- Tenaga Nasional Bhd (TNB) has provided further clarification on the additional tax assessment received from the Inland Revenue Board (IRB). In a Bursa announcement yesterday, TNB said the additional assessment of RM985mil and RM1.1bil for years of assessment of 2013 and 2014 was due to IRB’s decision to disallow TNB’s reinvestment allowance claims for both years.

- TNB said that it had claimed reinvestment allowance for the two years subsequent to IRB’s approval dated 21 Jan 2013. However, vide its letters on 17 June and 15 Sept 2015, the IRB had subsequently reversed its earlier approval on the basis that TNB is not in the business of manufacturing.

- TNB said the reinvestment allowance claim was consequent to the heavy investment in annual capex incurred to expand, modernise and upgrade its electricity infrastructure.

- Nevertheless, based on the advice obtained from TNB’s tax consultants and tax solicitors, TNB maintains that it is entitled to claim reinvestment allowance. Hence, TNB said it has commenced the appeal process to challenge the disputed assessments.

- In addition, TNB also requested to the IRB to grant a stand-over (postponement) of three months in respect to the payment of the disputed taxes while TNB engages with the relevant authorities on this matter.

- TNB also assured that any additional assessment for the years before 2013 does not arise as TNB had merely filed revised assessments to claim reinvestment allowance which would not result in additional taxes for TNB.

- We are neutral on the development as we had earlier expected the dispute to relate to reinvestment allowance. TNB’s net gearing will rise to 0.4x from 0.37x for end-FY16F if the additional taxes are recognised this year. Assuming that TNB’s effective tax rate would rise to 25% (from ~10%) for FY16F-FY18F, net earnings will fall by 16% p.a. – resulting in a lower DCF-based fair value of RM12.44/share. However, we maintain our numbers as we are hopeful that TNB will not be subject to these additional taxes. Meanwhile, The Edge Financial Daily reported today that a revision of the electricity tariff may be announced today. Trading of TNB’s shares has been suspended pending a material announcement. We maintain BUY.

Source: AmeSecurities Research - 8 Dec 2015