SGB-WA conversion discount widens
Alan Voon 

THE share price of Spring Gallery Bhd was limit-up at RM1.10 on Jan 29 after the company announced that it has accepted a letter of intent (LoI) from Village Roadshow Theme Parks Pty Ltd (VRS) for the proposed development and operation of a theme park in Klebang, Melaka.

The theme park is to be built on nine pieces of land collectively measuring about 292,795 sq m.

At the same time, Spring Gallery also announced that it has offered to purchase several pieces of land in Klebang with a total land area of about 4.4 million sq ft for RM186.63 mil from Benelac Holdings Bhd.

The offer to buy land is conditional upon Spring Gallery entering into a definite agreement to develop and operate the abovementioned theme park. Spring Gallery’s mother share closed at RM1.11 on the last trading day of January while its warrant SGB-WA settled at 33 sen.

Spring Gallery is originally involved in the ceramic and pottery industries. It has since diversified into the property construction, property investment and property development sectors to widen the group’s source of income and alleviate sole dependency on its ceramic segment.

The group’s diversification exercise into the property development sector include the acquisition of Klasik Ikhtiar Sdn Bhd (KISB) which was completed in August last year. KISB has secured a residential development project from the 1Malaysia Civil Servants Housing Unit (Unit Perumahan Penjawat Awam 1Malaysia) which is expected to be launched by the second quarter of this year.

In the first quarter of FYE 6/17 ended Sept 30, Spring Gallery widened its net loss to RM910,000 from RM770,000 in the corresponding period a year ago.

With the ceramic business facing lower sales and competitive pressure, Spring Gallery is banking on its new business of construction and property development to spur its future growth.

Besides SGB-WA, Spring Gallery also has a warrant-like irredeemable convertible preference share (ICPS) in SGB-PA that also allows its holders to “exercise” the ICPS into the mother share by paying up in cash.

The conversion price of SGB-PA is actually 60 sen and its holders can either convert to the mother share by tendering 10 units of SGB-PA or one unit of SGB-PA together with 54 sen in cash. This effective turns SGB-PA into a warrant with an exercise price of 54 sen.

Both SGB-WA and SGB-PA are now trading at a substantial discount as they failed to catch up with the mother share’s rally.

This may be due to the fact that investors are not banking on a sustainable rally of the mother share, thus leading to the two instruments trading at a discount.

Existing shareholders of Spring Gallery can therefore make arbitrage profit by selling the mother share and immediately buying the warrant and then exercise.

The writer is CEO of Warrants Capital Sdn Bhd

This article first appeared in Focus Malaysia Issue 270.