Telco - Mobile - GST dispute sets uncertain tone
Recommendation: Under Weight
There should be no contention over the charging of 6% GST on mobile communications services as it is a standard rated item. Therefore, the dispute between the industry and the Customs Department appears to revolve around the latter’s demand for telcos to maintain the prices of top-up cards and factor in GST through a reduction in reload credit. If telcos have to comply, they may not be able to fully benefit from passing through the GST, as prepaid users may pare down their usage. Supposing this occurs, we may have to cut our FY15-17 EBITDA forecast for Malaysian mobile operators by 0.8-2.8% and target prices by 2.1-3.2%. The most impacted would be DiGi and the least affected would be Axiata Group. We stay Underweight on the sector.
What Happened
According to the Star newspaper, Customs Department GST director Datuk Subromaniam Tholasy says that several telcos are being investigated for increasing the price of prepaid top-up cards in light of the 6% Goods and Services Tax (GST). He says this goes against the Customs Department’s instructions for prices to be maintained even after the GST came into effect.
What We Think
This comes as a negative surprise as there were no publicly announced directives on this previously. Speaking to our industry sources, we understand there is no contention over the charging of 6% GST as mobile communications services is a standard rated item under the Goods and Services Tax (GST) Act 2014. It appears the dispute with the Customs Department revolves around their demand that telcos maintain the prices of top-up cards and instead, factor in GST through a reduction in the amount of reload credit. However, telcos are resisting this as a) it would result in odd reload credit amounts (e.g. RM1o price for RM9.44 reload credit) and b) it may negatively impact consumer’s usage levels. Telcos says they should be left to dictate how they sell their products as long as they comply with the GST Act. We understand over the next few days, the telcos will be discussing with the Customs Department how to resolve this. If the 6% GST charge is indeed not the issue, then the worst-case scenario would be telcos backing down and complying with the Custom Department’s demand. In this event, telcos may not be able to fully benefit from GST as some prepaid subscribers may choose to stick with the reload credit they have and pare down usage, instead of reloading more frequently. We have currently factored in the full 6% GST impact. Assuming prepaid usage levels drop by 3%, our FY15-17 EBITDA forecast for DiGi would have to be reduced by 2.2-2.8%, for Maxis by 1.6-2.1% and for Axiata by 0.8-1.1%. Correspondingly, our target prices would have to be revised downwards to RM6.00 (-3.2%) for DiGi, RM6.70 (-2.9%) for Maxis and RM6.85 (-2.1%) for Axiata Group.
What You Should Do
We have an Underweight rating on the Malaysian telecom sector as we believe risk-reward is unfavourable, given rich valuations and potentially more intense competition this year. This GST issue only adds to uncertainties for the sector. If the worst-case scenario materialises, DiGi would be the most impacted, followed by Maxis and Axiata Group.
Source: CIMB Daybreak - 03 April 2015
Recommendation: Under Weight
There should be no contention over the charging of 6% GST on mobile communications services as it is a standard rated item. Therefore, the dispute between the industry and the Customs Department appears to revolve around the latter’s demand for telcos to maintain the prices of top-up cards and factor in GST through a reduction in reload credit. If telcos have to comply, they may not be able to fully benefit from passing through the GST, as prepaid users may pare down their usage. Supposing this occurs, we may have to cut our FY15-17 EBITDA forecast for Malaysian mobile operators by 0.8-2.8% and target prices by 2.1-3.2%. The most impacted would be DiGi and the least affected would be Axiata Group. We stay Underweight on the sector.
What Happened
According to the Star newspaper, Customs Department GST director Datuk Subromaniam Tholasy says that several telcos are being investigated for increasing the price of prepaid top-up cards in light of the 6% Goods and Services Tax (GST). He says this goes against the Customs Department’s instructions for prices to be maintained even after the GST came into effect.
This comes as a negative surprise as there were no publicly announced directives on this previously. Speaking to our industry sources, we understand there is no contention over the charging of 6% GST as mobile communications services is a standard rated item under the Goods and Services Tax (GST) Act 2014. It appears the dispute with the Customs Department revolves around their demand that telcos maintain the prices of top-up cards and instead, factor in GST through a reduction in the amount of reload credit. However, telcos are resisting this as a) it would result in odd reload credit amounts (e.g. RM1o price for RM9.44 reload credit) and b) it may negatively impact consumer’s usage levels. Telcos says they should be left to dictate how they sell their products as long as they comply with the GST Act. We understand over the next few days, the telcos will be discussing with the Customs Department how to resolve this. If the 6% GST charge is indeed not the issue, then the worst-case scenario would be telcos backing down and complying with the Custom Department’s demand. In this event, telcos may not be able to fully benefit from GST as some prepaid subscribers may choose to stick with the reload credit they have and pare down usage, instead of reloading more frequently. We have currently factored in the full 6% GST impact. Assuming prepaid usage levels drop by 3%, our FY15-17 EBITDA forecast for DiGi would have to be reduced by 2.2-2.8%, for Maxis by 1.6-2.1% and for Axiata by 0.8-1.1%. Correspondingly, our target prices would have to be revised downwards to RM6.00 (-3.2%) for DiGi, RM6.70 (-2.9%) for Maxis and RM6.85 (-2.1%) for Axiata Group.
What You Should Do
We have an Underweight rating on the Malaysian telecom sector as we believe risk-reward is unfavourable, given rich valuations and potentially more intense competition this year. This GST issue only adds to uncertainties for the sector. If the worst-case scenario materialises, DiGi would be the most impacted, followed by Maxis and Axiata Group.
Source: CIMB Daybreak - 03 April 2015
