The GST / SST Conundrum

The newly-elected Pakatan Harapan government announced that it would remove the goods and services tax (GST) and replace it with a sales and service tax (SST). The details on SST are still vague, but it could negatively affect the revenue / profits for the telcos’ prepaid business, should the government decide not to provide any tax rebates. DiGi has the highest exposure to the Malaysian prepaid market, followed by Maxis. That said, we acknowledge that the situation is still fluid and any impact on earnings will likely be manageable, partly cushioned by improvement in consumer sentiments arising from an absence of GST. Maintain Neutral.

GST at 0% Starting June 1st, SST to be Introduced at a Later Date

Malaysia’s Finance Ministry announced that the GST will be set at 0% beginning June 1, 2018, from 6% currently. Meanwhile, the government would reintroduce the SST at a later unspecific date, reported by The Star.

SST – Who Is Going to Foot the Bill

We believe the reintroduction of SST may create uncertainties in the prepaid segment, based on the past precedent. Prior to April 2015, both the postpaid and prepaid sales were subjected to 6% 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). Moving forward, it is unclear: (i) what the new SST tax rate; (ii) are postpaid and prepaid sales subject to SST; and (iii) will there be rebate?

SST Impact Could be Neutral or Negative, But Likely Manageable

All in, the reintroduction of SST may have a neutral (if the government provides rebates) or negative impact to the telco operators. DiGi has the highest exposure to Malaysia’s prepaid segment – 59% of its 2017 revenue, followed by Maxis (44%) and Axiata (11%). Notwithstanding DiGi and Maxis’ high revenue exposure, we expect the direct earnings impact from SST to be manageable, taking into consideration: (i) their high profit margins; (ii) resilient earnings trend during the 2015-16 period (implementation of GST, introduction of rebates); and (iii) we expect the telcos to benefit indirectly from improvement in consumer sentiment arising from lower GST rate. Maintain Neutral – cellular space remains competitive while valuations look rich; the yields of 3.5-4.4% should however cushion downside to share prices.

Source: Affin Hwang Research - 21 May 2018