MMCCORP announced additional income tax and penalties of RM45.9m from IRB. We believe this have a negative impact as the amount represents 14% (or 10%) of our FY17E (or FY18E) earnings forecast. However, as it is most likely a one-off expense, we opted to keep our core earnings forecasts unchanged. Balance-sheet impact from the penalties is also expected to be insignificant. Maintain OUTPERFORM, with unchanged SoP-TP of RM2.85.

Slapped with income tax penalties. The company announced receiving Notices of Assessment from the Inland Revenue Board (IRB) for additional income tax and penalties, summing to RM45.9m. This is pursuant to a tax audit for the years 2011-2013.

Reasonable grounds to challenge. The company believes that there are reasonable grounds to challenge the notices raised by the IRB upon consulting with its tax counsel. As such, MMCCORP intends to file the notices to the Special Commissioners of Income Tax, and to take all steps necessary to challenge the disputed notices. Nevertheless, MMCCORP will still be making full payment without prejudice basis to the IRB.

Financial impact from the tax penalties. We believe the announcement to negatively impact the company. With full payment made, the aforementioned sum of RM45.9m represents 14% (or 10%) of our FY17E (or FY18E) core earnings forecast. However, given that it will most probably be a one-off expense, we reckon that it would not significantly affect our earnings forecasts at the core-level. Likewise, we believe the penalties will not bear any significant impact towards its balance sheet as well, with its net-gearing level of 0.8-0.7x most likely remaining intact.

Maintain OUTPERFORM. With no changes made to our earnings forecasts, we are also keeping our SoP-derived TP of RM2.85 unchanged. Our OUTPERFORM call is premised on MMCCORP being a compelling SoP-valuation play, with a spin-off listing of its ports operations to potentially act as a rerating catalyst.

Risks to our call include: (i) lower-than expected ports activities, (ii) slower-than-expected construction progress, and (iii) de-rating of its associates MALAKOF and GASMSIA.

Source: Kenanga Research - 2 Jan 2018