Maintain neutral: The newly elected Pakatan Harapan government announced that it would remove the goods and services tax (GST) and replace it with a sales and service tax (SST). The details on the SST are still vague, but it could negatively affect the revenue and profits for the telecommunications companies’ (telcos) prepaid business should the government decide not to provide any tax rebates. DiGi has the highest exposure to the Malaysian prepaid market, followed by Maxis. That said, we acknowledge that the situation is still fluid and any impact on earnings will likely be manageable, partly cushioned by improvement in consumer sentiments arising from an absence of the GST. We maintain our “neutral” call.
Malaysia’s finance ministry announced that the GST will be set at 0% beginning June 1, 2018, from 6% currently. Meanwhile, the government would reintroduce the SST at a later unspecific date, reported by an English daily.
We believe the reintroduction of the SST may create uncertainties in the prepaid segment, based on the past precedent. Prior to April 2015, both post-paid and prepaid sales were subject to 6% service tax. The telcos passed on the SST to their post-paid customers but absorbed the SST for the prepaid users. Upon the introduction of the GST, the telcos decided to pass on both. In April 2015, for each RM10 top-up (inclusive of GST), the subscriber will have an airtime of RM9.43. After an outcry, some telcos decided to provide free minutes and text messages for a limited period. The government had later introduced a new mechanism where the consumer received a rebate for the GST paid on prepaid services (read: absorb the GST). Moving forward, the following is unclear: i) what is the new SST tax rate; ii) are post-paid and prepaid sales subject to SST; and iii) will there be rebates?
All in, the reintroduction of SST may have a neutral (if the government provides rebates) or negative impact on the telco operators. DiGi has the highest exposure to Malaysia’s prepaid segment — 59% of its 2017 revenue, followed by Maxis (44%) and Axiata (11%). Notwithstanding DiGi’s and Maxis’ high revenue exposure, we expect the direct earnings impact from SST to be manageable, taking into consideration: a) their high profit margins; b) resilient earnings trend during the 2015 to 2016 period (implementation of GST, introduction of rebates); and c) we expect the telcos to benefit indirectly from improvement in consumer sentiment arising from the lower GST rate. We maintain our “neutral” call — cellular space remains competitive while valuations look rich; the yields of 3.5% to 4.4% should, however, cushion downside to share prices. — Affin Hwang Capital Research, May 21