Tenaga Nasional Bhd (TNB) announced that it has received Notices of Additional Assessment from the Inland Revenue Board (IRB) for years of assessment of 2015 to 2017 amounting to c.RM4bn. We understand that TNB will be appealing against the said notices. This additional assessment is due to disputed reinvestment allowance claim during the period. Note that a similar outstanding dispute for years of assessment of 2013 and 2014 of RM2.1bn is still currently pending for court hearing. We understand that based on the legal advice obtained from their tax solicitors, TNB has good basis to contend that there is no legal and factual basis for the IRB to issue the said notices. Nevertheless, we believe share price could react negatively to this news, and hence we downgrade TNB to Trading Sell from Neutral.

• Lower effective tax rate between FY15-FY17. TNB’s effective tax rate between FY15 to FY17 were lower at an average of 13.6%, mainly due to utilisation of reinvestment allowances. To recap, the Reinvestment Allowance Incentive was no longer available from FY19 onwards.

• Maintain forecasts. This disputed notices may have a material financial impact on TNB should it fail to defend against the legal suit, though management believe it has a reasonable grounds to challenge the basis and validity of it. As at 30 September 2019, TNB’s cash balances stood at RM6.7bn. Pending further details on the appeal, we are keeping our forecasts for now.

Source: PublicInvest Research - 29 Nov 2019