KUALA LUMPUR (Oct 29): A reintroduction of the goods and services tax (GST) could have a negative impact on the telco industry with Digi.com Bhd being the most affected, followed by Maxis Bhd and Axiata Group Bhd, according to RHB Research in a note to clients on Friday (Oct 29).

The research firm said the reintroduction of the GST in 2023 would further compound the weakness in the prepaid market as prepaid subscribers are likely to claw back or reduce their usage.

Assuming a 3% reduction in usage, RHB sees core earnings before interest, taxes, depreciation and amortisation (EBITDA) of the mobile telcos falling 0.5% to 2.4% for the financial year ending Dec 31, 2023 (FY23).

“In the worst-case scenario of the telcos being made to absorb the GST (assumed at 6%), their FY23 core EBITDA would decline by 0.9% to 4.5%, with Digi being the most impacted, followed by Maxis and Axiata.

“Consequently, our TPs (target prices) for Digi, Maxis, and Axiata are likely to be lowered by 4% to 5% (the base case) and 11% to 14% in the worst-case scenario,” said RHB Research analyst Jeffrey Tan.

At the time of writing on Friday, Digi shares had slipped two sen or 0.46% to RM4.31, with a market value of RM33.51 billion. Maxis increased by 0.43% or two sen to RM4.72, translating into a market capitalisation of RM37.33 billion, while Axiata was up two sen or 0.5% at RM3.99, giving it a market capitalisation of RM36.6 billion.

The GST was introduced in 2015 but was later scrapped by the Pakatan Harapan government in 2018 as part of its manifesto, followed by the reintroduction of the sales and service tax (SST).

“The significant backlash from prepaid users and confusion that ensued following the shift to a GST regime and the subsequent roll-back of the SST in 2018 have, we believe, led to a stalemate on how the issue should be tackled going forward.

“Prepaid tax collection was previously reported to be in excess of RM1 billion annually — not a meagre sum considering the tight government finances. We believe a number of issues are worth mulling over before the GST is to be reimposed,” he said.

The analyst noted that communications services are now recognised as a public utility — much like electricity and water — with changes made to the regulatory framework and state by-laws.

Moreover, the prepaid market has continued to shrink on the back of data-led price competition, which compounded the downside impact of the Covid-19 pandemic.

Seen in this light, he said, the reimposition of the GST on prepaid may be perceived as counter-intuitive and a politically sensitive issue, especially when the welfare of the rakyat remains a top priority.

RHB maintained its "neutral" call on the telco sector, but continued to favour the fixed line or integrated plays, namely Telekom Malaysia Bhd and OCK Group Bhd, while Axiata is its preferred mobile pick.

Among the key risks to its call include competition, weaker-than-expected earnings and regulatory setbacks.