Malakoff Corporation and Tenaga Nasional (TNB) said a unit of theirs (Kapar Energy Ventures Sdn Bhd – KEV) has received notices of assessment from the Inland Revenue Board (IRB) amounting to RM596m. KEV is a 40%- owned associate of Malakoff. Should the Group be required to pay its portion in full, it could lower its earnings per share by ~5sen. That said, we understand that based on the legal advice obtained from its tax solicitors, KEV is of the view that it has a good basis in law to contend that the assessments were incorrectly raised by the IRB. Separately, we adjust the Group’s FY22 earnings downwards by 5% to factor In higher tax from the recently-announced Cukai Makmur. We maintain our Outperform call with an unchanged DCF-derived TP of RM1.02

• Notices of assessments are for the years of assessment (YAs) 2011, 2012 and 2014, and notices of additional assessment for the YAs 2013, 2015, 2016, 2017 and 2018, all dated Oct 29, 2021 amounting in aggregate to RM595.95m. We understand that the IRB took the position that the redeemable unsecured loan stock (RULS) granted to KEV by TNB and Malakoff to finance the acquisition and operation of Stesen Janaelektrik Sultan Salahuddin Abdul Aziz, Kapar, should be treated as an equity transaction and thus, capital in nature and as such the interest expenses incurred by KEV in relation to the RULS are not allowed by the IRB as expenses deductible under Section 33(1)(a) of the Income Tax Act 1967.

Source: PublicInvest Research - 8 Nov 2021