KUCHING: The reintroduction of sales and service tax (SST), which may have a neutral or negative impact to the telco operators, has been projected by analysts to possibly create uncertainties in the prepaid segment.
According to Affin Hwang Investment Bank Bhd (Affin Hwang), the details on SST are still vague, but it could negatively affect the revenue or profits for the telcos’ prepaid business, should the government decide not to provide any tax rebates.
The Ministry of Finance had last week issued a statement informing that the Goods and Services Tax (GST) will be zero-rated effective June 1. The SST will be reintroduced, but no implementation date was specified.
“We believe the reintroduction of SST may create uncertainties in the prepaid segment, based on the past precedent,” the research firm said.
“Prior to April 2015, both the postpaid and prepaid sales were subjected to six per cent Service Tax. The telcos passed on the SST to their postpaid customers but absorbed the SST for the prepaid users.
“Upon the introduction of 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 GST paid on prepaid services (read: absorb the GST).”
The research firm noted that moving forward, it is unclear as to what is the new SST tax rate, whether postpaid and prepaid sales subject to SST and whether there will be any rebates.
“All in, the reintroduction of SST may have a neutral (if the government provides rebates) or negative impact to the telco operators.”
Affin Hwang highlighted that Digi.Com Bhd (Digi) has the highest exposure to Malaysia’s prepaid segment, at 59 per cent of the group’s 2017 revenue, followed by Maxis Bhd (Maxis) with 44 per cent and Axiata Group Bhd (11 per cent).
Notwithstanding Digi and Maxis’ high revenue exposure, Affin Hwang expected the direct earnings impact from SST to be manageable.
This was after taking into consideration their high profit margins and resilient earnings trend during the 2015-2016 period which saw the implementation of GST and introduction of rebates.
Additionally, the research firm expected the telcos to benefit indirectly from improvement in consumer sentiment arising from lower GST rate.
Affin Hwang thus maintained its neutral view on the telco sector.
The research firm noted that the cellular space remains competitive while valuations look rich and the yields of 3.5-4.4 per cent should cushion downside to share prices.