How Would JK Tech Holdings’ Recent Private Placement Affect Its Shareholders?

In my series on private placement deals, case studies will be made from recent private placements happening in Singapore to help investors better understand how such deals can affect existing shareholders of the companies and listed-entities involved.

This time, my focus is on JK Tech Holdings (SGX: 5TS). Last month, the company announced a private placement program that involved two other companies, namely Ezion Holdings (SGX: 5ME) and SF Ventures. In addition, there was also a separate private placement of 19 million shares that had been underwritten by brokerage firm Maybank Kim Eng Securities.

Regarding the deal with Ezion and SF Ventures, JK Tech Holdings had issued 65 million new shares to the consortium in addition to 325 million options that would allow both investors to subscribe for more shares in the company, effectively making them the largest shareholders of JK Tech Holdings. Ezion’s an oil & gas support services provider while SF Ventures is an investment holding outfit that’s linked to the accounting and audit firm RSM Chio Lim LLP.

What is JK Tech Holdings?

JK Tech Holdings used to be an information technology solution provider in Singapore prior to the placement deal. Back then, it had focused on distributing different IT hardware, software products and providing other related services. However, with the new private placement, the company is planning to go into a completely different and new line of business: The exploration and production of oil and gas in the region (otherwise known as upstream activities within the oil and gas industry).

Clearly, the company does not have any experience or know-how regarding the new business and that is where Ezion Holdings comes in. As a leading offshore oil and gas service provider, there’s at least some experience that Ezion can share regarding exploration and production activities. Though, it must be noted that this is also Ezion’s first entry into the exploration and production of oil and gas. Ezion’s deal with JK Tech Holdings would basically see the former own 64.8% of the latter (assuming all the options are converted). In addition, JK Tech Holdings would also serve as a conduit for Ezion Holdings’ upstream oil & gas business.

Financial effects on JK Tech Holdings

After the issuance of all the private placement shares and assuming the options are fully converted, JK Tech Holdings’ net tangible asset will rise from S$5.4 million to S$42.6 million. Concurrently, the share count of the company would jump from 66.4 million to 466.3 million.

The market has viewed this as a piece of great news as JK Tech Holdings’ shares have risen by 260% from S$0.15 prior to the deal to $0.54 currently.

Investors beware

However, it seems that there’s a fair amount of speculative expectation that’s heaped onto the new business that JK Tech Holdings would be entering.

First of all, the company does not have any experience with running a sustainable and profitable oil and gas exploration and production business; even would-be majority owner Ezion Holdings has only ever had adjacent business experience through providing support services to explorers and producers. Secondly, oil and gas exploration might take years to reap any real profits for the company.

With the market expecting so much from the company at the moment – at current prices, JK Tech Holdings is selling for six times its book value assuming all options have been converted – a closer inspection of the risks involved might be warranted for investors.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.