CIMB Research: DiGi to benefit most from GST

KUALA LUMPUR: CIMB Equities Research said the likely introduction of the goods and services tax (GST) should be positive for the mobile carriers as they would no longer have to absorb the 6% sales tax for prepaid users.

“DiGi would benefit the most as 71% of its revenues are prepaid vs 58% at Celcom and 55% at Maxis,” it said.

It said on Friday the sector and its stock calls remain a Neutral across the board despite this potential development as the impact would be limited.

Assuming that the telcos are able to recover only half the tax as some consumers would reduce their usage when GST is imposed, it estimated only a 3%-6% lift for CY15 core net profit and 3%-5% for target prices. M1 is its top pick in the region.

CIMB Research said the GST proposal is likely to be included in Budget 2014 proposals which will be tabled on Oct 25. Should it indeed be on the cards, the GST would only be introduced in 2015 as the government will take around 14 months to implement it.

“Our economists expect it to range between 4% and 6%,” it said.

The imposition of GST should be positive for the mobile operators as they would finally be able to pass on the 6% sales tax on prepaid revenue that they have been absorbing. Postpaid users already bear this tax.

“DiGi stands to benefit the most from a GST, followed by Maxis and Axiata (through Celcom). Prepaid revenue makes up 71% of DiGi’s total revenue versus an estimated 55% at Maxis and 58% of Celcom.

“The cellcos currently book only 94% of prepaid revenues as they absorb the 6% sales tax. Prepaid users may  cut back on usage when GST is introduced as they are generally price sensitive and have tighter budgets,” it said.

Assuming that the telcos are able to recover only half the tax since some consumers would reduce their spending, DiGi’s FY15 core net profit could be lifted by 6% versus 4% for Maxis and about 3% for Axiata.

“We estimate a 4.6% or 21 sen rise in our DCF-based target price for DiGi and a 2.9% or 21 sen increase for Maxis. Axiata’s SOP-based target price would rise by 2.9% or 20 sen. We have not built this into our forecasts.

“We remain Neutral on the sector as this development would not have a significant impact on the industry’s earnings. Moreover, GST is only expected to be introduced in 2015. We prefer M1 which is the biggest beneficiary of mobile data repricing in Singapore,” said the research house.
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