Sugar tax expansion has small impact on F&N, but one-off prosperity tax effect unclear — CEO

Sugar tax expansion has small impact on F&N, but one-off prosperity tax effect unclear — CEO
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KUALA LUMPUR (Nov 5): The sugar tax hike announced by the government in Budget 2022 last Friday (Oct 29) will have little impact on food and beverage company Fraser & Neave Holdings Bhd (F&N).

Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz had earlier announced that the government would extend the excise tax to pre-mixed sugary drinks and impose an excise tax on all vape products and electronic cigarettes to force Malaysians to adopt a healthier lifestyle.

"Most of our products do not fall into this [sugar] category, so our impact should be rather small compared to the other companies," F&N chief executive officer Lim Yew Hoe told the media at F&N's virtual results briefing on Friday (Nov 5).

However, the CEO is not clear on how the "Cukai Makmur" or the one-off tax measure will affect the group. Under the tax, companies with taxable income of more than RM100 million will be taxed at a rate of 33%, instead of the previous flat rate of 24%. The tax will be levied on a company's chargeable income rather than net profit.

“If there is one thing that is unclear, it will be the prosperity tax [Cukai Makmur]... We are still checking the details to understand whether it will impact the overseas income, whether it will cover the dividends that we receive from our operations in Thailand. Other than that, I think there is no big concern,” he said.

F&N chief financial officer Lai Kah Shen added the group was more concerned about the proposed removal of the corporate income tax exemption for foreign-sourced income.

“For the prosperity tax, what has been announced, only more than [RM]100 million profits apply. And this is by legal entity, not on a group basis. So, in Malaysia, we have quite a few legal entities. I do not think we have one that has more than [RM]100 million of chargeable income. But our concern is more of [the removal of] corporate tax exemptions for foreign-sourced income.

"As you may be aware, a lot of our profits come from Thailand and we transfer or distribute dividends to Malaysia. So, if that part is taxable, we have some concerns. We are waiting for the details [on the prosperity tax] to be announced at the moment," he said.

In Budget 2022 announced last Friday (Oct 29), it was proposed that income tax be imposed on tax residents in Malaysia with income derived from foreign sources upon remittance into Malaysia, from Jan 1, 2022.

Separately, CGS-CIMB Research in a note dated Nov 4 also concurred that F&N is unlikely to be affected by the implementation of “Cukai Makmur”. 

The research house said this is because F&N’s Malaysia operations only make up 20.7% of the group’s operating profit, while the rest are from its Thailand operations.

CGS-CIMB has maintained its "add" call on F&N, with a higher target price of RM29.80 from RM28.50 previously.

"Our [discounted cash flow] DCF-based TP is raised to RM29.80 (beta: 0.6, g: 3%) as we roll over our valuation year to end-2021F. We reiterate our 'add' call on its attractive valuation (trading at 18.7% discount to its five-year mean of 26.5x), strong balance sheet (net cash of RM579 million as at end-FY6/21), and the ongoing recovery in HORECA sales (~30% of its total sales),” said the research house.

At Friday’s (Nov 5) noon break, shares in F&N were down by 0.67% or 18 sen at RM26.82, translating into a market capitalisation of RM9.84 billion. The counter saw some 31,000 shares transacted.

See more Budget 2022 highlights here.

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Lam Jian Wyn