Malaysia Prepaid 6% GST : the Impact To Telecommunication Stocks
Telecommunications 6% Government Service Tax No Longer Absorbed From 15 Sep 2011
Service Tax. As anticipated, the telcos are passing on the 6% service tax to prepaid users effective 15 Sep. The move is positive given the positive earnings impact (already imputed into our earnings forecasts) as the telcos would no longer absorb the tax. We believe the telcos may want to preempt any further potential increase in the service tax, as Budget 2012 is due to be tabled by the Prime Minister on 7 Oct.
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In a press release, Maxis said yesterday the 6% service tax will be charged for purchases of prepaid reloads and prepaid starter/SIM packs for all telcos. DiGi’s management also indicated yesterday during an informal luncheon that the telcos would no longer absorb the tax from 15 Sep. We gather that Celcom will do the same. No surprises since it is an industry-wide decision.
Impact on prepaid users. Going forward, with the charging of the 6% service tax on prepaid services, a customer who purchases a RM10 prepaid reload will need to pay RM10.60 (60 sen is for the service tax). Prior to its implementation, prepaid users would be notified via SMS.
Earnings impact. DiGi stands to gain the most with an estimated earnings boost of 5% in FY11, and 13% p.a. in FY12-13. Maxis is also another major beneficiary, with potential earnings boost of 3% in FY11, and 9% p.a. in FY12-13. While Celcom also should benefit, the net impact to Axiata is only 2% in FY11, and 6% p.a. in FY12-13. The net impact is diluted as Celcom’s revenue contributes only 44% of Axiata’s topline.
Risks. These include: 1) weaker-than-expected subscriber additions; 2) execution (such as network upgrades & expansion); and 3) all-out price war. Forecasts. No change to our forecasts for now. Although we had assumed that the tax would be passed on to prepaid users on 1 Sep, the slight delay is unlikely to have a material impact.
Investment case. We maintain our Overweight stance on the sector due to the positive earnings impact from passing on the 6% service tax to prepaid users, and the sector’s defensive qualities. Our top pick is DiGi as the biggest beneficiary when it no longer has to absorb the tax. We also like TM’s capital management potential as we expect another 29 sen/share capital distribution in 2011.
by RHB Research Institute