Wilmar - selling due to tax allegation a over reaction?

KEVIN'S TAKE on...Wilmar's share dive, buying opportunity

Written by Kevin Scully

Thursday, 20 May 2010

The following posting by Kevin Scully, executive chairman of NRA Capital, appeared on his blog yesterday and is reproduced here with permission. Visit www.nracapital.com I don’t follow Wilmar shares - at one point in time it had a market cap that was almost the same size as Singapore Telecom.  Wilmar shares declined sharply today by 6% today (at time of writing on 31bn shares and itself contributed to an 11-point decline of the STI Index's fall.  At the centre of the weakness is was alleged tax evasion - the following article in the Jakarta Post gives more details on the case.   Technically we could see the shares fall further to S$4.96 where I see some support - this may provide a buying/trading opportunity as the lost in market cap now is about 5 times the value of the alleged tax evasion.   Wilmar has come out to deny any wrong doing in a statement filed on SGX.  The statement is set-out below: RESPONSE TO RECENT MEDIA REPORTS ON INDONESIAN VALUE ADDED TAX  The Company refers to certain media reports today that certain Indonesian subsidiaries of the Company are under investigation over certain allegations relating to value added tax restitution claimed by those subsidiaries in Indonesia. Those reports had stated that the value added tax restitution claims are questionable and fictitious. Value added tax is typically payable for domestic purchases and restitution of value added tax payments arises out of refunds for exports of palm oil out of Indonesia. Wilmar’s Indonesian subsidiaries are collectively the biggest exporters of Indonesian palm oil. These subsidiaries collectively exported more than US$3 billion worth of palm oil in each of the last 3 financial years, thereby entitling these subsidiaries to claim the 10% value added tax paid on the cost of these sales for each of those years. These subsidiaries have received restitution of varying amounts over the years, which correspond directly with the actual quantum of cost of export sales, consistent with the permissible amounts claimable under Indonesian value added tax laws. The Company’s subsidiaries have fully complied with such value added tax laws and are in full compliance with the procedures relating thereto. The Company is fully confident that its subsidiaries are and have at all times been in full compliance with all relevant Indonesian value added tax laws. The Company categorically denies the allegations that the value added tax restitution claims are questionable and fictitious, and further categorically denies any allegation of collusion with tax officials referred to in those reports which the Company hereby states are completely untrue and unsubstantiated. From the charts - there seems to be some support technically at the S$4.96 level. Fundamentally, let me put the numbers in some context.  First the amount of the alleged tax evasion is US$385mn or about S$535mn.  This looks like a drop in the ocean compared to Wilmar's market capitalisation of S$37.2bn at S$5.82 or 1.4% of its current market cap.  The decline in market cap from yesterday to today, ie a S$0.37 drop has seen Wilmar's market cap fall by S$2.36bn.   In terms of NTA - at S$1.71 per share - the S$535mn of alleged tax evasion would only reduce its NTA by 8.4 cents to S$1.63.... Barring any new information and taking no view on the merits of the alleged tax evasion, the potential decline in the share price to S$4.96 would seem to provide a great buying/trading opportunity.  But a decline in Wilmar shares to S$4.96 from S$5.82 now would shave another 26 points off our STI index.

ML's Take:

Agreed with Kevin that the tax allegation would be a drop in the ocean toward wilmar mkt cap and NTA.

If this is the reason for the drop, it is overdone.

This blog is a selections of my investment views to my client. If you find it useful or have additional information to share, please do let me know. These blogs are my personal views and is not meant to solicit any sales or investment on any securities or investment. I may have vested interest in some of the counters or investment products, hence please invest at your own risk. As usual invest in what you understand and do your own homework. ML is a licensed stockbroker with one of Asia Leading Stock Broker firm. To contact him, please email: icewolfmike@gmail.com