Legal disputes in Nepal to have minimal impact on Axiata’s FY20 earnings
KUCHING: Axiata Group Bhd’s ( Axiata) 80 per cent- owned Ncell paid 23.4 billion Nepalese rupees ( US$ 194 million) to Nepal’s Large Taxpayers Office ( LTO) in protest against its demand for outstanding capital gains tax (CGT) arising from the US$ 1.4 billion sale in 2016 by TeliaSonera Norway Nepal Holdings AS to Axiata Investments ( UK) Ltd.
However, analysts believe that as this is a one- off item, it would likely not affect Axiata’s normalised earnings for the financial year 2020 ( FY20).
In a filing on Bursa Malaysia, Axiata said Ncell had, on April 12, 2020 settled the demand amount and an additional sum of 990.254 million Nepalese rupees as interest. Ncell’s payment of the total amount was made under protest and expressly without prejudice to Ncell and Axiata UK’s position in the international arbitration proceedings commenced by Ncell and Axiata UK against the Federal Democratic Republic of Nepal.
Axiata also previously announced that, on December 6, 2019, the LTPO served a demand letter against Ncell in which the LTPO demanded that Ncell pay the sum of 22.445 billion Nepalese rupees (approximately US$ 185 million) in satisfaction of the SC Judgment.
AmInvestment Bank Bhd’s research team ( AmInvestment) in a report, noted that Ncell and Axiata are currently appealing to the UK’s International Centre for the Settlement of Investment Disputes to overturn the Nepali Supreme Court’s ruling on the grounds that the transfer of shares occurred outside Nepal in a non- Nepalese company and is not subject to CGT.
“However, we are doubtful that restitution for the sums already paid can be effected against the country’s legal and tax authorities even with a favourable ruling by the tribunal.
“Hence, we expect Axiata to make the RM837 million full provision for this settlement which will account for a massive 62 per cent of its FY20F earnings and three per cent of its current market cap.
“This will also raise Axiata’s FY20F net debt by five per cent to RM18 billion and elevate its net debt per earnings before interest, tax, depreciation and amortisation ( EBITDA) to 1.7folds from 1.6-folds,” it said.
“As this one- off item will not affect normalised earnings, we maintain FY20F earnings,” it added.
AmInvestment said even though Ncell is currently the mobile market leader in a
duopoly which includes Nepal Telecom, higher consumption levies and intense ISP competition have caused its FY19 revenue to decrease six per cent year- on-year ( yo-y) from the impact of new consumption levies.
This caused EBITDA to drop 10 per cent y- o-y and core net profit to fall by 16 per cent y- o-y.
“Given these regulatory and operational risks, we do not discount the possibility that the group may exit Nepal under the current regime.
“As Ncell made up 12 per cent of and 24 per cent Axiata’s FY19 EBITDA and earnings respectively as well as 13 per cent of Axiata’s SOP, this could be a significant re- rating catalyst,” AmInvestment opined.