Saturday, July 24, 2010

Would you put your money on the line for Citi-bank?

There are two call warrants traded on Bursa Malaysia:

(1) CITIGRP-C3, strike US $ 3.1, conversion ratio 15:1, 211 days to expiry date(22-02-2011). It was traded for about 10% premium.

(2) CITGRP-C4, strike US $ 4.0, conversion ratio 20:1, 230 days to expiry date(10-03-2011). Traded about 20% premium.

Before you to pull out money out from your wallet, listen to some fundamental reasoning first.

1. Restructuring
C has restructured its business into Citi Corp(good bank) and Citi Holding(bad bank or ShitCo if you like to call it). Here is the latest quarter financial results.

Citi Holdings is the one that is holding all the distressed assets. They have shrunk its toxic assets by almost 40% to reduce their exposure. Their ultimate plan is to unwind Citi Holdings.

C will finally go back to its root of banking with core business of regional consumer bank and institutional clients group. I would say they will focus more on retail banking eventually.

2. Growth prospect/valuation

You can see the level of pessimism is rather high. Just look at the earning estimate 90 days ago vs. current.

Analysts expect them to earn around 0.38 in 2010 and 0.46 next year. I would say there could be surprise on higher end due to lower credit costs, write-down and stronger international business.

Valuation wise, their book value is about US $ 5.33 in Q2 2010. They used to sell for 2-3 times P/BV when they were high flying. I am not that optimistic that C price can go back to US $ 10 - 15 within short period of time. It will take a long time to regain investors' confidence. For argument sake, let's just say they sell for roughly 1X book value, it will be valued around US $ 5 - US $ 5.5.

Back to our Bursa call warrants, should you put your money on the line? Like what I posted yesterday, the US Treasury department will continue to cash out. While I don't think the stock price will crash but flushing down a big block will certainly keep the price subdue for a while. Let's say the stock price lying flat for next 90days, your hope to make some money hoping the stock price to reach US $ 5 - US $ 5.5 certainly is not very good.

The temptation to bet on strong sentiment hoping rising DOW will lift C price together is a risky one. This is a 60-40 risk-reward situation. I would rather punt on some other penny stocks than taking on this one. Pass, no thanks.

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