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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » REEF.W19 really?

REEF.W19 really?

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21REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Wed Oct 31, 2012 4:26 pm

anubis


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
I deleted a post twice because it was confusing Smile

@slstock: from our discussions I gathered the following points:

1. If you are buying warrants to sell without converting, then making a flat investment (compared to the same with .N shares) will give you a big gain percentage wise IF the .N share appreciates as expected. But IF things go really south, you are completely bust compared to the .N investor who made the same initial investment.

2. If you are buying warrants hoping to convert them (i.e buying a fixed number of shares), then warrants give you a certain protection against the company going bust. Because if you buy the same number of .N shares upfront, your loss will be considerably large.

Did I get the summary right this time? Suspect

Cheers!

22REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Wed Oct 31, 2012 4:32 pm

anubis


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
I think it's just the point number 1) above that we have seen in action, which is why warrants are called "high-risk high-gain"....

If you think about point 2), warrants are actually much safer than normal shares. But I guess nobody looks at warrants in this way.

Cheers!

23REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Wed Oct 31, 2012 5:39 pm

hariesha


Vice President - Equity Analytics
Vice President - Equity Analytics
@ anubis : I think you are still not getting the point of % gain.

I would like to add to what slstock has pointed.

There are more than two years for W19 conversion. So many things can happen in between. We have to think about the % gain with trading opportunities.

Let’s look at the lowest price and highest price of w19 and Reef.N during past six months.

W19 lowest was Rs.2.20 and highest is Rs.9.20
Reef.N lowest was TRs.20/- and highest was Rs.38/-
(Prices taken from my memory didn't check with the past records. I think these figures are correct as I did some good trades on both counters.)

Reef.19 maximum trading gain: 318%
Reef.N maximum trading gain : 90%

So this is the difference.

The logic that when Reef.N comes to Rs.20/-, W19 should go in smoke is true only when it is very close to the conversion date under subdued market conditions. This is because "THE TIME VALUE". When Reef.N hit Rs.20/- about four months back W19 had a value above Rs.2/-.

Look at the two GREG warrants. When you consider the conversion price, no value for the two warrants. But actually they do have value and demand.

What I feel about Reef.N is it's illiquid. The real guys are manipulating the price as they want.

24REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Wed Oct 31, 2012 5:56 pm

hunter


Moderator
Moderator
itching to add something to what @hari and @sls mentioned.

This is my way of explaining...

The derivatives (warrants, rights, non voting) when trading cheaper than the .N (share), they will have an 'amplifying' effect when the share price is changed.
i.e. when share price is changed by x%, the derivative will move more than x%.
It is because, usually the absolute difference (Rs difference) between the two is the same when the prices are changed.
It's like using some leverage to boost your profit.

Am I making things more complicated here ? scratch

25REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Wed Oct 31, 2012 8:07 pm

Fresher


Moderator
Moderator
slstock and some others have got the percentage gain/loss argument spot on.

compare apples with apples, so looking at percentage gain/loss, it is equal risk both ways. But if you are targeting an absolute gain/loss, then yes, W is better to a great extent.

One of the great warrant gains were seen for NTB which I'm sure chinwi has a great experience. Then warrants were new i guess to our people.

Recently warrants have not been successful but I'm hopeful the situation would change in the future. The failure of REEF.W0018 is actually a good thing in W19 perspective.

26REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Wed Oct 31, 2012 8:58 pm

Chinwi

Chinwi
Associate Director - Equity Analytics
Associate Director - Equity Analytics
Just logged in to say I join npp in :


npp wrote:
Recently warrants have not been successful but I'm hopeful the situation would change in the future. The failure of REEF.W0018 is actually a good thing in W19 perspective.

(I was out in some cool jungle area past few days. Had no chance to meet you. Managed to get access to write this. )


I also like to give my version of WMDCF's formula ,
For investing 1000 Rupees,

REEF.W19
for 1000 rupees => 200 shares
total cost = 1000/-
value if N=60, (200 x 60-40) -> 4000
profit = 4000-1000 -> 3000/-

If you buy REEF.N
for 1000 rupees => 33 shares

value if N=60, 60 x 33 = 1980
profit = 1980 - 1000 -> 980/-

27REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Wed Oct 31, 2012 9:03 pm

anubis


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@Chinwi: so is it the case that warrants are almost always bought in the hopes of selling them without converting?

If that is the primary motivation, then indeed warrants can give you a huge gain. Also, they can give you a huge loss if things go bad (assuming a flat initial investment here and not a fixed amount of shares)

Cheers!

28REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Wed Oct 31, 2012 9:31 pm

smallville

smallville
Associate Director - Equity Analytics
Associate Director - Equity Analytics
@anubis wrote:@wmdcf: I hope you are joking Smile

Cheers!

PS: Your calculation is wrong. You are investing 9K on warrants and only 1k on .N, try investing the same amount and do the calculation again.

I think what he was trying to say was that with a small investment you could reap more benefits with a warrant than buying the normal share..

@anubis wrote:PS: I guess at some point you have to take into account the fact that appreciation of REEF.N will weigh in the effect of warrants. So, speculating for REEF.N to reach 60 Rs might be a bit too far fetched, but this depends on how many warrants are out there. Need a more detailed calculation study

I think its safe to assume that REEF.N can reach at least 60 around June 2015, means after 2.5 years before the conversion..

All depends on how they handle the new hotel projects and the development of those in a timely mannar.

29REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Wed Oct 31, 2012 9:37 pm

anubis


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Aside from the technical discussion, how is REEF doing with the new hotels at the moment? have they started construction? Anybody aware of the ground situation?

Cheers!

PS: I hold both REEF.N and REEF.W19

30REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Wed Oct 31, 2012 9:52 pm

Chinwi

Chinwi
Associate Director - Equity Analytics
Associate Director - Equity Analytics
@anubis wrote:@Chinwi: so is it the case that warrants are almost always bought in the hopes of selling them without converting?

Yes and No.

Usually I do sell some portion when I get a fair return even before the Cdate.

Even if you convert it is same.
Eg. to convert 200 shares we pay 40 x 200 = 8000.00
New value 200 x 60 = 12,000

If they feel the company has got into a good position and go even better with the new money after the conversion people will try to increase their holding by paying for the conversion.



If that is the primary motivation, then indeed warrants can give you a huge gain. Also, they can give you a huge loss if things go bad (assuming a flat initial investment here and not a fixed amount of shares)

Correct.
Hence play with an amount you can forget.

31REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Wed Oct 31, 2012 9:54 pm

anubis


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Thanks Chinwi, and everyone who contributed. I think now I have a very good idea about warrants Smile

Cheers!

32REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Wed Oct 31, 2012 9:56 pm

Backstage

Backstage
Moderator
Moderator
Very interesting, thanks all.

33REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Wed Oct 31, 2012 11:29 pm

marusira


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@Chinwi wrote:Just logged in to say I join npp in :


npp wrote:
Recently warrants have not been successful but I'm hopeful the situation would change in the future. The failure of REEF.W0018 is actually a good thing in W19 perspective.

(I was out in some cool jungle area past few days. Had no chance to meet you. Managed to get access to write this. )


I also like to give my version of WMDCF's formula ,
For investing 1000 Rupees,

REEF.W1for 1000 rupees => 200 shares
total cost = 1000/-
value if N=60, (200 x 60-40) -> 4000
profit = 4000-1000 -> 3000/-

If you buy REEF.N
for 1000 rupees => 33 shares

value if N=60, 60 x 33 = 1980
profit = 1980 - 1000 -> 980/-

කොහේ ගණන්ද මේ......?
ආයෝජනය 1000 කිව්වට 40හ ගානේ 200 ට 8000ක් ගෙවන්න එපැයි...
මුළු ආයෝජනය 9000යි



Last edited by marusira on Wed Oct 31, 2012 11:41 pm; edited 1 time in total

34REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Wed Oct 31, 2012 11:34 pm

anubis


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@marusira: That's only if you want to convert... but if you exit without converting, then you have a big profit.

Your best exit price is = Value of REEF.N in 2015 - conversion price of W.19

The warrant will have gained up to 20 Rs. if REEF.N hits 60.

Cheers!

35REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Wed Oct 31, 2012 11:40 pm

smallville

smallville
Associate Director - Equity Analytics
Associate Director - Equity Analytics
@Chinwi wrote:Correct.
Hence play with an amount you can forget.

This is the most important thing in this investment Wink

In here; there are no magic formulas.. Only possible facts and assumptions.. However, I feel the known devil is better than unknown God..

When ur putting your money on the line, u need to take the necessary precautions..

36REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Thu Nov 01, 2012 7:09 am

Fresher


Moderator
Moderator
One important thing to note is that normally warrant conversion price should be less than the normal share price. It was in the case of W19 as well many months back.

So taking into consideration, theoretically, not taking time value of money into consideration the value of W19 now is around (-10). When N goes to 45/- W19 would trade at around 5/-

If that is the case and if you make these calculations assuming these are bought at that point, the potential % gain that can be made with W compared to N is very much more.

37REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Thu Nov 01, 2012 8:58 am

Light of Hope


Vice President - Equity Analytics
Vice President - Equity Analytics
npp wrote:
Recently warrants have not been successful but I'm hopeful the situation would change in the future. The failure of REEF.W0018 is actually a good thing in W19 perspective.

This is true in some points but how are they going to fund their future projects when the warrant conversion was a total failure? Can achieve their future objectives? How are they going to find money to build those hotels? Can somebody please enlighten on this?

If they don't have the money to go as planned, what value will REEF have in 2015? will reef.w0019 will be another failure?

38REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Thu Nov 01, 2012 9:39 am

Fresher


Moderator
Moderator
@Light of Hope wrote:
npp wrote:
Recently warrants have not been successful but I'm hopeful the situation would change in the future. The failure of REEF.W0018 is actually a good thing in W19 perspective.

This is true in some points but how are they going to fund their future projects when the warrant conversion was a total failure? Can achieve their future objectives? How are they going to find money to build those hotels? Can somebody please enlighten on this?

If they don't have the money to go as planned, what value will REEF have in 2015? will reef.w0019 will be another failure?

Your point is very valid. I have not gone into detail as to see what the objectives of the warrant proceeds are. But looking at the financials, it's subsidiaries have their own money to build the hotels, which after completition should add to the group's revenue.
REEF itself has a significant amount of cash and has earned a lot as interest as well. So, I'm not entirely sure as to what the objectives are, but since this is an option, the company would have not expected it to be excercised fully.

So for me, I'll take it as the failure of W18 (which they are trying to revive again) will not have such a drastic effect on REEF, even if it does, it probably will be set off (price wise) by the dilution that did not occur.

39REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Thu Nov 01, 2012 11:52 am

market bull

market bull
Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
This is totally wrong...you have to adjust discounted value of 8,000 in to REEF N.

Assume 12% discounted rate for 3 years=0.71*8000=5680

=189 shares+33 shares*30(60-30)=

Profit=6660 from REEF N=6660

@wmdcf wrote:REEF.W19
for 1000 rupees => 200 shares
200 x 40 = 8000
total cost = 9000
profit = (200 x 60) - 9000 -> 3000

REEF.N
for 1000 rupees => 33 shares
no aditinal cost
profit = (33 x 60) - 1000 -> 1880

Question

40REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Thu Nov 01, 2012 12:02 pm

market bull

market bull
Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
No money to start construction.check cash flows of CITK & Waskaduwa
http://forum.srilankaequity.com/t23962-dj-new-ipo-hikkaduwa

@anubis wrote:Aside from the technical discussion, how is REEF doing with the new hotels at the moment? have they started construction? Anybody aware of the ground situation?

Cheers!

PS: I hold both REEF.N and REEF.W19

41REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Thu Nov 01, 2012 12:25 pm

market bull

market bull
Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

CITK has 8M negative cash balance. Waskaduwa has 11M only.Do you think they can construct Waskaduwa from 11M.

Warrant conversion also coming,they have real problem with cash.

quote="npp"]
But looking at the financials, it's subsidiaries have their own money to build the hotels, which after completition should add to the group's revenue.
[/quote]

42REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Thu Nov 01, 2012 1:52 pm

Fresher


Moderator
Moderator
well you have to look closer. I don't know why cashflow statement does not tally with the balance sheet but they have positive cash+fixed deposits which can also be considered 'cash'
They (CITK) also have a large stake in CLND which is worth around 1.4bn rupees. So it's not that they are struggling for cash, but they have loads of it. Further CITK also has a very comfortable debt/equity ratio.

CITW also has a huge amount due from related parties and NO debt, so again, it will not be hard to find cash.

Only concern for me is that most of the amount due to both CITK and CITW is from the parent REEF. Now the failed warrant conversion will affect that in a big way since the amount is almost 1bn rupees. The amount foregone by the W18 non-conversion is 943m. Anyway, it's not that even the parent company too is struggling for cash

Btw, the amount that could be raised by the W19 conversion in 2015 is 2.5bn

43REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Thu Nov 01, 2012 1:54 pm

Fresher


Moderator
Moderator
I hold no REEF.N, but only REEF.W19

These points are not in favor of REEF but just to make the point that the group is in no immediate risk of not having cash

44REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Thu Nov 01, 2012 5:08 pm

market bull

market bull
Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
I also dont know why.But normally cash & cash equivalents reflect in cash flow.last year b/s figure was tallied with cash flow balance.

According to cmv of CLND it is worth 1.4Bn. Problem is whether it is cash realizable or not in short term to mid term.Current NAPS is 18.25,CLND running at loss.Who is going to buy this loss making company at least above 30.Initial cost of Investment was around 30 after transferring 10% stake from Reff to citk at 40.

What REEF did they have brought 10% of CLND at 20 & transferred to CITK at 40.only one thing they can do now transfer CLND stake to another company from CITK at profit.

Hikka IPO failed,w conversion coming..... construction of CITW,CITK not properly started.yes no doubt they are running out of cash.

Do you think that REEF can transfer 900M to Wskaduwa immediately no...at leat they need another 2-3 IPO's.

npp wrote:well you have to look closer. I don't know why cashflow statement does not tally with the balance sheet but they have positive cash+fixed deposits which can also be considered 'cash'
They (CITK) also have a large stake in CLND which is worth around 1.4bn rupees. So it's not that they are struggling for cash, but they have loads of it. Further CITK also has a very comfortable debt/equity ratio.

CITW also has a huge amount due from related parties and NO debt, so again, it will not be hard to find cash.

Only concern for me is that most of the amount due to both CITK and CITW is from the parent REEF. Now the failed warrant conversion will affect that in a big way since the amount is almost 1bn rupees. The amount foregone by the W18 non-conversion is 943m. Anyway, it's not that even the parent company too is struggling for cash

Btw, the amount that could be raised by the W19 conversion in 2015 is 2.5bn

45REEF.W19 really? - Page 2 Empty Re: REEF.W19 really? Thu Nov 01, 2012 5:19 pm

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
@market bull wrote:I also dont know why.But normally cash & cash equivalents reflect in cash flow.last year b/s figure was tallied with cash flow balance.

According to cmv of CLND it is worth 1.4Bn. Problem is whether it is cash realizable or not in short term to mid term.Current NAPS is 18.25,CLND running at loss.Who is going to buy this loss making company at least above 30.Initial cost of Investment was around 30 after transferring 10% stake from Reff to citk at 40.

What REEF did they have brought 10% of CLND at 20 & transferred to CITK at 40.only one thing they can do now transfer CLND stake to another company from CITK at profit.

Hikka IPO failed,w conversion coming..... construction of CITW,CITK not properly started.yes no doubt they are running out of cash.

Do you think that REEF can transfer 900M to Wskaduwa immediately no...at leat they need another 2-3 IPO's.

npp wrote:well you have to look closer. I don't know why cashflow statement does not tally with the balance sheet but they have positive cash+fixed deposits which can also be considered 'cash'
They (CITK) also have a large stake in CLND which is worth around 1.4bn rupees. So it's not that they are struggling for cash, but they have loads of it. Further CITK also has a very comfortable debt/equity ratio.

CITW also has a huge amount due from related parties and NO debt, so again, it will not be hard to find cash.

Only concern for me is that most of the amount due to both CITK and CITW is from the parent REEF. Now the failed warrant conversion will affect that in a big way since the amount is almost 1bn rupees. The amount foregone by the W18 non-conversion is 943m. Anyway, it's not that even the parent company too is struggling for cash

Btw, the amount that could be raised by the W19 conversion in 2015 is 2.5bn

Please note they can go for Debenture Issue, which will be mutual benefit for their bosses affliated banks.

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