INVESTMENT HIGHLIGHTS

• MMC Corp faces additional income tax of RM45.9m

• Interest expenses on certain investments not tax deductible

• No material impact on MMC Corp’s financial health

• Maintain BUY with unchanged TP of RM2.67 per share

MMC Corp receives Notices of Assessment from IRB. The company on 29 December 2017 announced that it has received Notices of Assessment from the Inland Revenue Board (IRB). The notices follow a tax audit for the years of assessment from 2011 to 2013 pertaining to additional income tax and penalties totalling RM45.9m. The company noted that it will be making the full payment for the additional income tax without prejudice basis to the IRB.

Basis for additional income tax. The IRB imposed the additional income tax on MMC Corp on grounds that interest expenses relating to certain investments are not eligible for tax deduction according to Section 33 of the Income Tax Act, 1967.

MMC Corp plans to appeal. Pursuant to MMC Corp’s consultation with its tax counsel, the company opines that there are reasonable grounds to challenge the Notices of Assessment. Henceforth, the company intends to file the Notices of Appeal to the Special Commissioners of Income Tax while taking all steps to challenge the disputed Notices of Assessment.

Appeal proceedings may take time. Based on our understanding, an appeal proceeding may take up to as long as 12 months to be completed. Hence, any impact from the appeal if it were to be in favour of MMC Corp will not likely be reflected in the near term.

Financial impact. As the payment to IRB will likely be settled on an instalment basis, we reckon that the additional income tax and penalties worth RM45.9m will not have a material impact on MMC Corp’s day-to-day operations and its financial health as the company has generated a net operating cash flow of RM168m on average for the past three quarters in FY17. Meanwhile as of 30 September 2017, MMC Corp has a cash pile of RM844m and debt worth RM9b which translates to a net debt-to-equity ratio of 0.79x.

Maintain BUY with unchanged TP of RM2.67 per share, based on our sum-of-parts (SOP) valuation. Our BUY call is premised on: i) expected higher contribution from Penang Port upon completion of its 51% remaining stake, ii) the recovery in Johor Port and PTP due to higher demand of conventional cargo at the Johor Hinterland and iii) the steady performance by the energy segment.

Source: MIDF Research - 2 Jan 2018