Cellcos to benefit from GST implementation

by Sharon Kong, sharonkong@theborneopost.com. Posted on September 14, 2013, Saturday

KUCHING: Cell phone companies (cellcos) are set to benefit from the introduction of the goods and services tax (GST) as observed by analysts.

According to the research arm of CIMB Investment Bank Bhd (CIMB Research), the likely introduction of GST should be positive for the mobile carriers as they would no longer have to absorb the six per cent sales tax for prepaid users.

“Postpaid users already bear this tax. The operators attempted to pass on the sales tax in 2011 but could not get the government’s blessing as it was a sensitive issue before the general election,” Kelvin Goh of CIMB Research explained.

This is despite the government not having any say on the telecom companies (telcos) since the tax is imposed on consumers.

The research arm opined that DiGi.Com Bhd (DiGi) stands to benefit the most from a GST, followed by Maxis Communications Bhd (Maxis) and Axiata Group Bhd (Axiata) through Celcom.

It added that prepaid revenue makes up 71 per cent of DiGi’s total revenue, compared to an estimated 55 per cent at Maxis and 58 per cent of Celcom.

However, the research arm noted that prepaid users may cut back on usage when GST is introduced as they are generally price sensitive and have tighter budgets.

Assuming that the telcos are able to recover only half the tax since some consumers would reduce their spending, DiGi’s financial year 2015 (FY15) core net profit could be lifted by six per cent versus four per cent for Maxis and about three per cent for Axiata.

“As such, we estimate a 4.6 per cent or RM0.21 rise in our discounted cash flow-based target price for DiGi and a 2.9 per cent or RM0.21 increase for Maxis, while Axiata’s sum of parts-based target price would rise by 2.9 per cent or RM0.20,” Goh reiterated.

As for the research arm of Hong Leong Investment Bank Bhd (HLIB Research), it generally welcomed this development as this will benefit cellcos in terms of cost savings.

As with CIMB Research, it also expects DiGi to benefit the most if this materialises considering that it has the highest proportion (84 per cent) of prepaid users to total subscriber base, compared to Maxis (74.8 per cent) and Celcom (77.5 per cent).

“Based on our estimation using the second quarter of 2013 (2Q13) operating data, DiGi will possibly enjoy the most with 13.6 per cent in earning uplift (based on FY15 estimates profit after tax), followed by Maxis and Axiata with 7.8 per cent and six per cent respectively, provided competition and usage remain status quo,” analyst Tan J Young of HLIB Research projected.

However, HLIB Research also highlighted the risk of lower usage (MOU) from prepaid subscribers after the pass through is enforced considering the highly price sensitive nature of this market segment, especially migrants who are the major contributor of the prepaid segment.

Hence, this may dwarf its bullish estimation above in the short term as usage declines.

“We also do not discount that cellcos may use this opportunity to intensify competition by introducing new packages to compensate the higher cost of service with extra air time or download quota to prepaid subscribers which may also neutralise part of the gain from the tax savings,” Tan added.

Overall, both HLIB Research and CIMB Research maintained their ‘neutral’ ratings on the sector, given the fact that GST is only expected to be introduced in 2015.

Read more: http://www.theborneopost.com/2013/09/14/cellcos-to-benefit-from-gst-implementation/#ixzz2fDqZ7WkN