Interest in CIMB’s structured call warrant on Toyota Motor Corp (Toyota-C3) has picked up after the car manufacturer’s stock price tumbled 20% within two months due to a massive vehicle recall, mainly in the US. Toyota-C3 closed at 11 sen last Tuesday, with an unusually high volume of 448,000 units traded. According to Bloomberg data, the structured warrant has drawn investor interest with volume averaging 95,000 units daily since Jan 28, compared with a few thousands units or zero volume in the earlier part of the year and 2009.

The warrant was listed on May 28, 2009, and expires on Nov 26 this year. It was issued at 38 sen per unit, and is exercisable at a ratio of 100:1 at an exercise price of  Y3,680 per Toyota share. Being a cash-settled European-style warrant, Toyota-C3 can only be exercised on the expiry date.

At last Tuesday’s closing price of 11 sen, the structured warrant was trading at about 19.7% premium to Toyota’s stock listed on the Tokyo Stock Exchange, which closed at Y3,315 last Tuesday. In theory, Toyota’s share price must surge to at least Y3,969 for Toyota-C3 to break even.

The Tokyo-listed stock had lost about 20% from its recent high of Y4,200 on Jan 15, due to defects found in the acceleration and braking systems of hot-selling models such as the Camry and the Prius hybrid vehicle. The company was compelled to recall some eight million cars in the US.

Toyota’s vehicle recall has damaged the company’s once unrivalled reputation and may dent its near-term sales, apart from the high costs associated with repairing the defects and legal suits, foreign news commentary said.  But this didn’t stop some auto industry analysts from calling a “buy” on Toyota, indicating that the stock could have been oversold after falling 20%. There were nine “buy” calls, versus three “sell” and eight “neutral” recommendations, according to a Bloomberg poll of analysts covering Toyota.

Meanwhile, target prices for the stock, from analysts who recently updated their ratings on Toyota at Bloomberg, range from Y3,300 to JPY5,100.  Investors who recently bought Toyota-C3 were obviously trying to cash in on a rebound in the mother share. Any rebound, analysts say, would depend on how Toyota handles the situation and restores consumer confidence in its products. Hopefully, the latest recalls by General Motors Corp of some 1.3 million vehicles due to power steering defects may divert some attention from Toyota and help soften the blow to the Japanese manufacturer.  Nevertheless, for those who invested in Toyota-C3, the main concern remainsis that time is running out fast, as the structured warrant expires on Nov 26 this year.

This article appeared in Capital page of The Edge Malaysia, Issue 796, Mar 8 - 14, 2009.