Ncell and Axiata UK have filed a request for arbitration with the ICSID over the matter

By NUR HAZIQAH A MALEK / Pic BERNAMA

AXIATA Group Bhd’s move to pay US$185 million (RM802.44 million) in capital gains tax and US$8.2 million interest to the Nepalese government on April 12 was a surprise to many.

The tax was in relation to the group’s unit, Axiata Investments (UK) Ltd’s acquisition of Nepalese mobile service provider Ncell Pte Ltd.

Ncell and Axiata UK have filed a request for arbitration with the International Centre for the Settlement of Investment Disputes (ICSID) over the matter.

Public Investment Bank Bhd said the settlement came as a surprise as Axiata had announced in December 2019 that the outcome of arbitration was in the group’s favour.

“Although the payment was made under protest and Axiata will seek remedies including restitution of sums already paid, we think the possibility of Axiata receiving any form of compensation is low.

“As we highlighted previously, Axiata’s operations in emerging markets (EMs) may entail higher growth, but they also draw higher investment risks due to less established regulatory frameworks,” it wrote in a recent note.

The research firm has left its core profit forecast for Axiata unchanged, though it expects the telecommunication company’s (telco) headline profit to decline sharply for the financial year ending Dec 31, 2020 (FY20).

“We maintain our ‘Neutral’ rating on Axiata. Our sum-of-the-parts-based (SOTP-based) valuation is reduced to RM3.90 (from RM4) as we factor in a lower cash holding following this settlement,” it said.

AmInvestment Bank Bhd, meanwhile, expects Axiata to make the full RM837 million provision for the settlement, which will account for a massive 62% of its FY20 earnings forecast and 3% of its current market capitalisation.

It noted that Ncell, which is 80%-owned by Axiata, and Axiata UK are currently appealing to the ICSID to overturn the Nepali Supreme Court’s ruling on the grounds that the transfer of shares occurred outside Nepal in a non-Nepalese company and is not subject to capital gains tax.

“However, we are doubtful that restitution for the sums already paid can be effected against the country’s legal and tax authorities even with a favourable ruling by the tribunal,” it said.

Although Ncell is currently the mobile market leader in a duopoly involving Nepal Telecom, higher consumption levies and intense Internet service provider competition have caused its FY19 revenue to decrease 6% year-on-year.

“Given these regulatory and operational risks, we do not discount the possibility that the group may exit Nepal under the current regime.

“As Ncell made up 12% and 24% of Axiata’s FY19 Ebitda, and earnings respectively, as well as 13% of Axiata’s SOP, this could be a significant re-rating catalyst,” AmInvestment added.

However, the research house maintained its ‘Buy’ call on the telco, with an unchanged SOTP- based fair value of RM4.90 per share.

Axiata recorded a net profit of RM332.56 million in the fourth quarter ended Dec 31, 2019 (4Q19), versus a net loss of RM1.43 billion a year ago, attributed to better operational performance, and lower depreciation and amortisation due to one-off assets written off in 4Q18.

For the full year, the group recorded earnings of RM1.46 billion against a net loss of RM4.76 billion previously.