PublicInvest: Development shows Axiata exposed to higher regulatory risk
the issue of the tax debate came to the fore after the tax authority failed to notify Axiata about the tax liability, as the taxman only initiated the process to tax the transaction after TeliaSonera exited Nepal. This was despite Axiata having sought to find out whether the deal would attract taxes in Nepal.
“As per existing laws, the Nepalese authority should get 25% of the profit made from the TeliaSonera-Axiata deal. Of that amount, 15% of the applicable tax should be left at the company that was sold, while the remaining 10% of the amount should be paid by the seller.
“The latest SCN’s decision has ended a long-drawn debate over whether the buyer should pay the tax in cases when the seller does not settle its tax liabilities,” it adds.
Whether Axiata will appeal the court’s decision remains to be seen.
But it did add in its statement that “Ncell, Reynolds and Axiata UK were given the full clearance by the Large Taxpayers Office (LTPO) of its obligations to withhold any capital gains tax (CGT) payment on behalf of the seller (Reynolds) via a letter from LTPO dated June 4, 2018 after the full and final payment made by Ncell, albeit under protest on the basis that CGT is not applicable on offshore transactions, and even if applicable, any shortfall in payment is the responsibility of the seller”.
In June 2017, Axiata made an advance deposit of 13.6 billion rupees (or RM563.6mil) to the LTPO, clearing the tax hurdle on its purchase. However, the recent order indicates that it should pay the full amount and then seek refunds for the 13.6 billion rupees.
Axiata has not addressed how it will pay the 66 billion rupees. As at Sept 31, 2018, the Axiata group’s total borrowings stood at about RM19bil, with net cash of about RM6bil.
Kenanga Research says that should Axiata comply with the SCN’s order and deposit the entire 66 billion rupees (or RM2.35bil), it will raise its 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).
As it is, the research house expects Axiata to provide for impairments for its 4Q18 earnings.
The impairment is related to modernisation and technology changes in some markets where some legacy equipment was made redundant.
“Our full-year core profit after tax and minority interest estimate of RM912mil (RM668mil for the first nine months of FY18) remains intact,” Kenanga Research says.
For now, it has not made any changes to the FY18-FY19 earnings forecast, pending the 4Q18 financial results.
However, it has lowered the target price by 10 sen to RM4.50 a share and this was “after lowering Ncell’s targeted earnings multiplier to 5.0 times (versus 6.0 times previously) to account for the higher regulation risks ahead in Nepal. All in, we are keeping our outperform call for now in view of its relatively decent valuation (forward enterprise value/Ebitda of 7.2 times versus its peers of 12 times to 13 times), coupled with a stronger Celcom and earnings recovery at XL”, it adds.
PublicInvest Research believes that even though Axiata was able to deliver higher core earnings growth, given its footprint in highgrowth developing markets, this latest development means that it is exposed to higher regulatory and investment risks in these markets.
“Our core earnings forecasts remain unchanged, but headline profit could see a sharp decline should Axiata be compelled to pay this capital gain tax in FY19F,” it adds.