Infratil Warrants, What are they worth ?

[zyreon]

hmmmmmm

they are indeed options, warrent is just the jargon... just like rights are also options, just another piece of jargon to clarify the nature of them.

heh and as far as the price goes that depends on how people feel about the co. ("a share is worth as much as someone is willing to pay for it")

[OldRider]

Around 50c was a figure I heard tossed around. How this was arrived at I have no idea. Time will provide the answer.

[OldRider]

Lawnmower: You might find something helpful here:
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/spreadsh.htm#basicoption

[Lawnmower]

IFT went ex Warrants Friday, 1:5 issued free, at excercise price of $3.50, in 2009 sometime (forgot exact date, think 31/03/09). (Current share price $3.15) Does anyone want to have a punt on what they will list at ? My gut feeling is that they would have to be worth at least $1.
Also, anyone have an idea why they are refered to as warrants ? I thought options would be a better description ? As that is what they are in effect, as there seems no compulsion on holder to excercise the warrant on expiry.
Finally does anyone have a link to an "idiot proof" options calculator ? (ie Scholes Black) so I can see how my gut feeling stacks up against the academic theorists.


PS: Whatever happens to IFT share price, this will be a great trading stock, as will be volatile.

PPS: Sorry to interrupt the political discussions guys !
Cheers

[Lawnmower]

Gee, I just went away to get a coffee, and see 2 replies, and 19 have read post, just shows what can happen if there is no footy on TV. But to reply:-

Zyreon, I briefly followed link to your website (will look in detail later) lots of financial stuff, but what are you ? Investment advisor ??

OldRider, At 50cents, I would be selling my IFT shares and buying warrants. (Would bet the farm on it)

General comments re options pricing (Scholes Black) The previous web site calculator I used, well the site has "died" !
In general terms an option value usually far exceeds what rational logic (ie comparing headshare price with exercise price) tells you. That is the time value of money, plus inherent volatility, longer period = greater value.

[Lawnmower]

Oldrider, just spotted your second post, but that link seems to have died too.
Cheers

[digger]

After a very busy day came here to start a thread about IFTWB,but see Lawnmower has done it for me. IFT is a share we for some reason talk very little about,yet it has been one of the best preformers in the last 2 years on NZX. I put 50000 into it two vears ago and it is worth 160000 now. So i can not complain,it is my top earner share.


I would say the head share has risen about 20 cents recently to position the new holder for the options[warrants]. That would seem to imply that IFTWB will come on at about $1 to $1.20. And at anything like 50 or 60 cents i will be betting my farm on them.So their u r Old Rider i will undertake to buy your IFTWB here and now for 60 cents,and happly too.

[Lawnmower]

I suspect many readers think IFT is just a punt on Whenuapai v's AIA, however Whenuapai is just a distraction, and a bonus if it happens. A brokers report valued IFT at $3.70, and here is a really rough breakdown of valuation (ie what you get built into each share ):
- Trustpower $2.10
- Wgtn Airport $0.90
- Glasgow Airport $0.80
- Port Tauranga $0.30
- Energy Developments $0.20
- Whenuapai $NIL
- Miscellanious & Debt ($0.60 Negative )
= Est Brokers Value $3.70
The only weakness I see is Energy Developments, but excluding this, we are talking about companies like Trustpower/POT , that never get a mention in this forum, but just go quietly about their bizz, while their share price continues to appreciate. It's a pity Wellington Airport isn't listed, so we would know true market value of that.
OK Time I went (have I done enough for the share price today ? )

PS: Don't rely on brokers valuations, for an expectation of what shares true value is, I just gave valuation details, so everyone can understand IFT fundamentals better.

[TheBossMan]

quote:Originally posted by digger


I would say the head share has risen about 20 cents recently to position the new holder for the options[warrants]. That would seem to imply that IFTWB will come on at about $1 to $1.20. And at anything like 50 or 60 cents i will be betting my farm on them.So their u r Old Rider i will undertake to buy your IFTWB here and now for 60 cents,and happly too.

So digger, did you bet your farm to buy at 60 cents?

[zyreon]

quote:Zyreon, I briefly followed link to your website (will look in detail later) lots of financial stuff, but what are you ? Investment advisor ??

I'm a student, I just puddle around with this website to keep me busy over the holidays and slow periods.

I hope to do more on the analysis and calculations section over the next few days, throw in a few useful formulas for wroking out theoretical share values etc...

[whatsup]

Lawnmower, Is that your purchase of 160,000 @ .60= $96,000 + bkg ,will watch with interest ,Does IFT pay a div? if so how much pa? & when

[Lawnmower]

Well, I just put my money down at 60 cents (Happily too)

[OldRider]

Lawnmower: I have just tried the link I posted above - worked for me, so have another try. There is a large amount of material available there , well worth another attempt.

[k1w1]

It wasn't the farm that I bet - just my quarter acre.

For better or worse this is what I have done.

Jun04 Buy 2000 IFT @ 3.10 + brokerage

July 2 Receive 2000 IFTWB warrants - no cost

Today Sell 2000 IFT @ 3.05 (average) + brokerage
Buy 10000 IFTWBA @ .60 + brokerage

Net Outcome I now hold 12000 warrants at av cost of 52 cents. I need the share price get over $4.02 before 31/03/09.

If not I am going to need a Lawnmower- or a job on Digger's farm.

[digger]

Yes i am into it.Getting pushed around a bit by Lawnmower,but he will soon run out of money and i will be away. Now is a good time to buy as a lot of holders will have free warrants and some people will simply profit them as they do not hold that type of secerity.

[OldRider]

K1W1:I think you might need to relook at your calculations,provided you had no other holding of IFT,the deal is 1 warrant for 5 shares

[Lawnmower]

Ok a few replies
K: The issue rate was 1:5 not 1:1, so for your 2000 IFT shares, so you will get only 400 free warrants, not 2000. To put things another way you want the headshare price to be $4.10 ($3.50 + .60) to break even, on your IFTWB purchase, I like to consider each transaction in isolation, it's simpler. As current price is (say) $3.10, you need to have approx 30% appreciation in price of headshares over the next 5 years to break even. (What is that, ? approx 6% pa ? ) To assess the probability of that for yourself, just look at price history over last 5 years (To me it's a "no brainer" )

O/Rider: Yes, the link works fine now, have saved to my favourites. (V usefull)

My Trading: I put my buy order in at 10.30 this morning, ( @60 cents) and I checked in on my account (I'm with Access) just now, and saw to my dismay that my buy order was still untraded, ??? despite being ample sellers at or below my buy price for the entire day. So I cancelled my order, and as have saved a few dollars (closed @ 57) will put in again tomorrow, but not before I've asked Access for an explanation. I've dealt with Access for some years now, and never had this problem before, anyone else had this problem with them ?? I don't really mind if the price goes down, whem I'm a buyer, but if I was a seller, the word "irate" would be an understatement.

[digger]

Lawnmower i stuffed up as well. I am with directbroking and my 100000 at 58 was not acted upon as it exceeded their credit limit. Like yourself i did not pick this up until late in the day,so will have to fight again another day.
Like your valuations. Do u think the German airport is also a good idea?? I liked that one as it seems to be in the centre of the action.

Happy buying.Like buying cattle maybe we should agree to take turns at buying. One takes the odd days the other the even.We seem to be the very few that like this no-brainer thing.

[Lawnmower]

Digger, If you exceeded the credit limit, well ,a reasonable person would accept that and get on with life, however I'm talking about having more than sufficient funds in my Access call account, and yet the order wasn't executed ! (Grrrrrrrr)

German airport, I'd put in same category as Whenuapai, (bonus is it happens, but don't count on it) Even if we get Whenuapai "OK" it would probably take futher 5 years for residual RMA issues to be resolved (AIA won't be helpfull here, wouldn't surprise me if they would underwrite local residents legal fees, just to preserve their monopoly status timewise )
Cheers
PS Don't ask me about buying cattle, I just sell them (I'm a breeder, sell 2yo as store cattle )

[TheBossMan]

Though I bought IFTWB via ASB, I noticed that Access was having issues with their systems. I was closely looking at the depth and I saw that my order appeared once and after a minute it vanished!

Frantic calls to ASB and sorted things out finally. For most of the morning the quote in Access was "Buy:11; Sell;60", even though the Depth showed plenty of buyers between 50-58.

[HarryFlashman]

Lawnmower

The Schaeffer Research website has an option pricer on it and you can also get one from www.cboe.com not sure of these are any use with NZ options/warants etc but worth a look.

Cheers
Harry

[James K]

I used the Damodaran warrant spreadsheet (which allows for dilution) on the link provided by Oldrider. Seems to me we should not adjust for dilution (as the market did this on monday when the head shares when ex-warrant entitlement). Using current IFT share price, Std dev over last 6 months prices of 20%, 5 years to run, the model suggested a warrant price of 68.6 cents.

Assuming I've done it right, this suggests the warrants are cheap (which was certainly my strong view before I ran the model).

Has anybody else had a play with the models in the link Oldrider provided?

[Futurz]

quote:Originally posted by Lawnmower

Digger, If you exceeded the credit limit, well ,a reasonable person would accept that and get on with life, however I'm talking about having more than sufficient funds in my Access call account, and yet the order wasn't executed ! (Grrrrrrrr)



What explanation did they give for not executing your order??

If the price had gone the other way then they would have had to book it to you at the price you stated and they would take the loss, assuming they didn't have a reasonable excuse

[TheBossMan]

T/over is higher for the warrants.

Seems to me that people are selling their head shares to buy the 'undervalued' warrants.

[Lawnmower]

Hi Boss, I was going to do that myself, but weakness in head share price made my mind up to leave alone, will have another look at doing in a couple of weeks time.

[k1w1]

Doh ! It was only 200 warrants not 2000.

[Binklebonk]

quote:Originally posted by Lawnmower

I suspect many readers think IFT is just a punt on Whenuapai v's AIA, however Whenuapai is just a distraction, and a bonus if it happens. A brokers report valued IFT at $3.70, and here is a really rough breakdown of valuation (ie what you get built into each share ):
- Trustpower $2.10
- Wgtn Airport $0.90
- Glasgow Airport $0.80
- Port Tauranga $0.30
- Energy Developments $0.20
- Whenuapai $NIL
- Miscellanious & Debt ($0.60 Negative )
= Est Brokers Value $3.70
The only weakness I see is Energy Developments, but excluding this, we are talking about companies like Trustpower/POT , that never get a mention in this forum, but just go quietly about their bizz, while their share price continues to appreciate. It's a pity Wellington Airport isn't listed, so we would know true market value of that.
OK Time I went (have I done enough for the share price today ? )

PS: Don't rely on brokers valuations, for an expectation of what shares true value is, I just gave valuation details, so everyone can understand IFT fundamentals better.


At what date is this report? - It appears to be very recent.The values of listed investments appears to be close to current values, however I would be concerned about the airport values used which appear to be a lot higher than recent valuations which is a bit strange.By my calculations your broker has revalued Glasgow upwards again from $150m to $180m. Considering this investment is returning just $0.78m down from last years $1.19m and on strong passenger growth. It's hard to see how they justified the revaluation from $93m to $150m on those numbers let alone a higher figure. Relying on high assets values growth for warrants is not without its risks.

[James K]

CSFB (First NZ capital) have put a brief note out they value the warrants at 33 cents, 37% below the mkt price!

methinks they need to redo their maths! I would certainly be a buyer at 33cents per warrant.

They also state that their estimate of IFT NAV is 353 cents.

[k1w1]

James K,

Do you know how they arrived at that figure ?

[Lawnmower]

I don't think any 2 brokers will ever agree on a valuation (like economists forecasts).
B/bnk the report was dated 25/06/04 (Macquarie) and was more of a commentary on Whenuapai, rather than detailed valuation, they just added NAV info at back. For a detailed valuation of GPIA, should compare with independent valuation reports, when they bought out the minority shareholders a few months back.

[James K]

k1w1, not sure if you are referring to the NAV or the calculated price of the warrant. if you mean the NAV, they didn't provide a split. Last time they did (mid-may, after IFT result) they had TPW at $465m (sp of $4.2), POT at $61.8m (sp of $5.0), Wgtn Ariport at $181m, Prestwick at $135.6, EDL at $41m, other at $5m, and net debt of -$125.5m. That suggests NAV of 337cps if u make no allowance for the warrants. So has not moved much since then.
For their warrant valuation, (frustratingly) they don't make their calculations or assumptions clear.

[TheBossMan]

tempted to pick up more at .50. But, will wait to top up...

Disc: hold lots at avg.56

[Major von Tempsky]

I'm starting to get a bit sceptical. I hold a few free ones and had ideas of jumping in to buy a whole lot more, but 60 cents?
You've gotta be joking. Theoretically they're currently worth minus 48 cents a warrant.
They're down to 50 cents now and steaming backwards.
Considerations: (a) As Infratil grows rapidly it gets harder and harder to keep growing rapidly on a much larger base as lots of examples in the past such as BIL showed.
(b) a lot of the excitement depends on Whenuapai being a goer. If it isn't a goer....
(c) Infratil seems to have a vast and growing appetite for issuing screeds of options/warrants/extra shares to all and sundry at an accelerating rate as if there was no tomorrow. Sooner or later a realisation of significant dilution and being ripped off by top management/controlling shareholders sets in.

They need to sort themselves out a bit, lay down a few self governance rules on share proliferation limits....

[SEC]

No-one has talked about how volatility and dividends affect IFTWB's price.

Everything else being equal, the longer the time to expiry, the greater the time value. James K alluded to it but using a 20% value based on 6 months and plonking that into Black-Scholes is incorrect. The stdev may be the same for 6 months as 5 years but the volatility (as used in B-S) increases by the square root of time. I get 47% historical volatility based on extrapolating 1 year of data, or 53% based on the previous 5 years.

Let's say the HV is 50%.

Then there's dividends to take into account. IFT pays dividends, IFTWB does not.

If IFT pay out 4% pa based on the share price, the share price compounds 15% pa (like it has the past 5 years) and the risk-free rate of return is 6%, then the real increase is 9% pa and the div payouts would total 72c over 5 years.

So crunching the numbers into B-S I get a value for IFTWB of 140c. Subtract div payouts of 72c leaves a vlaue of 68c.

With a current price of 50c this leaves IFTWB 18c undervalued according to B-S derivative pricing theory.

SEC

[SEC]

Lawnmower, I suggest you take Derivatives 101 :D

My conclusion is that IFTWB is undervalued wrt the heads by a considerable margin.

Digger, if divs are paid out at 3% in the future then subtract 54 from the B-S price of 140.

SEC

[digger]

Sec good reasoning which i mostly agree with. However in the end 68 cents is probably too low as we also should take into account mamagement. Firstly the co will want the warrants exercised in 5 years,so the dividends to IFT and not to IFTWA will be watered down to make this happen. I remember all too well a hope going around less than a year ago that the div was going to be much bigger than it was and the depression when it was much less. This team will on past record make it happen,so i say your div substraction is very ammendable by mamagement.
Nevertheless i will be buying more when i thing the bottom is near and am happy to let the price fall.

[Lawnmower]

SEC, You've confused me ( and I rhyme )

[trendy]

Hmm what are IFTWB worth??? It seems only 45 cents looking at the current price.

[TheBossMan]

...or even 51 cents

[blackcap]

quote:Originally posted by TheBoss

...or even 51 cents


I have been told that the First Capital valuation is a slight deviation from the "normal" Black Scholes method in that they also provide a dilutionary effect that the warrants will have on the head shares. If you think it through logically this makes sense, as the head share price will move less rapidly upwards after $3.50 as the dilutionary effects of the warrants block its progress. To me this suggests that volatility is also reduced, thus reducing the value of the calls.

[TheBossMan]

having said that, head shares did not slow down when the exercise price of IFTWA was reached (was it $1.40 or so?)

[blackcap]

quote:Originally posted by TheBoss

having said that, head shares did not slow down when the exercise price of IFTWA was reached (was it $1.40 or so?)


Dosnt work like that Boss, Head shares will have continued forward quicker without the WA's around. Whatever happens, once IFT goes above 3.50 there will be a dilutionary factor present.

[TheBossMan]

increased rapidly to 56 cents, we've a long way to go....

disc: holding at 50cents

[blackcap]

quote:Originally posted by TheBoss

increased rapidly to 56 cents, we've a long way to go....

disc: holding at 50cents


Boss, Im not saying they are under or overvalued, just that when using a valuation you need to take the dilutionary factor into account. Yes they are rising and good too, as I hold a few of these puppies.

I like the idea that its such a long term. Means that there will be plenty of time value left for a while.

[trendy]

I wouldn't read anything into the price increase with the current low volumes. So far today 35,000 at average of $0.54 or ~$19,000 this isn't enough liquidity to get me excited...yet.

[Tim]

5 years is a long time no need to rush. Remember head shares pay dividends, warrants do not. Dividends must be added to equation to compare.

[k1w1]

quote:CSFB (First NZ capital) have put a brief note out they value the warrants at 33 cents,...

With todays price at 62 cents, I hope someone up there is reading the sits vacant column...

[digger]

Quote; CSFB value iftwb at 33 cents.

Well it is obvious they have someone in the system somewhere who is hoping to buy. That sort of valueing is not too far off the Nigeran get rich scheme. Well i am happy to buy IFTWB off CSFB at 40 cents.
To me these warrants are still very cheap.

[James K]

ABN AMRO put out a note yesterday valuing the warrants at 45.9cents and recommending people switch from the warrants into the head shares. weer more bullish on the head shares rating them a buy and valuing them at 371cps. Not really sure how they can rationalise that, it the headshares are really significantly undervalued by the market (as ABN AMRO suggest) you would be better off buying the more leveraged instrument (i.e. the warrants). They do say though that there aren't many catalysts to get the share price moving and the freight volumes in/out of Glasgow aren't helping. Disc: holding IFT and IFTWB (and keen for more of the latter)

[k1w1]

Hi James K,

How do they get to this figure. Is it by using a ouja board ? If there is in fact some analysis, what is the reasoning process whereby they reached that figure ? Why do they differ from the other broker ?

Can't make a decision on the validity of these valuations without having more facts. Otherwise its like following some guru.

[blackcap]

quote:Originally posted by k1w1

Hi James K,

How do they get to this figure. Is it by using a ouja board ? If there is in fact some analysis, what is the reasoning process whereby they reached that figure ? Why do they differ from the other broker ?

Can't make a decision on the validity of these valuations without having more facts. Otherwise its like following some guru.


They generally use empirically tested and theoretically proven, option pricing formulas taking into consideration the following factors:

The risk free rate
The volatility of the underlying head share
The time to maturity of the option/warrant
The strike price
The current share price
The expected dividend payout

Once these figures have been collated and inserted into the formula, it gives you a price for the option/warrant.

[SEC]

And I've done all the said analysis and come up with a warrant value some 17 - 18 cents above present value. Having said that, one of the reasons why ABN Amro came up with the conclusion to buy the heads over the warrants is that it is expecting increased div payouts. My analysis assumes 4% yield, an increase in yield to 5% reduces the warrant value by 18c and make the warrants 'fair value'.

Blackcap, yes there may be reduction in volatility after the heads reach 350. But IFT's 5 year historic volatility has included the effect of IFTWA and for most of that time IFT was trading above IFTWA's strike price of 140. So applying IFT's historic volatility in the B-S equation should still provide a valid answer.

What surprises me is how the broking firms come up with significantly different answers for the warrant's worth.

SEC

[Steve]

quote:[i]What surprises me is how the broking firms come up with significantly different answers for the warrant's worth.

Just imagine how sad life would be if they (and us) all came up with the same answers...[:p]

[SEC]

Steve, the worth of share can be guessed at, but the worth of a derivative is arrived at using mathematics. It's a bit like the analysts coming up with different answers for the question '1+1=?' Are you also advocating there are several answers:D

SEC

[TheBossMan]

SEC, if you're referring to B-S model, then it also depends on what risk free rate they have used.

If the broker says it is overpriced, then it is usually time to buy!

Disc: holding at .50

[SEC]

Aye Boss - I've used 6%, there is a negative correlation between risk free rate and a derivative's worth. Every % increase devalues IFTWB's worth by 4c.

Two importants lessons need to be learnt from valuing IFTWB via theoretical models:

1. Longer timeframes mean more assumptions for input values.
2. GIGO.

At the end of the day IFTWB should only be considered a leveraged IFT play, rather than an arbitrage opportunity.

SEC