This article first appeared in The Edge Malaysia Weekly on November 6, 2017 - November 12, 2017

THE recent agreement between loss-making MNC Wireless Bhd and SPNB Dana Sdn Bhd — a wholly-owned unit of Syarikat Perumahan Negara Bhd (SPNB) which, in turn, is owned by the Minister of Finance Inc (MoF Inc) — raises questions about the expected returns on MNC’s proposed RM20 million investment in the project.

On Oct 25, MNC announced that it had signed a subscription and shareholder agreement (SSA) with SPNB Dana to incorporate a joint-venture company (JVCo).

MNC would subscribe for 30% equity interest in JVCo while SPNB Dana would hold the rest of the stake.

This followed a memorandum of understanding (MOU) agreement for the collaboration — signed on Aug 25 — which indicated the appointment of MNC as SPNB Dana’s technology solutions partner.

On Aug 28, MNC entered into an agreement with mobile services provider mTouche Technology Bhd to develop a digital platform for SPNB Dana, comprising mobile application, website, digital display and broadcasting solutions, and integrated payment gateway solutions.

MNC and mTouche are also seeking the exclusive rights to market and commercialise the digital platform for the Malaysian market.

However, checks with parties familiar with the deal reveal that there is no legally binding guarantee of MNC’s appointment as SPNB Dana’s technology partner, as the agreement signed in August was only an MOU.

Based on MNC’s filing with the exchange, the SSA that it had entered into with SPNB Dana does not specifically mention its appointment as SPNB Dana’s technology partner, despite a press release stating that the appointment actually forms a part of the SSA.

When contacted, MNC CEO Christopher Tan Chor How tells The Edge that the company is in discussions with SPNB Dana to be appointed as technology partner.

“We have been in discussion to work out the framework of the technology partnership, which will be announced in due course. It was a part of our arrangement, as you can see in the MOU and the SSA,” he says.

He points out that the works form a part of SPNB’s digital transformation road map, which will require various solutions that have yet to be finalised.

“They are still ironing out the details of their requirements but we have had many preliminary discussion with them. We will have to wait for them to finalise the agreement on the partnership,” Tan says, adding that MNC is looking at securing an agreement within the year.

Meanwhile, another factor to consider are the weak financial results of SPNB Dana. Checks with the Companies Commission of Malaysia show that the company posted a net loss of RM3.95 million for the financial year ended Dec 31 last year.

It also had retained losses amounting to RM11.88 million and liabilities totalling RM2.76 million compared with total assets of RM1.39 million, which begs the question as to whether MNC will see a return on its investment in JVCo.

“From what I understand, it (SPNB Dana) is a relatively new company, which just commenced operations in 2015 or 2016. Naturally, any business takes time to pick up.

“At the end of the day, it is a unit of SPNB, which is owned by MoF Inc. If it involves MoF Inc, then I think it’s an acceptable risk,” Tan explains.

MNC will be undertaking a rights issue with free warrants to raise up to RM20 million, which will be used to subscribe for the redeemable preference shares (RPS) of JVCo.

The company says the RPS has a coupon rate of 5% per annum, providing returns on top of the 30% share of profits from JVCo.

SPNB Dana, in turn, will use the funds raised to provide short-term financing to eligible buyers of SPNB’s developments for down payments or differential sums, seeing as SPNB Dana only has RM1.39 million in assets.

However, MNC might not call for the rights issue in the immediate future as it has just completed a rights issue exercise in November last year.

In August 2015, MNC announced a cash call via a renounceable rights issue of up to 311.76 million new shares, together with 207.84 million free warrants, on the basis of three rights shares for every one existing share held.

The exercise had been expected to raise between RM4.95 million and RM46.76 million, after considering the impact of another proposed private placement exercise by MNC prior to the rights issue.

About 32% of the proceeds had been allocated for working capital purposes while 29% of the funds had been earmarked for the purchase of advertising display panels.

The balance had been allocated for the development of mobile gaming applications, infrastructure development expenditure, branch expansion, repayment of bank borrowings and to cover the estimated expense of the proposals.

Bursa Malaysia and MNC’s shareholders green-lighted the exercise at end-2015, but the company then applied for an extension to November 2016 to complete the rights issue.

MNC subsequently revised the expected proceeds to be raised to between RM3.3 million and RM28.34 million, due to the cancellation of a prior private placement exercise as the company could not secure investors.

Meanwhile, Metronic Global Bhd — the largest shareholder of MNC — sought an injunction to restrain MNC from executing the rights issue, but it was later struck off by the High Court.

In November last year, the shares were listed, with Metronic subscribing for 53.14 million shares. This increased its direct equity interest in MNC to 70.86 million shares or 18.75%. As at Oct 9, Metronic’s stake in MNC stood at 16.066%.

By the end of the company’s second financial quarter, MNC had utilised RM13.75 million out of the RM28.34 million in proceeds.

Earlier this year, MNC completed a private placement to fund a different project, which is related to its MOU with mobile solutions provider M3 Technologies (Asia) Bhd.

The MOU entailed a collaboration between the two parties for the development of a business-to-business and consumer-to-consumer e-commerce platform to operate in the Malaysia Digital Free Trade Zone. The platform is aimed at supporting smaller scale entrepreneurs when they trade their products and services online.

Despite the non-legally binding MOU and the lack of a concrete agreement between MNC and M3, MNC has already raised the cash it needs for the project via another private placement exercise completed in August. The exercise raised RM2.37 million instead of the RM3.48 million proposed earlier.

The company said in a bourse filing last month that it is in the final stage of discussion with M3, and expects to formalise a collaborative agreement by the first quarter of next year.

Besides the MOUs with SPNB Dana and M3, MNC still has a pending MOU with licensed Petronas vendor Petrowangsa Sdn Bhd for the provision of advertising and digital solutions.

There has been no material development in the MOU since its signing in November 2015.

This brings into question MNC’s ability to take on other jobs, considering its tendency to conduct cash call exercises to fund its projects. As at the end of 2QFY2017, MNC’s cash and bank balances stood at RM20.83 million.

The company has been loss-making since 2006 — a year after its listing on the Mesdaq Market (now ACE Market) of Bursa Malaysia — although it has seen a gradual reduction in its losses over the years and had posted a net profit of RM313,062 for FY2016.

However, MNC fell back into the red in the first half of FY2017 with a cumulative net loss of RM259,000 compared with a net profit of RM14,000 in 1HFY2016, while revenue fell 13% year on year to RM7.83 million from RM9.05 million.

The company attributed the weaker performance to higher operating expenditure from higher customer acquisition costs and administrative costs, coupled with higher infrastructure costs from system enhancement initiatives.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.