Telecommunication Sector - A resolve on GST NEUTRAL, 14 May 2015

The Minister of Communications and Multimedia, Datuk Seri Ahmad Shabery Chik announced that the government has come to a decision to charge GST to consumers based on usage. Currently, telcos charged consumers GST on the total amount of reload purchased, whereby GST is charged on top of the typical reload value – e.g. a RM10 reload is charged an additional RM0.60 for GST. Telcos have been given six months to implement the new system, which is likely to be very late in 2015 or early-2016. In the meantime, the current system will be maintained.

While the outcome is positive in the sense that telcos will finally get to pass on GST to consumers, there is likely to be elasticity and therefore an impact on usage.Based on our checks with the telcos (and to their understanding), under the new pay-per-use GST system, the chargeable GST amount is taken out of prepaid credits, which essentially means that out a RM10 reload (and assuming full usage), consumers only get RM9.40 of actual credits.

This model in itself can impact usage, on top of ultra-price sensitive prepaid users which might simply pare usage given the higher effective cost. We have conservatively only factored in a 3% pass through (instead of a full 6%) in our projections and as such make no changes to our numbers because of this development. Other than this, telcos have also been asked to reduce tariff by the government to balance out the impact of GST, but this has to be taken in context with the typical gradual reduction in telco tariff over time.

Axiata (BUY, FV: RM7.80/share) remains our top sector pick for:- (1) a turnaround in Celcom performance in 2H15 having resolved its network issues and is at the tail end of its IT revamp; (2) a structurally improved XL from 2H15 once it is through its transition to a value-driven business model; and (3) best potential for a dividend surprise, given its low net debt to EBITDA of 1.2x vs. ceiling of 2.5x, and being one of the better positioned GLCs to increase dividend upflow to Khazanah.

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