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KUALA LUMPUR: The new pay-per-use goods and services tax (GST) system for prepaid mobile services, as announced by the Communication and Multimedia Ministry, is positive for mobile telecommunications companies (telcos), analysts said, but there is likely to be an impact on usage.

As a result, they estimate the new model to provide a 3% pass through instead of a full 6%.

PublicInvest Research analyst Lee Wee Sieng said the new system will be positive for key mobile players.

“While telcos will incur additional costs to reconfigure their systems and produce new prepaid top-up cards, we believe the benefits from passing through GST on prepaid services will outweigh the additional costs of reconfiguration to collect GST based on usage,” said Lee in a report yesterday.

The research house named DiGi.com Bhd (fundamental: 1.55; valuation: 1.7) as the main beneficiary of the move, as its prepaid segment contributes 73% to its revenue — the highest among mobile players.

Lee also noted that DiGi’s share price performance has been relatively weak in the past month, partly due to uncertainty about the GST implementation.

AmResearch analyst Hafriz Hezry said while the outcome of the move is mostly positive as telcos will be able to pass on GST to consumers, consumer usage is likely to be impacted.

“This model in itself can impact usage, on top of ultra-price sensitive prepaid users which might simply pare usage given the higher effective cost,” he said, adding that he has conservatively only factored in a 3% pass through instead of a full 6% in his projections.

Hafriz noted that under the new pay-per-use GST system, the chargeable GST amount is taken out of prepaid credits, which essentially means that for a RM10 reload (and assuming full usage), consumers only get RM9.40 of actual credit.

AmResearch prefers Axiata Group Bhd (fundamental: 0.85; valuation: 1.1) as its top pick for the sector, as it expects a turnaround in subsidiaries PT XL Axiata’s and Celcom Axiata Bhd’s performance in the second half of 2015.

Maybank Investment Bank Bhd (Maybank IB) analyst Tan Chi Wei also deems the announcement of the new system as a satisfactory outcome for mobile telcos, but noted that the impact on companies’ bottom lines is not clear-cut.

“There are elasticity considerations, and competition remains intense. This means part of the newfound revenue could be returned to customers in the form of lower effective tariffs,” he said, adding that reload sales could have already been affected in April and May, due to the confusion over the GST treatment.

However, on the government’s call for telcos to lower tariffs, Tan said it should not be an issue, as tariffs will trend down over time due to technological improvements.

Maybank IB named Maxis Bhd (fundamental: 1.15; valuation: 1.1) and Axiata as its top picks for the sector.

On Wednesday, Communications and Multimedia Minister Datuk Seri Ahmad Shabery Cheek announced that the GST of 6% for mobile prepaid reloads will be based on usage rather than being charged upon the purchase of reloads.

Telcos have been given six months to implement the new system.

In a statement yesterday, Communications and Multimedia Consumer Forum of Malaysia (CFM) said implementing the new change is a massive effort which is expected to take more than half a year to complete.

“The decision to change the basis of charging GST from activation to usage is not as simple as an on/off switch.

“It involves complex reconfiguration of the telcos’ backend systems as well as those of over 30,000 third party retailers, resellers and agents such as financial institutions, electronic payment providers, supermarkets, petrol stations and all other sales agents,” it added.

DiGi shares closed up 0.34% at RM5.98 yesterday, while Maxis’ share price settled at RM7.03, down 0.28%. Axiata shares ended the day up 0.89% at RM6.79.


The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.

 

This article first appeared in The Edge Financial Daily, on May 15, 2015.

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