Axiata’s RM2.16b Ncell deal tax bill downside for headline profit and share price

PETALING JAYA: Axiata Group Bhd’s RM2.16 billion tax bill for the Ncell Pte Ltd buyout deal came as a negative surprise to analysts, who warned that the group’s headline profit and share price could react negatively to the news.

On Friday, the counter tumbled as much as 20 sen or 5.13% to RM3.70 before closing 17 sen or 4.36% lower at RM3.73 on 14.22 million shares done.

Nonetheless, Axiata told Bursa Malaysia on Friday that it has not received the judgment and order of the Nepal Supreme Court in relation to the tax bill.

PublicInvest Research said although it has always been wary of Axiata’s exposure to high regulatory risk at its regional operating units, this came as a negative surprise to the research house as the tax issues with Ncell were thought to have been resolved following the advance deposit payment of Rs13.6 billion (RM563.6 million) by Axiata to the Nepalese tax department in 2017.

Including late payment fees and fines, it estimated that the total amount could be Rs66 billion (RM2.35 billion). However, it is believed that Ncell has already paid tax instalments totalling Rs21 billion. This means the outstanding amount could be Rs40-45 billion (RM1.4 billion-RM1.6 billion).

“We have highlighted earlier that although Axiata is able to deliver higher core earnings growth owing to its footprint in high-growth developing markets, this latest development would also mean that Axiata is exposed to higher regulatory and investment risks in these markets,“ it said.

It added that its core earnings forecasts remain unchanged but headline profit could see a sharp decline should Axiata be compelled to pay this capital gain tax in FY19.

Kenanga Research said the tax bill may lead to negative knee-jerk reactions over the short-term. Besides, the group may also potentially provide for some non-core impairments related to its legacy equipment.

“We made no changes to our FY18-19 earnings forecasts. Reiterate outperform call in view of its relatively decent valuation coupled with a stronger Celcom and earnings recovery at XL; but with a lower target price of RM4.50 after lowering our Ncell’s targeted earnings multiplier to 5.0 times to account for the higher regulation risks ahead in Nepal.”

Kenanga Research said should Axiata comply with the Supreme Court’s order and deposit the entire Rs66 billion, it will raise the estimated FY19 gross debt/ebitda and net debt/ebitda ratios to 2.4 times/1.7 times (versus 2.1 times/1.5 times previously).

The research house believes its reported patami (profit after tax and minority interest) for FY18 may be overstated given Axiata is expected to provide for impairments in the upcoming 4Q18 result, which is set to be released on Feb 22. The impairment is believed to be related to the modernisation and technology change in certain markets and thus leading to some legacy equipment made redundant.

Having said that, it believes Axiata’s full-year core patami estimate of RM912 million remains intact.

“Bargain-hunting opportunity could potentially arise on any share price weakness due to the recent hiccup. We advocate investors to start accumulating the share at RM3.70 level.”

Source: TheSunDaily