After much confusion surrounding the prepaid service tax, MoF issued a media release yesterday stating that it will be exempted but for Malaysians only as a short term solution for telcos’ quick adaptation to the new tax regime. Now, we do not discount the possibility that telcos being instructed by the government to compensate this 6% levy. Maintain forecast for now as this is similar to GST practice. Reiterate NEUTRAL on the sector with TIME dotCom as our top pick.

NEWSBREAK

Clarification. Yesterday, MoF issued a media release stating that all prepaid services to Malaysian citizen are exempted from the 6% service tax. This is to accommodate telcos’ challenges in changing their configuration immediately. Other methods will be announced later for telcos so that the government does not incur losses in its effort to ensure customers get the full value for payment made. This exemption is according to Section 34(3)(a) of the Service Tax Act 2018 and takes effect on 6 Sep 2018.

The drama. Telcos started imposing service tax on all their services on 1 Sep 2018, including prepaid services, whereby a RM10 reload card only yielded RM9.43 worth of service value. This has resulted uproar among the prepaid subs during the past weekend. Government had met the telcos early this week to clear the confusion.

HLIB’s VIEW

Status quo. This implementation is similar to the scrapped GST regime as GST deducted from prepaid reload from any Malaysian was rebated by the government. As such, we do not expect any earnings impact on telcos under our coverage for now.

Temporary relief? As this is a short term solution for telcos’ quick adaptation, we do not discount the possibility that telcos being instructed by the government to compensate domestic prepaid subs of the 6% levy. However, if the compensation is done in the form of freebies instead of cash outlay, we believe the negative impact will be more manageable. On the flip side, this may reduce the intensity of the competition in the market as telcos grapple to contain this new cost item.

Forecast. Maintained while waiting for further announcement by the government and telcos. Maintain NEUTRAL on the sector due to the lack of positive catalyst in the near term. However, telco remains stable supported by resilient domestic demand. Their dependable dividend yield will be a plus point in a volatile market.

Top pick: TIME dotCom (BUY, TP: RM9.75). We like TIME as its retail is gaining momentum on the back of reach expansion and undisputable high value products. Also, data centre is expanding resiliently as IT outsourcing, cloud computing and virtualization gain wide adoption. IRU is no longer a drag and expected to perform better as demand recovers.

Digi.com (BUY, TP: RM5.10). Still one of our favourites due to: (1) MSAP beneficiary; (2) Improved efficiency with access to low frequency band and managed services; (4) Strong balance sheet to support spectrum fee; and (5) Prudent management.

Source: Hong Leong Investment Bank Research - 12 Sept 2018