KUCHING: Budget 2019’s digital tax at the commercial level could potentially impact companies that rely on foreign digital services such as web hosting, AmInvestment Bank Bhd (AmInvestment Bank) opine in a N2N Connect Bhd (N2N) company report.
According to AmInvestment Bank, these foreign digital services include web hosting, cloud storage, payment gateway and customer-relationship management (CRM).
“Amazon Web Services (AWS), Dropbox, Shopify and Zoho are a few of many foreign suppliers that provide digital services to local companies but do not have a physical presence in Malaysia,” the research firm said.
AmInvestment Bank noted that operationally, N2N does not rely on foreign web hosting services such as AWS to run the group’s network.
It further noted that N2N hosts the group’s servers via third-party local service providers.
“Instead, the concern may be N2N’s market data subscription (for example, consensus estimate, price quotes and volume) from a foreign supplier which could be subjected to digital tax.
“These data are featured on its TCPro Global trading platform.”
AmInvestment Bank has however pointed out that there were still many unanswered questions in regards to the framework and implementation of the digital tax system.
“For instance, foreign digital service providers may not be compelled to be registered under our local Sales and Service Tax (SST) system, and there are also queries if the digital tax would be passed on to customers.
“Due to the ambiguity of this matter, the management is unable to quantify the impact until further clarification from the government in December 2018.”
Based on AmInvestment Bank’s back-of-the-envelope calculation, a 10 per cent digital service tax on N2N’s market data subscription could potentially lower the research firm’s financial year 2019 forecast (FY19F) net core profit by two per cent, and subsequently reduce its fair value by two sen to RM1.48 per share.
“Thanks to the accretive acquisition of AFE Solutions in FY17, we deem this to be negligible as N2N will potentially see greater savings from the termination of overlapping market data licences over the next one to two years upon expiry.
“Currently, market data subscription makes up circa 25 per cent of the entire group’s cost of sales.”
Overall, AmInvestment Bank continued to like N2N due to the group’s leading position in the online trading solution space, the acquisition of AFE, which offers tremendous earnings accretion and the affordability of TCPro Global, which could help the group win market share from global competitors such as Bloomberg and Thomson Reuters.
As such, the research firm maintained its ‘buy’ recommendation with an unchanged fair value of RM1.50 per share.