This article first appeared in The Edge Financial Daily on July 21, 2017

Magnum Bhd 
(July 20, RM1.72)
Maintain buy recommendation with a target price (TP) of RM2: Magnum Bhd announced yesterday — with  regard to its litigation with the Inland Revenue Board’s (IRB) over RM476 million in tax claims — that its leave application for a judicial review had been fixed for Aug 9, 2017 by the  Kuala Lumpur High Court.

Meanwhile, the interim stay of proceedings granted on June 6, 2017 till July 19, 2017 has been extended to Aug 9, 2017.

To recap, on May 19, Magnum announced that IRB retrospectively disallowed Magnum’s wholly-owned Magnum Holdings Sdn Bhd’s deduction of interest and loan stock interest expenses incurred during 2008 to 2013 for the court-sanctioned selective capital repayment exercise and privatisation of Magnum Corp Sdn Bhd in 2008, and disallowed Magnum’s deduction of interest expenses for investments. 

Recall that before its relisting in 2013, Magnum was privatised by a joint venture between multinational private equity investor CVC Asia Pacific Ltd and the present controlling shareholder. Magnum applied for a stay against IRB’s “pay in 30 days and appeal later” policy.

Although it is too early to conclude whether Magnum would be able to win the court case, we see a high possibility for Magnum to pay a smaller penalty. Magnum firmly believes that IRB has no grounds for the claims of the tax penalty as the tax shield was ratified by IRB at that point in time, and assessment years for 2008 to 2011 are already out of the prescribed time frame under the present tax law. 

Based on information at hand, we subscribe to Magnum’s view that it would prevail, noting that IRB’s win would create a dangerous precedent in deterring business formations in Malaysia. 

Magnum offers attractive yields of 5.5% and 6.4% for 2017 and 2018 respectively despite our conservative 70% payout assumption. There are a number of potential catalysts for Magnum, such as operational improvement, resumption of dividend, smaller-than-expected penalty by IRB and the monetisation of U Mobile Sdn Bhd. — UOB Kay Hian, July 20