This article first appeared in The Edge Financial Daily on December 23, 2019

Axiata Group Bhd
(Dec 20, RM4.22)
Upgrade to neutral with a target price of RM4: Axiata Group Bhd announced that the tribunal in the Bilateral Investment Treaty Arbitration has granted Axiata UK and Ncell’s application for a provisional measure order (PMO) ordering that Nepal and its agencies, including the tax authorities, be restrained from taking steps to enforce the collection of the alleged 22.5 billion Nepalese rupee (RM819 million) outstanding capital gain tax (inclusive of interest and penalties) in connection with the sale by TeliaSonera Norway.

Nepal and its agencies are obliged under the international law to comply with the PMO. Axiata UK and Ncell will seek remedies including compensation for sum already paid (total deposit paid to the Nepali tax authority amounted to 23.6 billion Nepalese rupee) and a permanent injunction against further attempts to collect capital gain tax from Ncell.

We view this positively as this could help to resolve the investment disputes in Nepal and removes the risk of provision in the coming quarter. As our RM4 TP only suggests a 5% downside from current price, we upgrade our rating to “neutral”.

Earlier in November, the Supreme Court of Nepal has ruled that Axiata’s Nepalese subsidiary, Ncell, will remain liable for the outstanding capital gain tax arose from the purchase of Ncell by Axiata UK from TeliaSonera Norway.

However, the amount was almost halved to 21.1 billion Nepalese rupee compared with the original amount of 39.1 billion Nepalese rupee. The tax authority in Nepal was supposed to collect the sum from the seller but having failed to do so, shifting the burden to the buyer of the transaction.

Ncell and Axiata UK have filed a request for arbitration with the International Centre for the Settlement of Investment Disputes pursuant to the agreement between the governments of the UK and Nepal for the promotion and protection of investments. The basis of the arbitration is that the transaction involved the transfer of shares outside of Nepal in a non-Nepalese company and should not be subject to capital gain tax. In any case, Axiata and Ncell were the buyer and neither made any capital gains from the transaction.

Although the PMO is in favour of Axiata and perhaps obtains a permanent injunction at a later stage, preventing Nepal from any further attempts to collect the taxes, we do not rule out other forms of regulatory risk that could affect Ncell’s operations in the country in future. — PublicInvest Research, Dec 20