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Nikkei Markets

Axiata shares swoon on Nepal court's capital gains tax claim

Analysts expect near-term weakness to persist as expansion fans regulatory risks

Shares of Axiata have fallen as much as 9% since Thursday   © Reuters

KUALA LUMPUR (Nikkei Markets) - Shares of Axiata Group fell sharply Friday tracking a report that Nepal's Supreme Court has asked to pay 2.16 billion ringgit ($530.5 million) in capital gains tax following its purchase of Ncell in the Himalayan country.

Analysts widely expect the stock of the largest Malaysian telecommunications company by revenue to stay under pressure in the near term as regulatory risk weighs.

"This may lead to negative knee-jerk reactions over the short-term," said Kenanga analyst Cheow Ming Liang, who cut the target price of Axiata share to 4.50 ringgit from 4.60 ringgit. "Besides, the group may also potentially provide for some non-core impairments related to its legacy equipment."

A full bench of Nepal's apex court decided after two days of hearings that Reynolds Holdings Ltd was a shell company and the real owner of Ncell was Axiata, and it was liable to pay the tax along with Ncell Nepal, the Nepali Times newspaper reported.

The tax dispute arose after Axiata had bought Reynolds Holding, which held a majority stake in Ncell, from Sweden's TeliaSonera at around $1.03 billion in 2015. Axiata has filed 23.56 billion rupees under capital gains tax to the Nepali central bank, and has claimed to have cleared all tax liabilities.

None of the Axiata-linked parties to the litigation has received the judgment and order of the Supreme Court following its ruling. It also doesn't possess any detail of what was ordered by the Supreme Court, Axiata Group said in a statement.

The company also insisted that capital gains tax is not applicable on offshore transactions and even if applicable, any shortfall on payment is the responsibility of the seller after Ncell made the full and final payment.

State-backed Axiata has been expanding its footprint outside Malaysia in a bid to boost earnings driven by the so-called regional champion initiative advanced by the Malaysian government. As a group, Axiata currently commands over 260 million subscribers in Southeast Asia and South Asia.

Most recently, Axiata agreed in January to acquire 80% stake in Mekong Tower Company for 12.8 Lao kip ($1.48 million) in its foray into Laos. In December, the company bought another 325 telecommunication towers in Cambodia.

"Although Axiata is able to deliver higher core earnings growth owing to its footprint in high-growth developing markets, this latest development would also mean that Axiata is exposed to higher regulatory and investment risks in these markets," said Public Investment Bank Analyst Eltricia Foong.

Axiata's net profit tumbled 44% to 132.07 million ringgit in the third quarter from a year earlier mainly due to lower operating income and currency loss on loans. Quarterly revenue slipped 3.2% year-on-year to 6.00 billion ringgit. The company is expected to release its latest financial results on February 22.

Shares of Axiata have fallen as much as 9% since Thursday when trading resumed after a two-day Lunar New Year break. The stock fell 4.4% on Friday to 3.73 ringgit, sharply outpacing the benchmark FTSE Bursa Malaysia KLCI's 0.4% loss.

--Jason Ng

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