Telecommunications sector
Maintain underweight: According to a leading English daily, Customs Department GST director Datuk Subromaniam Tholasy said 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 went against the Customs Department’s instructions for prices to be maintained even after GST comes into effect.

This comes as a surprise as there was no publicly announced directive on this previously. Speaking to our industry sources, we understand there is no contention over the charging of GST as mobile communications services is a standard-rated item under the GST Act 2014.

It appears the dispute with the Customs Department revolves around its demand that telcos maintain the prices of top-up cards and instead factor in GST through a reduction in the reload credit. However, telcos are resisting this as it would result in odd reload credit amounts (for example RM10 for RM9.44 reload credit) and 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 GST impact. Assuming prepaid usage levels drop by 3%, our financial year 2015 (FY15) to FY17 earnings before interest, taxes, depreciation and amortisation forecast for DiGi.com Bhd would have to be reduced by 2.2% to 2.8%, for Maxis Bhd by 1.6% to 2.1% and for Axiata Group Bhd by 0.8% to 1.1%. Correspondingly, our target prices would have to be revised downwards to RM6 (-3.2%) for DiGi, RM6.70 (-2.9%) for Maxis and RM6.85 (-2.1%) for Axiata Group Bhd.

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.Com would be the most impacted, followed by Maxis and Axiata Group. — CIMB Research, April 3

This article first appeared in The Edge Financial Daily, on April 6, 2015.