News

• On 3 September 2015, the Company received bills of demand dated 28 August 2015 from the Royal Malaysian Customs of Federal Territory of Kuala Lumpur (RMC) demanding payment of additional excise duties and sales tax, totaling RM56.3 million.
• The amounts in demand were: 1) RM34, 166,098.81 claimed under the Excise Act 1976, for the period of 28 August 2012 to 31 October 2013; and 2) RM22, 159,456.40 claimed under the Sales Tax Act 1972, for the period of 1 July 2012 to 31 October 2013.

Highlights

• Malaysian tax on alcohol is understood to be one of the most complex globally, giving rise to possible misinterpretations on its computation.
• Carlsberg for example is also faced with similar demands amounting to RM56.34m, which stems from the RMC imposing a new method of valuation for excise duty, which came into effect on 1 November 2013. The new method included advertising and promotions expenditure in the valuation.
• The abovementioned bills of demand are based on historic claims for excise and sales tax for the aforesaid periods.
• The Company does not admit liability on the bills of demand and believes that a retrospective application on the new valuation method is unjustifiable; having indicated that they will take appropriate measures on the issue.
• While we are not in a position to question the validity of GAB or the customs claims on the matter, we believe that it will be a prolonged affair. Financial Impact
• Impact on earnings… should the liability materialize; we are forecasting Net Profit of RM234.9m for FY16, minus the amount of RM56.3m from the bills of demand, this would decrease our FY16 Net profit forecast by circa 24%, thus diluting EPS by similar magnitude of circa 24% to RM59.12 sen/share from RM77.7 sen/share.
• Impact on net cash position… as of FY12/15, GAB has a cash balance of RM52.3m, should the liability materialize, this would erode their cash balance and move the group into a net debt position of RM79m (Cash minus ST and LT liabilities) as at FY12/15. However, this is not a going concern as their strong free cash flow will quickly push the company back into net cash position and shouldn’t significantly impact dividend payout.

Forecasts

• Unchanged.

Rating

HOLD

Positives

• 1) Relatively high dividend yield stock; 2) Duopoly industry; and 3) Resilient earnings and low capex requirements.

Negatives

• 1) Highly regulated industry; and 2) Potential excise duty hike.

Valuation

• Maintain our HOLD recommendation, TP of RM13.92 Unchanged.

Source: Hong Leong Investment Bank Research - 8 Sep 2015