DiGi to be worst hit without GST pass on

PETALING JAYA: AmResearch said DiGi.com Bhd will be the worst hit in the event that telecommunication companies, or telcos, are not allowed to pass on the Goods and Services Tax (GST) to consumers.
In a research note yesterday, AmResearch said this is given that DiGi is the biggest beneficiary of the GST pass through due to its large prepaid revenue base, which accounts for 73% of mobile revenue compared with the industry average of 61%.
"On an annualised basis, every 1% prepaid GST pass through is estimated to impact FY15F bottom line by 1.7%, 1.5% and 1.3% for DiGi, Maxis Bhd and Axiata Group Bhd respectively," it noted.
AmResearch said on top of the three-month 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.
During the interim three-month period, telcos are allowed to charge the 6% GST for prepaid top-ups, provided subscribers are given more airtime and texting quota, the Customs Department has said.
Customs and telcos are still in talks for a permanent resolution to the issue of whether telcos will be allowed to pass on the 6% tax for prepaid top-ups.
AmResearch said the conflicting statements among different government bodies and ministers made the issue worse, while suggestions that previous pricing by telcos already built in the previous Sales and Service Tax of 6% is not entirely accurate – this applied only to the postpaid segment, while for the prepaid segment, it had been borne 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," the research house noted.
Under the GST Act 2014, mobile communication services are standard-rated items except for international roaming, which is zero-rated.
M&A Securities is of the view that the extra talk time and texting given will not bite telcos' margins as both call and text revenue contribution to telcos have been on a steady decline for several years, in contrast to rising data and internet usage.
"At the end, should subscriber fully utilise the extra call time and SMS given, it may provide some relief to telcos which will potentially lift their ARPU (average revenue per user)," it said.
M&A Securities expects the FY15 bottom line for the telco industry to be lifted by around 3% to 5% depending on their subscriber base.
"Having said this, we found that DiGi are the clear winner as their prepaid subscriber forms 83% of their total subscribers versus Celcom (70%) and Maxis (77%) as at FY14," it said.