Theta- if you don't succeed, try again!

Sometime back, I have posted a piece on Lityan which had subsequently been renamed Theta Edge Bhd ('Theta'). The company underwent a restructuring involving the following:
1) It carried out a capital reduction of 8-to-1, which reduced its paid-up capital from RM102,805,882 to RM12,850,735;
2) Its creditors (with amount owed of RM170 million then) took a haircut of 85%, with the balance of 15% converted to shares (issued at RM1.00 each);
3) A Special Issue of 31,452,265 new Shares in Theta at an issue price of RM1.00 per Share to Lembaga Tabung Haji ('LTH'); and
4) Acquisition of THT Integrated Solutions Sdn Bhd (from TH Technologies Sdn Bhd, a wholly-owned subsidiary of LTH) for a purchase consideration of RM1.6 million to be satisfied by the issuance of 1.6 million new Shares in Theta at an issue price of RM1.00 per Share.

When I posted the earlier piece, I was extremely skeptical that Theta would make sufficient profit to justify the high share price on its re-quotation. To wit:

Lityan is now trading at RM3.18 (as at 11.45 am) after hitting a high of RM3.46 this morning. At RM3.18 apiece, Lityan's market capitalization is RM200.6 million. To justify this market capitalization, Lityan must report a net profit of at least RM20 million (assuming a PE multiple of 10 times).

I have serious doubt that THT Integrated Solutions Sdn Bhd, which was sold by LTH to Lityan at a price of RM1.6 million, could record that kind of profit. I was right. Theta incurred a net loss of RM4.3 million for FYE31/12/2010 (here). Its latest quarterly results for QE31/3/2011 was slightly better, where it recorded a net profit of RM800k (here).

Theta recently proposed another Rights Issue of RM31.552 million on the basis of 1 share come with 1 free warrant for every 1 share owned. In addition, it will be acquiring another IT outfit from LTH- TH Computers Sdn Bhd ('THC')- at a cost of RM13.65 million by issuance of 13.65 million Theta shares valued at RM1.00 each. THC is a distributor of computers & computer related equipment, which reported a net profit of RM0.28 million & RM2.2 million for FYE31/12/2009 & FYE31/12/2010, respectively. Can one justify the price paid for THC? Distribution of computers & related equipment is a cut-throat business, with razor-thin profit margin. The high profit for FYE31/12/2010 could be due to a one-off contract which may never recur. For more details of the acquisition, go here.

Meanwhile, if you have been watching this stock, you would notice how much it had declined to about RM0.70-0.80 since its re-quotation 20 months ago. My advice to anyone looking at this stock now is the same as it was 20 months ago- avoid it.


Chart: Theta's weekly chart as at July 5, 2011 (Source: Quickcharts)