Opportunity calls with GST
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.
The sector and our 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 since we think that some consumers would reduce their usage when GST is imposed, we estimate a 3-6% lift for CY15 core net profit and 3-5% for target prices. M1 is our top pick in the region.
The GST proposal is likely to be included in Budget 2014 which will be tabled on 25 Oct. Should it indeed be in the cards, the GST would only be introduced in 2015 as our economics team believes that the government will take around 14 months to implement it. Our economists expect it to range between 4% and 6%.
What We Think
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. The operators attempted to pass on the sales tax in 2011 but could not get the government’s blessing as it was a sensitive issue before the general election. This is despite the government not having any say on the telcos since the tax is imposed on consumers. 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 vs 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. 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% vs. 4% for Maxis and about 3% for Axiata. We estimate a 4.6% or RM0.21 rise in our DCF-based target price for DiGi and a 2.9% or RM0.21 increase for Maxis. Axiata’s SOP-based target price would rise by 2.9% or RM0.20. We have not built this into our forecasts.
What You Should Do
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.
Publish date: 13/09/13