- Recent newsflows revealed mixed updates on the treatment of GST by telcos. The conflicting statements among different government bodies and ministers made this worse, while suggestions that previous pricing by telcos already built in the previous SST of 6% is not entirely accurate – as this only applies to the postpaid segment, while for the prepaid segment, it had been born by the telcos.

- While it is surprising that such issues came about when the telcos’ intent to pass on the GST was made clear more than a year ago, we note that even (failed) attempts to pass on the SST to prepaid users previously required some sort of agreement by the regulators/government. Under the GST Act 2014, mobile communication services are standard rated items except for international roaming, which is zero-rated.

- After a meeting between industry players and the Customs Department late last week, it was agreed that:

• (1) Reloads for prepaid is subject to GST, upon activation;
• (2) Value of the reload is identical to pre-GST and that the only difference is that GST is added to the reload amount;
• (3) The industry is in compliance with the GST Act 2014 and therefore has added GST to the current value of reload, which is agreeable to the Customs since the underlying value of the reload is unchanged – for example, a RM10 reload value will now cost RM10.60; and

- (4) As a transitional measure, the industry will give to all customers who reload >RM5 a value which is higher that the GST addition in the form of free minutes and SMS. For example, customers will get five voice minutes and five SMS for every top up of RM10, while for reloads of RM20, the customer gets 10 voice minutes and 10 SMS. This applies for three months only, starting 3 April 2015.

- We had conservatively factored in only half of the impact of the GST pass through into our projections (i.e. 3% vs. 6%) previously, so our numbers are kept for now. On top of the 3-months transitional period, there is always risk of price elasticity in the prepaid segment, which might drive downward rate adjustments and counter the benefits of the tax pass through.

- In the case of a failure to pass on the GST, Digi (HOLD, FV: RM6.50) will be the worst hit (in terms of earnings expectations) given that it was expected to be the biggest beneficiary of the GST pass through given its large prepaid revenue base (73% of mobile revenue vs. industry average of 61%). On an annualised basis, every 1ppt prepaid GST pass through is estimated to impact FY15F bottomline by 1.7%, 1.5%, and 1.3% for Digi, Maxis (HOLD, FV: RM6.70) and Axiata (BUY, FV: RM7.90), respectively.

Source: AmeSecurities Research - 7 Apr 2015