According to The Himalayan Times, Ncell Pte Ltd (Ncell) and its major shareholder Axiata Group (Axiata) have been ordered by the Supreme Court to pay capital gains tax amounting to Rs61bn (about RM2.16bn), excluding late fees and fines, for the Ncell buyout deal. Although we have always been wary of Axiata’s exposure to high regulatory risk at its regional operating units, this came as a negative surprise to us as the tax issues with Ncell were thought to have been resolved following the advance deposit payment of Rs13.6bn (RM563.6m) by Axiata to the Nepalese tax department in 2017. Nevertheless, Axiata has yet to make any official statement regarding the Supreme Court’s ruling. Although our core earnings forecasts and Neutral call remain unchanged, we believe share price would react negatively to this news due to uncertainties and the potential downside to headline profit.

• Unsettled Nepalese tax issue? In June 2017, Axiata announced that it made an advance deposit of Rs13.6bn (or RM563.6m) to the Large Taxpayer Office (LTPO), clearing the tax hurdle over its purchase of Ncell from TeliaSonera Norway in December 2015. We thought this issue had already been settled fully. The Supreme Court’s ordering of Ncell and Axiata to foot a tax bill of Rs61bn is an obvious negative surprise. According to the Himalayan Times, the LTPO chief Dhani Ram Sharma said they would only initiate the process of collecting the tax amount once a copy of the court verdict is received. Including late payment fees and fines, the total amount could be Rs66bn. However, it is believed that Ncell has already paid tax instalments totalling Rs21bn. This means the outstanding amount could be Rs40-45bn (approx. RM1.4-1.6bn).

• Downside to headline profit and a drag to share price. 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. 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.

Source: PublicInvest Research - 8 Feb 2019