic value that it’s unthinkable to pass this trade.
Looking at WE, the premium is currently only at 3.9%. That is so low! Let's look at other warrants. Sunway-WA has a 15.6% premium and expires in 2016 August (what. the. hell.). Mitra-WD a construction player has a premium of 25.2% and expires in 2020. Just look at any warrant and you'll see that a 3.9% premium on a 2021 warrant is very unjustified. Even if Gamuda-WE has a 10% premium, the WE will be worth RM1.38.
Finally, I must confess that I have made mistakes in my past. I didn’t use to score 100% in math at school, so if you’re reading this and you are skeptical and find mistakes in my calculation/ article please let me know where I have gone wrong. The models I’ve used are linked below and my parameters are clearly stated. I want to learn from you as much as you learn from me.
Happy investing ya’ll.
Cephas
Appendix:
Parameters:
1. Mother price: RM4.94
2. Exercise price: RM4.05
3. Time to expiry: 4.9 years
4. Volatility (standard deviation): 30%
a. Here I used 1 year of Gamuda price movement and using excel, I ran =stdev.p to derive the standard deviation
5. Dividend yield: 2.4%6. Risk free rate: 3.5% (Actually if you look at the 5 year BNM MGS rates, it is 3.66% but I used a more conservative 3.5%)
Ps. When you use a Black Scholes template online, make sure there are fields for dividend and risk free rate in the model.
NYU Black Scholes model
http://www.stern.nyu.edu/~igiddy/spreadsheets/black-scholes.xls
Fintools.com
http://www.fintools.com/resources/online-calculators/options-calcs/options-calculator/
University of Notre Dame
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0ahUKEwjUxteSwdHLAhXFxY4KHf5fDNMQFggxMAM&url=
https%3A%2F%2Fwww3.nd.edu%2F~scorwin%2Ffin40610%2FBlackScholes.xls&usg=AFQjCNHrqlS_Sxv32Dh
Rg0YO9c_VHFjU5A&sig2=0iB6tjZXND5IdsZjsnZT1w&cad=rja
GAMUDA-WE (5398WE) - Dude, Gamuda-WE is seriously UNDERVALUED
http://klse.i3investor.com/blogs/dudetrades/93467.jsp
