Investment Highlights

• The group received additional assessment from IRB

• Appointed tax solicitors to resolve the issue

• Future proceedings may take a while to complete

• Possible adjustment to TP pending further clarity from management

• Maintain BUY with TP of RM14.75

AEON Credit received additional assessment from IRB. The group yesterday announced that it has been served with notices of additional assessment and penalties totalling RM96.8mil from IRB. This amount accounted for the additional tax bill, which goes back seven years to the assessment year in 2010.

This substantial amount claimed by IRB is comprised of RM66.8m of additional tax and RM30.0m worth of penalty.

From Bursa:

The said notices of additional assessment were raised by the Director General Inland Revenue Board (DGIR) among others, pursuant to:

(a) The DGIR varying the loan transaction collaterized by receivables undertaken by the Company with a local financial institution to that of a sale of receivables. The DGIR did not specify which provision of the Income Tax Act 1967 in making this variation.

(b) The DGIR also raised time barred assessments for the years of assessment 2010 and 2011. The DGIR also did not provide any reason for raising the time barred assessments.

(c) The DGIR imposed penalties for alleged submission of incorrect returns.

Appointment of tax solicitors. Following from this development, management has appointed tax solicitors to take legal actions, in order to challenge the validity and legality of this notice.

The proceedings completion may take a while. Based on previous cases, we understand that the proceedings will take at least months to conclude where the earliest period for case settlement was 3 months. Hence, we expect that there would be no immediate impact to the company’s earnings at least in the near term of FY18. While there is possibility that the outcome may conclude in the group’s favour, we do not rule out the risks of payment by the full amount borne by AEON Credit.

Our situational analysis showed; assuming that a lump sum payment that were to take place earliest in FY19, the company will likely see a contraction in its net earnings by approximately ~30.0%. Given that our valuation is based on the company’s book value, the earnings contraction will drive down the FY19 BVPS to RM4.90 from RM5.30. Hence, we estimate that it would result in a fair value decrease of -7.0% to RM13.72 which would constitute a NEUTRAL call. However, at this juncture we are maintaining our FY18 and FY19 earnings given that the length of the legal process and pending further information of the timeline of the proceeding.

Maintain earnings. We continue to be optimistic on the outlook on the group’s business based on its value chain transformation journey. We note that this new development might pose a blip in its future earnings but does not detract from its earnings potential. Future re-rating catalyst would be 1) the outcome of the proceedings and 2) higher than expected future earnings (FY19 onwards). As for now, we maintain our BUY call on AEON Credit with TP of RM14.75, pegging its FY19 BVPS to PBV of 2.8x.

Source: MIDF Research - 14 Dec 2017