Warrants Update: MQ Tech-WA follows mother share in brief upswing

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This article first appeared in Capital, The Edge Malaysia Weekly, on January 2 - 8, 2017.

 

LOSS-making hard disk drive manufacturer MQ Technology Bhd (MQ Tech) grabbed the headlines when its wholly-owned unit, Star Acres Sdn Bhd, entered into a memorandum of agreement (MoA) with Cambodian Resort And Entertainment Co Ltd (CRE) to collaborate on the development and management of a theme park in Cambodia.

The announcement boosted MQ Tech’s share price to 12.5 sen on Dec 13.  The price of its warrants, which were listed on Nov 28, soared to a new high of six sen on the same day.

However, the upward momentum was short-lived. MQ Tech’s share price nosedived after the company denied a news report that it was in talks to build a casino in Cambodia, plunging to eight sen on Dec 14 and to a record low of four sen on Dec 27.  Likewise, the price of its warrants, MQ Tech-WA, dipped to 2.5 sen.

Interestingly, the company’s two major shareholders — Goh Boon Soo and Teh Eng Huat — have sold a large chunk of warrants separately on the open market. The sales could point to the possible emergence of a new substantial shareholder in the company.

Goh sold his 58.16 million warrants, which were issued to sweeten the company’s rights issue, on the open market on Dec 14. Teh disposed of 55.16 million warrants, equivalent to a 30.05% stake, on the same day. Collectively, the two sold 113.32 million warrants, or 61.7% of the company’s warrant holding. This begs the question as to who bought these derivatives.  If it was a single buyer, he could emerge as a substantial shareholder in MQ Tech should he convert the warrants.

Some 183.5 million warrants were issued free to shareholders who subscribed for the company’s rights issue, which was priced at 10 sen per share, on the basis of two warrants for every three rights shares subscribed. MQ Tech-WA is trading at a premium of 150%, based on last Thursday’s closing of 2.5 sen and exercise price of 10 sen.

Nonetheless, the venture into a theme park in Cambodia could be a game changer for MQ Tech, which has been in the red in the past five years.

CRE is the owner of 5.1ha of freehold land in Bonteay Chakkrei, Prey Veng Province in Cambodia, according to the announcement to Bursa Malaysia. CRE intends to develop the parcel into a mixed resort, which will have a Jurassic theme park along with hotels,  a casino and apartments with a total estimated gross development value of US$51.1 million (RM229 million), within six years.

Under the MoA, Star Acres will assist CRE in the setting up of the theme park at an estimated cost of US$5.1 million within three years on a joint-operation basis, subject to a due diligence review.

But there is scepticism about the deal, given MQ Tech’s financials. As at Sept 30 it had a cash balance of RM971,268 while its long-term borrowings were RM3.35 million and short-term liabilities amounted to RM6.4 million. Does it have the financial muscle to undertake the project?