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KUALA LUMPUR: RHB Research Institute believes the market mispriced the shares of Hibiscus Petroleum, Malaysia’s first special purpose acquisition company (SPAC) when it was listed on Monday, July 25.
At the close of trading on its first day of listing, the share price was at 53.5 sen, or 28.7% below the IPO price of 75 sen. The Hibiscus warrants closed at 14 sen. Together, the two instruments have a combined value of 67.5 sen, that is at the 90% refund value as stipulated under the Securities Commission’s SPAC listing rules.
“In our view, given the share has the 90% refund guarantee, it should trade at a minimum of 67.5 sen. If we include the after-tax interest over a three-year period, the share should trade at 73 sen. We thus estimate a minimum arbitrage gain of 14 sen a share or an upside of 26.2%,” it said on Tuesday, July 26.
However, the warrant (issued free to IPO subscribers) on the other hand has no such guarantee and therefore has greater risk. Nevertheless, the warrant’s performance on Monday was positive.
“Therefore, if we assume the warrants are accurately priced, add the exercise price of 50 sen/warrant, and without factoring in any premium, this implies the share should trade at 64 sen – this is 20.8% higher than yesterday’s close.
“We think there is a little bit more upside to the warrant price as the share should in fact trade at a minimum of 67.5 sen. This implies a minimum warrant price of 17.5 sen. Any arbitrage gain therefore depends on fair pricing for the share,” it said.
RHB Research under the SPAC listing rules, Hibiscus has to set aside 90% of the funds raised in a trust account. The funds must be returned to shareholders (excluding management and pre-IPO initial investors) with interest at the end of three years if no qualifying asset is identified and approved by at least 75% of shareholders.
Therefore, based on the IPO price of 75 sen, this guarantees a minimum refund of 67.5 sen a share. After interest, the refund could be as high as 73 sen a share. The warrants have a 3-year tenure from issue date, but can only be exercised once the qualifying asset is identified and approved for acquisition.
RHB Research said Hibiscus shares may be suited to investors looking to participate in the long-term uptrend in oil prices, but understand that meaningful returns may take up to three years to materialise.
The safeguards in place, and management’s vested interest (20% stake), imply limited downside risk.
However, once a QA is approved, and we understand this could happen quite quickly, we highlight that the refund guarantee is no longer applicable, and risks escalate at that point. In any case, at the current share price, the potential arbitrage gain (based on the guaranteed refund) of 26.2% implies a compounded interest of 8.1% per annum over the next three years.