YNH Property Bhd
(Jan 26, RM1.70)
Maintain hold at RM1.76 , target price at RM1.72: Over the past few days, YNH had announced two lawsuits initiated by the Inland Revenue Board (IRB) against two of its subsidiaries.

Last Friday, YNH said that its wholly owned subsidiary, Kar Sin Bhd, was served with a writ of summons and statement of claim by IRB for back taxes for the years of assessment 1998 and 1999 amounting to RM1.1 million and RM3.3 million, respectively.

This was followed by Monday’s announcement that another wholly owned subsidiary, YNH Construction Sdn Bhd, was served with a writ of summons and statement of claim for back taxes for the year of assessment 1999 amounting to about RM1 million.

YNH will contest the claims. The firm had previously appealed against the income tax assessments raised and the  special commissioners of IRB have set the hearing dates in November.

Such announcements will be unwelcomed by investors, especially when the aborted property sale to Kuwait  Finance House is still fresh in memory. Our checks with YNH revealed that IRB disagreed with the company move to  recognise certain income in the year of assessment 2000 which was a tax-free year.

Instead, IRB attributed the disputed income to years of assessment 1999 and 1998, which had a corporate tax rate  of 30%. Notwithstanding the disagreement, YNH has already paid the back taxes in 2008. After seeking legal  advice, the company is of the view that its original tax treatment is defensible and, hence, the classification of the amount paid as tax recoverable, which is an asset on the balance sheet.

In the event YNH loses the tax appeal, there will be no further cash flow impact. However, its bottom line will be hit by a charge of RM6.2 million which is about 9.1% of our FY10 earnings estimate.

We are not changing our estimates at this point as the tax appeal is a long drawn-out affair which may not see closure within the next two years.

Nevertheless, this negative news will still weigh down on YNH. Despite its 45% discount to revalued net asset value of RM3.21, we believe the wide valuation gap is unlikely to be narrowed anytime soon until the arrival of  positive news.

As such, we maintain our hold call and target price of RM1.72 for the stock based on a price-to-earnings ratio (PER) of 10 times FY10 earnings per share (EPS). — ECM Libra Investment Research, Jan 26
This article appeared in The Edge Financial Daily, January 27, 2010.