By G. Sharmila
The GST was much looked forward to by local telecommunication services providers (telcos). However, they were caught in a controversy when they imposed a 6% GST on prepaid reloads on April 1. Now the government has decided that the prepaid reload prices will revert to pre-GST prices beginning May. Can the telcos afford this move?
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In our previous story it was mentioned that Deputy Finance Minister Ahmad Maslan had said that effective May 1, prepaid reload prices will revert to pre-GST prices. So instead of costing RM10.60 as it did since April 1, a reload card will cost RM10 (with the 6% GST already factored into the RM10 sale price). He also said that the telcos had committed to reverting to old prices, but needed a month to change their systems.
Halim Shafie
This was said soon after Malaysian Communications and Multimedia Commission (MCMC) chairman Halim Shafie in a statement last Friday indicated that the RM10.60 reload price tag would remain for three months beginning April 3 and that telcos would give users additional airtime and SMS.
In the statement he said that the value of the reload is identical to the value prior to GST implementation, the GST is added to the reload amount.
“According to the four providers, the Royal Customs and Excise Department is agreeable to this treatment of GST on prepaid reloads as discussed in a meeting held yesterday between the Customs Department and the representatives of the four communication providers,” the statement said.
It is understood that all the four telcos involved are complying with the directives from the Customs and the MCMC.
Halim had also said in the statement that a survey will be conducted by the telcos to assess if customers prefer lower reload values on which GST would be charged. For example, a RM10 reload could be RM10.60 (RM 10 reload plus 6% GST added) or RM10 (RM 9.43 reload plus 6% GST added).
To the four telcos who had initially increased prices of prepaid cards to RM10.60 on April 1, having to reduce prices will be an unexpected blow to them. (The four are DiGi.Com Bhd, Celcom Axiata Bhd (owned by Axiata Group Bhd), Maxis Bhd and U Mobile Sdn Bhd.)
In a report dated April 3 (at the height of the GST dispute between telcos and the authorities), CIMB Research noted that if telcos were to comply with the government’s instructions that they reduce prepaid reload prices to accommodate the 6% GST, telcos may not be able to fully benefit from GST as some prepaid subscribers may choose to stick with the reload credit they have and pare down usage, instead of reloading more frequently.
CIMB said that assuming prepaid usage levels drop by 3%, its financial year 2015-2017 (FY15-17) Ebitda (earnings before interest, tax, depreciation and amortisation) forecast for DiGi would have to be reduced by 2.2-2.8%, for Maxis by 1.6%-2.1% and for Axiata by 0.8-1.1%.
“Correspondingly, our target prices would have to be revised downwards to RM6.00 (-3.2%) for DiGi, RM6.70 (-2.9%) for Maxis and RM6.85 (-2.1%) for Axiata Group,” it said. It added that if the worst-case scenario materialises, DiGi would be the most impacted, followed by Maxis and Axiata Group.
In a sector update dated April 7, AmResearch noted that in the case of a failure to pass on the GST, DiGi will be the worst hit in terms of earnings expectations, given that it was expected to be the biggest beneficiary of the GST pass-through.
This is because DiGi has a large prepaid revenue base (73% of mobile revenue vs the industry average of 61%, according to AmResearch).
“On annualised basis, every one percentage point prepaid GST pass through is estimated to impact FY15F bottomline by 1.7%, 1.5% and 1.3% for DiGi, Maxis and Axiata, respectively,” AmResearch said. (See Table 1 for a more complete picture of how telcos will benefit from a GST-pass through).
The issue is, however, can these telcos afford to charge lower prices? It would seem that they can, as some analysts suggest. According to an analyst from a bank-backed research house, Malaysian telcos Ebitda margins are between 45% and 50%, higher than that of their regional peers.
“They (telcos) are like a cartel. They also make a lot of money off smartphone bundles. They don’t offer subsidised handsets like in Europe or Singapore and their ROEs (returns on equity) are higher compared to their regional peers too,” the analyst emphasised.
According to Investopedia.com, ROE measures a company’s profitability by revealing how much profit a company generates with the money shareholders have invested. (For a full picture of Malaysian telco valuations against their regional peers, see Table 2).
“One can hardly blame them however for wanting to benefit from the 6% GST. The sector topline is not growing, so they need a way to improve their margins,” the analyst said, adding that the shift from voice and SMS to data is causing telcos to experience margin compressions.
Public-listed telcos such as DiGi and Maxis and even Axiata Group, which owns Celcom Axiata, have to answer to their shareholders if their revenues slide, so it is in their interest to charge the 6% GST, the analyst pointed out.
Having to charge lower prices for prepaid reloads is a double whammy of sorts for local telcos, who have also agreed to reduce broadband service charges by at least 6% to encourage greater Internet usage among the public.
This was announced by Communications and Multimedia Minister Ahmad Shabery Cheek on April 2, who said that an official announcement would be made within a month’s time.
Another analyst with a local bank-backed research house said that the mobile operators would not be as impacted as Telekom Malaysia Bhd would be by a reduction in broadband prices. Even Maxis, which offers wireless broadband, will not be as impacted as much as TM, the analyst said.
“Maxis is focusing on small- and mid-sized screen devices, the growth in mobile Internet will offset any price reduction,” the analyst said, adding that on the whole, celcos (short for cellular companies) will not be greatly impacted by a reduction in broadband prices.
Still, as mentioned above, telcos are liable to suffer some impact to their revenues due to having to reduce their prepaid prices. It remains to be seen how much this will really impact them in the long run, given that they are allowed to charge 6% GST for postpaid services.
In our next story, we discuss the implications of the authorities’ flip-flop surrounding the GST charged for prepaid reloads and propose some solutions to the matter. Stay tuned.
Yesterday: Flip-flopping hits local telcos
Tomorrow: Minister says one thing, MCMC another
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