Short Position - Bursa, energy, plantation tax

Bursa bldg man

Time for Bursa Malaysia to clarify

G Neptune Bhd submitted a business regularisation plan last year, that would see LHO Group come in as a white knight.

After a lengthy consideration, Bursa Malaysia rejected the proposal late last year.

Its overarching reason is that LHO was not a suitable company to meet its listing requirements. But questions over one of Bursa Malaysia’s reasons for the rejection are raising concerns.

Among the reasons given was that LHO was recording negative cashflow despite posting a profit over the past four years.

Bursa Malaysia said LHO had to rely on loans and borrowings to sustain its operations and given its high gearing and negative cashflow from operations, this could be an issue if loan facilities were reduced.

But Bursa Malaysia calling LHO a company that raises public interest concern, and hence was the ground for rejecting the plan, is a grey area which is causing some discomfort among investors.

LHO is a company that distributes and sells alcoholic beverages. It is licenced to do that and based on the fact that it makes a profit, one can assume it has been paying corporate taxes.

Rejecting a company for a backdoor listing if there are doubts on the financial suitability of that company is fine but to reject a legal tax-paying company for a listing because there are “public concerns”, needs to be clarified.

Is Bursa Malaysia saying that it will not allow such companies to be listed? Is there a provision in its listing requirements that companies involved in the legal alcohol or related businesses cannot be listed in Malaysia?

Malaysia is losing ground and attractiveness when it comes to listings, especially among overseas companies.

With the next wave of technology companies coming to the fore, especially with the digitalisation of the economy, the need for capital for growth is going to be huge.

Some of those companies might very well be fintech-related, and may not be fully syariah-compliant should they deal with interest-rate bearing instruments.

Furthermore, vague restrictions may put off potential listings in favour of jurisdictions like Singapore, which has embraced a number of Malaysian companies to float their businesses in the republic.

Renewable energy challenges

OVER the last few months, many listed companies have announced plans to get involved in renewable energy projects, particularly solar power generation.

Oftentimes, the announcements have got investors excited about the prospects of such ventures, driving up the share prices of the companies. But the solar business is far from being easy, let alone highly-profitable.

While the demand for renewable energy is real, what is challenging is having the know- how to build and operate solar power generation in a profitable manner.

The plan announced recently for Johor is notable.

The Sultan Ibrahim Solar Park costing RM1.4bil aims to be the biggest of its kind in South-East Asia with a combined installed capacity of 450 megawatts (MW).

It is an ambitious project clearly also aimed at tapping into the potentially strong demand from Singapore. But there are challenges.

Who will fund the power cable link into Singapore?

More importantly, a look at the solar heat resource map shows that Johor is perhaps the least suitable location in Malaysia for solar power plants.

Furthermore, if building solar power plants was an easy venture, why only several of the awarded solar projects under the three cycles of the country’s large scale solar (LSS) programme have gone live?

A number of projects have missed the deadlines under their award and have received extensions. One wonders under what circumstances have the Energy Commission, the regulator of the sector, been giving such extensions?

Shouldn’t such awards be cancelled and re-tendered?

Meanwhile, all eyes are going to be on the fourth cycle of the LSS, which is promising the award of one gigawatt (GW) of solar plants.

Hopefully, the winners in this round will not delay their implementation.

The concern is that while Malaysia has the best laid out plans for renewable energy, too little is actually coming onstream to reach the target.

In 2018, Malaysia announced that it had set a target of 20% renewable energy in its generation mix by 2025. It is far from that goal. Better execution and stricter adherence to the timelines set out in awards need to be enforced. Otherwise, it will be just yet another ambitious plan of the country that fails to reach fruition.

Tax burden for planters

ALL is not well for planters despite the current strong crude palm oil (CPO) prices.

If CPO consistently trades above RM3,000 per tonne for the remaining part of the year, then the heavily-taxed palm oil sector could end up paying even higher taxes.

It is believed that one-third of a plantation company’s pre-tax profit goes to the government in the form of taxes and cess.

Effective this month, many planters will have to pay a higher cess at RM16 per tonne, from the previous RM14 per tonne to the Malaysian Palm Oil Board (MPOB).

The planters’ existing cess commitment is to fund MPOB’s new research and development works, marketing promotion activities by the Malaysian Palm Oil Council and the Malaysian Sustainable Palm Oil certification programme.

This time round, the additional cess is to support the newly- established Mechanisation and Automation Research Consortium of Oil Palm.

Other taxes imposed on planters are the CPO export tax, CPO windfall profit tax and the corporate tax. Planters in Sabah and Sarawak were also imposed with sales tax of 7.5% and 5% respectively.

In comparison, the corporate tax in Malaysia is 24% while Indonesia is 22% for this year and 20% in 2022.

Big plantation companies also had to pay yearly levy of RM640 per foreign worker and the Roundtable on Sustainable Palm Oil compliance costs.

At the height of CPO prices in 2017 when there were also CPO export taxes and CPO windfall payments in Peninsular Malaysia, the payments accounted for almost 6% to 7% of the revenues of many plantation companies.Hence, if CPO stays above RM3,000 per tonne throughout this year, experts estimate that the MPOB cess and various taxes could roughly account for about 3% to 8% of the revenue of some big plantation companies.

The estimated tax payments are inclusive of the planters’ windfall tax and CPO export tax.

Hence, there is no doubt that the MPOB cess and other taxes are expected “to eat into the cash flow and net profit margin of local plantation companies this year.”

But on the bright side, as long as local planters’ CPO production continues to recover and CPO prices exceed the plantation companies’ all-in production costs of about RM2,000 to RM2,300 per tonne, then most plantation companies could still record net profit growth of about 5% or more for this year.

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