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This article first appeared in The Edge Financial Daily on December 10, 2019

Magnum Bhd
(Dec 9, RM2.57)
Maintain hold with a lower target price (TP) of RM2.75:
Magnum Bhd announced that its wholly-owned Multi-Purpose International Ltd (MPIL), a Labuan company, had received via email notices of assessment for income tax for assessment years 2014 to 2018 amounting to RM182.8 million or 13 sen per share. The Inland Revenue Board (IRB) claimed that MPIL should be taxed under the Income Tax Act 1967 instead of the Labuan Business Activity Tax Act 1990. Labuan trading companies are taxed at 3% of taxable income capped at RM20,000 per annum, while Labuan non-trading companies are not subject to tax.

We understand that MPIL receives interest income from Magnum Holdings Sdn Bhd (MHSB), the subject of an earlier tax dispute with the IRB. Recall the IRB disallowed MHSB’s deduction of interest expense and loan stock interest expense (MPIL’s interest income) for the selective capital reduction of Magnum Corp Bhd in 2008. Magnum stated its practice of assessing MPIL’s income under the Labuan Business Activity Tax Act 1990 had previously not been questioned by the IRB and that this tax dispute relates to the MHSB one settled in September 2018. Though we do not believe Magnum will stop paying dividends, we cut our estimated dividend per share by three sen per annum as we cut our dividend payout ratio (DPR) assumption from 99% to 82%. After the MHSB tax dispute arose in May 2017, Magnum cut its core DPR from 98% for financial year 2016 (FY16) to 76% and 84% for FY17 and FY18 respectively.

While the MHSB tax dispute was settled at RM148.1 million or 31% of the initial notices of assessment, we deduct 100% of the MPIL notices of assessment from our discounted cash flow-based valuation for now to arrive at our new TP of RM2.75. — Maybank IB Research, Dec 9

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