Perfect storm pushes Zetrix to the precipice

Over the course of just over a month, the digital services firm Zetrix AI Bhd has found itself on the brink of collapse. Its share price has plummeted by over 90%, causing the market capitalisation to sink by more than RM5 billion. The decline began on August 27 when the company opened at 66 sen, with a valuation of around RM5.33 billion.

By the end of that day, it had fallen nearly 10% to 59.5 sen. The following day, the shares plummeted an astounding 50.4%, closing at 29.5 sen and erasing RM2.4 billion from the company's market value. The primary cause of this monumental collapse was speculation linking Zetrix to former human resources minister M Saravanan's corruption case, as well as forced sales of shares by its co-founder and group managing director, Wong Thean Soon.

The situation worsened further, with the Road Transport Department suspending Zetrix and its subsidiary MyEG Sdn Bhd as collection agents due to unremitted government revenue. Transport Minister Loke Siew Fook later revealed that Zetrix had failed to remit RM314 million in collected government revenues, prompting an investigation by the police and the Malaysian Anti-Corruption Commission.

The troubles faced by Zetrix have put it squarely in the spotlight of rating agencies. On October 18, MARC Ratings downgraded Zetrix's RM2 billion sukuk (Islamic bonds) programme rating to BB+IS from AA-IS, causing the stock to tumble with concerns of a potential covenant breach. Wong's stake has been reduced to 1.84% from nearly 30% following forced share sales by banks triggered by margin calls, and the sukuk trustee has given Zetrix until October 22 to remedy the issue.

Without a waiver, the default could result in the early repayment of the RM2 billion principal and RM164.5 million in future coupon payments, triggering a Practice Note 17 (PN17) classification, which would be catastrophic for Zetrix. Despite its strong financial performance, Zetrix's share price has fallen to an all-time low of 5 sen, valuing the company at RM404 million.

The paradox lies in the fact that the company should be trading closer to its all-time high, given its strong financial results. Zetrix's e-government services business model appears to be inherently risky as the need for a middleman is becoming obsolete. The company's transformation into a blockchain and AI company has been successful, with robust financial performance in recent years driven by AI subscriptions, services, Web3 application fees, and sales of Zetrix Layer-1 nodes.

However, the aggressive investment in blockchain infrastructure, AI applications, and international expansion has led to significant debt. Zetrix currently has RM541.6 million in cash and cash equivalents against RM853.1 million in short-term loans and borrowings, with total borrowings standing at RM2.2 billion, up 74.3% from the previous year.

The company may have a trump card in the form of listing its AI and blockchain unit, AI Foundation Lab, on the Nasdaq by the end of 2026, backed by a US$40 million (RM163 million) investment.