• Tenaga Nasional’s (TNB) 60%-owned subsidiary, Kapar Energy Ventures (KEV) has received notices of assessment for Years of Assessment (YA) 2011 to 2014 and additional notices of assessment for YA2013 to 2018 from the IRB, amounting to RM595.9mil in total.

• Malakoff Corporation owns the balance 40% of KEV.

• The IRB said that the interest expense in respect of the RULS (Redeemable Unsecured Loan Stock) issued to finance the acquisition and operation of the power plant is not tax deductible. This is because the RULS is an equity transaction and hence, it is capital in nature. The IRB had also disallowed the revision in KEV’s revenue for YA 2004 to 2009.

• KEV is of the view that the assessments were incorrectly raised by the IRB. The Board of Directors of KEV is currently deliberating on the next course of action.

• Based on precedents, we believe that TNB would not be recognising the additional tax liability in its P&L Statement. Still, the potential additional tax assessment of RM595.9mil is about 11.9% of TNB’s FY22F normalised net profit.

• Although TNB might not be recognising the additional tax liability, we view the development negatively. This is because KEV’s notices of tax assessment is another addition to TNB’s existing list of additional tax assessments (for YA2013 to YA2018) from the IRB. In addition, we believe that it would take a long time for all of the tax issues to be resolved.

• TNB’s additional tax assessments for YA2013 to 2018 amounted to about RM7.9bil in total. The additional tax assessments for TNB were in respect of reinvestment allowances for TNB’s capex for the expansion and upgrading of its electricity infrastructure.

• TNB’s current additional tax assessments are still unresolved as most of the cases are pending court hearings. For instance, the court hearing date for YA2018 was rescheduled from 26 October 2021 to 13 January 2022. The court hearing date for YA2015 to 2017 has been fixed at 2 December 2021 after being vacated on 9 September 2021.

• We maintain BUY on TNB with a fair value of RM12.10/share.

Source: AmInvest Research - 8 Nov 2021