Axiata’s Ncell has made a further advance deposit of Rs13.6b (or c.RM563m) to the Nepalese taxman to settle a capital gain tax dispute. We are NEUTRAL on this latest corporate development as the conclusion of the long- overdue tax dispute could provide a much-needed playing field for Axiata to operate and promote Ncell smoothly. All in, we are keeping our Axiata’s FY17E/FY18E earnings forecasts unchanged. We reiterate our MARKET PERFORM call on Axiata with an unchanged SoP-driven target price at RM4.70.

Ncell ‘fully cleared’ capital gains tax. Ncell (an 80%-owned subsidiary of Axiata) confirmed it had concluded its tax matters in relation to the indirect sale by the previous owner – TeliaSonera Norway Nepal Holdings AS. Under the direction of the Nepal Large Tax Payer Office (LTPO), Ncell had made a further advance deposit of approximately Rs13.6b (or c.RM563m for the second time) on behalf of TeliaSonera and the company is now fully cleared in relation to the transaction which attracted capital gains tax under the Income Tax Act, 2058 (2002), according to the group’s press release.

To recap, Ncell was dragged into a controversy after the government did not receive applicable capital gains tax (CGT) in the Ncell deal worth USD1.365b (or. Rs 139b) between Norway-based TeliaSonera and Axiata. Following immense pressure, Ncell deposited Rs9.97b CGT (as 15% withholding tax) to the government in May last year. However, the controversy deepened, as lawmakers charged Ncell with not paying the actual amount of CGT, which could amount to excess of Rs30b, according to The Himalayan Times (Nepal’s largest English daily newspaper). As per existing laws, the Nepalese authority should get 25% of the profit made from the TeliaSonera-Axiata deal. Of this amount, 15% of the applicable tax should be left at the company that was sold while the remaining 10% of the amount should be paid by the seller.

Ncell – the largest tax payer in Nepal. To date, Ncell remains as one of the largest tax payer in Nepal with over Rs160b paid over the last 13 years. Ncell contributes 3.2% to the GDP of Nepal, its capital and operational investment in 2016 alone amounts to USD258m, according to Axiata’s press statement. Through its operations, directly and indirectly, Ncell provides close to 110k jobs in Nepal and service more than 15m customers.

Potential higher investment cost in Ncell. With the additional Rs13.6b deposited, Ncell has placed Rs23.6b in total in CGT made from the deal profit, which implied a c.17% increase (to c.Rs 162b) in the total investment cost of Ncell should Axiata failed to recoup the advance deposit. As of 1Q17, Ncell’s revenue/EBITDA stood at RM576m/RM385m, which accounted for c.10%/18% to Axiata Group, respectively. Besides, Ncell has launched the much-awaited 4G service in early June in the Kathmandu Valley (including Nagarkot, Banepa and Dhulikhel) with an aim to achieve 15% nationwide coverage by end-CY17 after expanding the service to another 40 cities.

Maintain MARKET PERFORM with an unchanged TP of RM4.70. We are keeping our FY17/FY18E earnings forecast unchanged given that the additional tax deposit is set to have a mild impact to its balance sheet rather than the profit and loss account. Maintain MARKET PERFORM call on Axiata with an unchanged SoP-driven target price at RM4.70. Key downside risks include keener competition, tax and regulatory challenges; upside risk is stronger- than-expected recovery at Celcom and XL.

Source: Kenanga Research - 06 Jun 2017