Stock Name: AXIATA
Company Name: AXIATA GROUP BERHAD
Telecommunications
Maintain overweight: We understand from the media and the telecommunications industry that mobile operators are planning to pass on the 6% sales tax on prepaid revenues to the users. Postpaid users are already footing this tax but the telcos have been subsidising it for prepaid users. Apparently, the industry had a change of heart when the government raised the sales tax from 5% to 6% this year. This was compounded by plunging voice tariffs.
We understand that the government has asked the industry to defer its plan until Sept 1, 2011. However, media reports indicate that the date has yet to be finalised.
The telcos, which currently book only 94% of prepaid revenues, will be able to recover the lost profits by passing on the sales tax to users. We understand the four mobile operators (including U Mobile) have agreed to coordinate the passing on of the tax. However, passing on the tax is similar to raising tariffs in our view. Being generally price sensitive, prepaid users may cut back on usage. We therefore do not expect a 6% rise in revenue when the sales tax is passed through.
DiGi.Com Bhd should benefit the most because it has the highest composition of prepaid users among the telcos. Prepaid revenues comprise about 75% of DiGi's total revenue against 59% to 60% for Celcom Bhd and 56% to 57% for Maxis Bhd. Assuming that half of prepaid users maintain their usage while the rest cut back, telcos effectively raise their revenue by 3% and core net profit could rise 4% to 8% on a full-year basis.
We gather that telcos are likely to build the 6% tax into the price of the reload vouchers (RM10.60 for a RM10 voucher) instead of deducting 6% from their vouchers (60 sen is deducted from RM10 worth of credits).
The telecom regulator does not have a say in the decision to pass on the sales tax to users. However, telcos have been 'asked' by the government to pass on the sales tax on Sept 1. We believe this is a sensitive issue as the rising cost of living has been a major source of angst for the man in the street. In the meantime, the telcos will have to educate their sales channel and reprogramme their billing systems to accommodate the pass-through.
Factoring in the tax pass-through, we raise our end-2011 target prices by 2% from RM6.08 to RM6.20 for Axiata, 8% from RM31.60 to RM34 for DiGi and 2% from RM5.80 to RM5.90 for Maxis. We upgrade DiGi from 'neutral' to 'outperform' as it stands to benefit significantly from the pass-through of the sales tax.
Axiata and Telekom Malaysia Bhd remain 'outperforms' while Maxis is still a 'neutral'. The sector remains an 'overweight'. The key uncertainties are: (i) a possible delay of the Sept 1 date; and (ii) the possibility of a further drop in call volumes when the 6% tax is passed on, resulting in very little incremental revenue for the telcos. ' CIMB Research, July 6
This article appeared in The Edge Financial Daily, July 7, 2011.
Company Name: AXIATA GROUP BERHAD
| Research House: CIMB | Price Call: BUY | Target Price: 6.20 |
Telecommunications
Maintain overweight: We understand from the media and the telecommunications industry that mobile operators are planning to pass on the 6% sales tax on prepaid revenues to the users. Postpaid users are already footing this tax but the telcos have been subsidising it for prepaid users. Apparently, the industry had a change of heart when the government raised the sales tax from 5% to 6% this year. This was compounded by plunging voice tariffs.
We understand that the government has asked the industry to defer its plan until Sept 1, 2011. However, media reports indicate that the date has yet to be finalised.
The telcos, which currently book only 94% of prepaid revenues, will be able to recover the lost profits by passing on the sales tax to users. We understand the four mobile operators (including U Mobile) have agreed to coordinate the passing on of the tax. However, passing on the tax is similar to raising tariffs in our view. Being generally price sensitive, prepaid users may cut back on usage. We therefore do not expect a 6% rise in revenue when the sales tax is passed through.
DiGi.Com Bhd should benefit the most because it has the highest composition of prepaid users among the telcos. Prepaid revenues comprise about 75% of DiGi's total revenue against 59% to 60% for Celcom Bhd and 56% to 57% for Maxis Bhd. Assuming that half of prepaid users maintain their usage while the rest cut back, telcos effectively raise their revenue by 3% and core net profit could rise 4% to 8% on a full-year basis.
We gather that telcos are likely to build the 6% tax into the price of the reload vouchers (RM10.60 for a RM10 voucher) instead of deducting 6% from their vouchers (60 sen is deducted from RM10 worth of credits).
The telecom regulator does not have a say in the decision to pass on the sales tax to users. However, telcos have been 'asked' by the government to pass on the sales tax on Sept 1. We believe this is a sensitive issue as the rising cost of living has been a major source of angst for the man in the street. In the meantime, the telcos will have to educate their sales channel and reprogramme their billing systems to accommodate the pass-through.
Factoring in the tax pass-through, we raise our end-2011 target prices by 2% from RM6.08 to RM6.20 for Axiata, 8% from RM31.60 to RM34 for DiGi and 2% from RM5.80 to RM5.90 for Maxis. We upgrade DiGi from 'neutral' to 'outperform' as it stands to benefit significantly from the pass-through of the sales tax.
Axiata and Telekom Malaysia Bhd remain 'outperforms' while Maxis is still a 'neutral'. The sector remains an 'overweight'. The key uncertainties are: (i) a possible delay of the Sept 1 date; and (ii) the possibility of a further drop in call volumes when the 6% tax is passed on, resulting in very little incremental revenue for the telcos. ' CIMB Research, July 6
This article appeared in The Edge Financial Daily, July 7, 2011.
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