I wrote an article on valuation of Insas preference share PA and Insas warrants Wb less than one and a half month ago here:

http://klse.i3investor.com/blogs/kcchongnz/71783.jsp

Someone mocked me with his posts below:

Posted by donfollowblindly > Mar 2, 2015 10:34 PM | Report Abuse

The purpose of this blog is to ask you to chase Insas W (TP 35sen with exercise price RM1) which will be listed tomorrow. Is it worth 57% premium as calculated? Why so high? Why not trade at discount like Pesona W?

Posted by donfollowblindly > Mar 3, 2015 09:54 PM | Report Abuse

AyamTua, sudah kaya belum ikut KC? Hari ini ada beli Insas PS dan warrant?

At that time of trading of PA and Wb the first few days, one could get Insas PA and Wb at about 80 sen and 23 sen respectively.

Today at the close, Insas PA was traded at 90.0 sen, and Wb at 31.0 sen. One could have made a gain of 12.5% and 39% for PA and Wb respectively, in less than one and a half months ago. These prices of PA rose to a high of 91.0 sen today and Wb to 34 sen, just a little away from those prices I estimated in the above post.

I made some thorough analysis of what the fair prices of PA should be using a bond pricing and Wb with the Black-Scholes Option Pricing Model, with some assumptions of course. It was not simply plucking some figures from the sky. Actually I was lucky also as the share price of the underlying Insas went up too, and so the derivatives of Insas Wb. PA is a different case though.

“Luck is what happens when preparation meets opportunity.”

So what was the mocking about?

More importantly, how should we look at Insas, PA and Wb from now on? Let us look at each of them and see if they are good investments, and if so, which is better.

Insas Berhad

We will attempt to value Insas based on its sum pf parts here. Table 1 in the appendix shows the assets and liabilities of Insas as at 31th December 2014. The numbers are all in book values.

The balance sheet shows the book value per share of Insas is about RM1.80. One particular item we should pay attention to is the investments in “Associates companies”. Insas has a number of associate companies; Inari Amertron, Melium Holdings, Winfield development etc. The market value of Inari and its warrant of which Insas is holding alone has exceeded the market value of the whole of Insas. That is how much Insas is undervalued. You can refer to the following blog to understand it better.

http://www.intellecpoint.com/2013/07/is-it-not-most-undervalued-stock.html

And here

http://www.stocks-unleashed.com/2015/03/insas-rm087-still-stuck-while-inari.html

So what is the risk of investing in Insas at the current price of 95 sen now, and what is its potential return?

What about Insas PA?

Insas PA

The investment value of Insas PA as a pure bond was computed in the article below as equivalent to 93.5 sen, with an assumption of a required return of 5.5%, about 150 basis points above the fixed deposit rate given by banks.

 http://klse.i3investor.com/blogs/kcchongnz/71783.jsp

Not sure what is the bond rating of Insas PA but I will treat it as AAA, looking at the quality of the assets Insas has. Hence this premium of 150 basis point is reasonable to me.

The beauty of this PA is it can be used as cash of RM1.00 to convert a Wb into Insas share. Hence if Wb is deep-in-the-money, the value of PA is close to RM1.00.

So PA can be anywhere between 93.5 sen and RM1.00, the floor of 93.5 sen is provided by a bond-like instrument, and the ceiling of RM1.00, its convertible value.

At 90 sen now, there isn’t much risk involved investing in this instrument, is there?

Insas Wb

The previous article also provided a valuation of Wb using the Black-Scholes Option Pricing Model (OPM), just one and a half months ago. It was mentioned that Wb is worth 35 sen based on that model and the historical volatility of 53%. But that time, the value of Wb was obtained basing on the underlying share price of 86 sen. Insas closed at 95 sen today, a 10.5% above the previous price. And a 45 days’ time decay has also occurred since then.

What should be value of Wa base on this new information?

The OPM shows the value of Wa is 41.5 sen. But that is based on the exercise price of RM1.00. What if you lock in your exercise price of 90 sen now, I mean buy some PA at 90 sen and use it as RM1.00 for conversion of your Wb to Insas in the future? Not very sure if this logic is logical.

With this, Insas Wb is worth 44.5 sen a piece based on the OPM.

So at 32 sen now, is Wb risky to invest in?

The gearing of Wb is about 3 times, with the effective leverage of 2.1 times (delta*gearing) at the present prices of Wb and Insas.

So invest or not, and which to invest, you make your own judgment.

For those who are interested to learn about financial statement analysis and valuation, please contact me at

ckc15training2@gmmail.com

K C Chong (14^th April 2015)

Appendix

Table 1: Balance sheet of Insas as at 21 December 2014