Maintain NEUTRAL on the telco sector. The Customs Department has clarified that prepaid subscribers will have to fork out 6% GST on top of the value of the reload vouchers, with the telcos offering additional airtime to make up for the higher cost. We view this as an amicable solution and believe the impact on earnings will be manageable, though some telcos could use the opportunity to drive up price competition.

Sending out the wrong signals. We find the controversies surrounding the 6% Goods and Services Tax (GST) levied on prepaid reload vouchers (effective 1 Apr) baffling, considering that plans to pass through the tax were mooted as far back as 2011 and the telcos hadbeen in consultation with the Government on the implementation. It does not help that conflicting statements were issued in that prices of reload vouchers should remain unchanged (GST built in) when the consumption tax should be added to the value of the reload (cost plus). Here, a prepaid subscriber purchasing a MYR10 reload voucher is to bear the additional 60 sen (MYR10.60) GST, which a telco collects and remits to the Government to comply with the GST Act 2014.

Striking a middle ground. Following a meeting held with the Customs Department yesterday, the telcos have in principle agreed to offer additional airtime/SMS credits to ‘offset’ the GST charge, which is to be borne by prepaid subscribers. This represents an interim workaround for which a solution should be finalised within three months. We believe this is an amicable solution as: i) a prepaid subscriber would be receiving bonus airtime to counter the higher cost to reload; and ii) the telcos have incurred some costs over the past 18 months to reconfigure their billing systems for the GST; and iii) the underlying objectives of the GST are met. Nonetheless, we do not rule out the possibility that the telcos may resort to pricing their services more aggressively in an effort to ease the burden, especially for the more price-sensitive segment.

No significant impact to earnings. We had previously been conservative in our forecast on the 6% GST pass through and factored in an adjustment period of about six months. The projected cost savings, estimated at 2-6% of the telcos’ earnings, assume no change in subscriber behaviour. We note that the telcos have remained conservative on their FY15 KPIs and guided for “low- to mid-single digit”revenue growth (with GST), hence any impact on earnings should be manageable. We are keeping our earnings forecasts at this juncture.

Maintain NEUTRAL. We expect the sector to exhibit lacklustre growth this year due to: i) continued pressure on voice/SMS revenues; ii) competitive risks; iii) the knee-jerk reaction to the implementation of the GST.