Tenaga’s Share Price Sees Red After Being Slapped With RM2.1b Additional Tax Assessment

Tenaga Nasional Bhd’s share price took a beating today after the utility giant was slapped with notices of additional tax assessment from the Inland Revenue Board amounting to RM985.6 million and RM1.1 billion for the years of assessment 2013 and 2014, respectively.

In a filing to Bursa Malaysia on Friday, Tenaga notified that its tax solicitors will be appealing against the said notices received on November 23 and the appeal process has commenced. Tenaga’s stock price hit an intra-day low of RM13.28 this morning from Friday’s close of RM13.60.

At 11.08pm, Tenaga was down 26 sen or 1.91% to RM13.34 with 3,159,800 shares exchanged hands.

Commenting on the additional tax assessment, PublicInvest Research opined that it could have originated from disputes on utilization of reinvestment allowances and non-taxable income.

“(Tenaga’s) effective tax rate for FY2013 and FY2014 were lower than the statutory corporate tax rate at 9.2% and 9.7%, respectively, mainly due to utilization of reinvestment allowances and non-taxable income,” analyst Syarifah Hidayatul Akmal pointed out. “The additional tax assessment imposed for FY2013 and FY2014 would bring the effective tax rate for the respective year to 25.8% and 24.9%, respectively.”

According to Syarifah Hidayatul, Tenaga’s cash holding which stood at RM8.9 billion as of August 31 this year is sufficient to cover for the additional tax payment should the power utility fail in its appeal. “However, the huge amount of RM2.1 billion would reduce its cash by approximately 24%,”cautioned the analyst.

Moving forward, PublicInvest Research has assumed lower effective tax rates of 12.1% to 12.6% for FY2016 to FY2018 given the expected completion of Hulu Terengganu, Ulu Jelai, TNB Prai, Tembat and Manjung 5 power plants.

“If there were adjustments to be made for whatever reason and by assuming effective tax rate of 25% for FY2016 to FY2018, our estimated net profit would decline by about 14%,” projected Syarifah Hidayatul. “The potential drop in earnings would therefore affect our DCF (discounted cash flow) valuation by about 4%.”

For now, PublicInvest Research is maintaining its estimates on Tenaga as there is no clarity on whether future taxes will be affected. “The management is unable to provide further clarification and information at this juncture as the appeal procedure is ongoing,” explained the analyst.

All-in PublicInvest Research reaffirmed its OUTPERFORM rating on Tenaga with an unchanged target price of RM14.97. “We continue to like Tenaga due to its defensive nature, resilient earnings and undemanding valuation which is trading at forward PE (price-to-earnings ratio) of around 11x,” added the research house.

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