Telco sector biggest winner post-GST, tax absorbed by subscribers

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KUCHING: The telco sector has been viewed as the biggest “winner” in terms of its performance after the implementation of goods and services tax (GST) as they are able to pass the six per cent previously absorbed by them back to their subscribers, analysts observed.

According to the research arm of M&A Securities Sdn Bhd (M&A Securities), the first day of GST implementation saw telco issues topping the statistics for GST complaints at 44 per cent share as the confusion of who should absorb the six per cent on prepaid reload became a hot debate.

It noted that this led exchange of words between Malaysia’s Finance Minister and Custom Department and the latter summoned telcos representative to explain their action on such move.

“Finally, (the) communication minister laid the debate to rest, explaining the telcos action is not wrongful and hence, maintaining the six per cent GST charge on prepaid reload,” M&A Securities said.

As the research arm explained previously, this situation has been a hot debate for a while now as telcos have requested for the six per cent sales and service tax (SST) to be passed on to their subscribers.

While the government finally agreed to lift the SST charge in 2012, it noted that the move only lasted for several days as customer complaints mounted.

M&A Securities noted that previously, telcos have been absorbing the six per cent SST on the prepaid reload.

“Lets say consumers paid RM10 for the reload, hence telcos are paying 60 sen of each reload to the government.

“With the implementation of GST, telcos are finally able to pass the 60 sen from RM10 reload back to customers,” it said.

On top of that, the research arm said that the six per cent GST is now charged on the RM10 reloads, making the purchased amount at RM10.60.

As a temporary solution, M&A Securities noted that telcos are now giving extra talk time and SMS to their subscribers for at least three months, and subsequently Customs Department will further negotiate with telcos for a permanent solution.

“At this juncture, we are uncertain on the quantum of extra talk time and SMS to the subscribers pending telcos announcement,” it said.

It said it viewed as a temporary solution as telcos have been discussing this with the Communication Ministry.

The research arm foresees that the extra talk time and texting given will not bite into the telcos’ margins as both calls and texts have been steadily declining in contribution to telcos’ revenue for several years in contrast to rising data and internet usage.

M&A Securities said that in the end, should subscribers fully utilise the extra calls and SMSes given, it might provide some relief to telcos as it could potentially lift their average revenue per user (ARPU).

Overall, with the implementation of GST, the research arm noted that the telco sector is the biggest winner as they are able to pass the six per cent back to their subscribers.

“That said, their financial year 2015 (FY15) bottomline will be lifted by around three per cent to five per cent depending on their subscribers base,” it said.

To minimise the rising cost of GST implementation, M&A Securities said that the ministry has agreed in principal with telcos to drop their broadband price at least by six per cent in the near future.

It noted that this is certainly good news for subscribers coping with the GST that is already being charged on broadband prices.

However, the research arm is of the view that the broadband usage is still low in the country with broadband subscribers only forming about 10 per cent (Celcom), four per cent (Maxis) and two per cent (Digi) of total subscriber base in FY14. This has been due to expensive devices which thus restricts the full potential of broadband.

Hence, it foresees that lowering the price of broadband will not bring any significant impact to telcos as the rise of affordable smartphones in the market will be able to cover the shortfall.

Despite the headwinds in GST implementation, M&A Securities maintained its ‘overweight’ call on the telecommunication sector as fund managers are looking for a safe haven to rebalance their portfolios in bleak outlook of equity market.

The research arm noted that the valuation offered by telcos are not cheap. However, in view of the solid dividend payment in the current negative environment, this may offset the lofty valuation.

It added that attractions of the sector include attractive dividend stream, strong broadband initiatives and take up rate, and steady postpaid and prepaid net addition.