Monday, September 26

Telcos to see earnings boost from six per cent service tax, says analysts


FUTURE GAINS: RHB Research says DiGi stands to gain the most with an estimated earnings boost of five per cent in FY11, followed by Maxis with three per cent and Celcom with two per cent. – Reuters photo

KUCHING: Telecommunications companies (telcos) are forecasted to see slight increases in their earnings as they will pass on the oncoming cost of the service tax for prepaid reloads and SIM starter packs to subcribers.

To recap, the Malaysian telco industry released a joint statement revealing that prepaid customers were in the process of being informed of the service tax effective September 15 via SMS, as reported in The Borneo Post yesterday.

RHB Research Institute Sdn Bhd (RHB Research) analyst Lim Tee Yang stated, “The move is positive given the positive earnings impact (already imputed into our earnings forecasts) as the telcos would no longer absorb the tax.”

Telco player Maxis Bhd (Maxis) announced in a press release that the six per cent service tax would be charged for purchases of prepaid reloads and prepaid starter/SIM packs for all telcos. Bhd’s (DiGi) management also indicated that the telcos would no longer absorb the tax from September 15. RHB Research had gathered that Celcom Axiata Bhd (Celcom) would do the same as well.

Lim opined, “We believe the telcos may want to preempt any further potential increase in the service tax, as Budget 2012 is due to be tabled by the Prime Minister on October 7.

“DiGi stands to gain the most with an estimated earnings boost of five per cent in financial year 2011 (FY11), and 13 per cent per annum in FY12 to FY13.

“Maxis Bhd is also another major beneficiary, with potential earnings boost of three per cent in FY11, and nine per cent per annum in FY12 to FY13.

“While Celcom also should benefit, the net impact to Axiata Bhd is only two per cent in FY11, and six per cent per annum in FY12-13. The net impact is diluted as Celcom’s revenue contributes only 44 per cent of Axiata’s topline.”

Risks to the research house’s forecast included weaker than expected subscriber additions, execution (such as network upgrades and expansion) and an all-out price war.

With regard to the all-out price war, Lim told The Borneo Post that the competition within the industry was currently rational and he did not anticipate any irrational levels of competitions with the introduction of the added cost to subscribers.

In addition, Lim stated that he did not foresee a significant shift in mobile service customers switching from prepaid subscriptions to postpaid accounts for the time being.

He made no changes to RHB Research’s forecasts for now and justified it by elaborating, “Although we had assumed that the tax would be passed on to prepaid users on September 1, the slight delay is unlikely to have a material impact.”

The research house picked DiGi as the being biggest beneficiary when it would no longer have to absorb the tax.

In addition, Lim also commended TM Bhd’s capital management potential and expected another 29 sen per share capital distribution in 2011.