Consumption to normalise over 3 to 4 quarters after GST: UOB Kay Hian

KUALA LUMPUR: UOB Kay Hian Malaysia Research expects overall consumption to normalise over the next three to four quarters following the implementation of the 6% Goods and Services Tax (GST) on April 1.

It said on Monday that this was based on the experience of other countries that implemented GST and taking into account Malaysia’s heftier GST rate.

“We expect consumption to normalise over the next three to four quarters. Most impacted are the NFO, automobile, retail and telecommunications sectors. Continue to Underweight the cyclical automobile sector, and Market Weight the NFO and telco sectors; the latter may Underperform in the near term.

Its channel check results reinforced its Sell calls on UMW and TM. Its top defensive Buy stocks include Maybank and Carlsberg.

“We continue to like Tenaga, which is close to our assessed trough value of around RM12,” it said

UOB Kay Kian Research said its channel checks indicate lingering effects of the 6% GST on overall consumption extended into June.

“While sales were generally down in April and May, partly reflecting a strong surge in pre-GST stockpiling in March (for example record sales of Yamaha motorcycles in March), only a few companies expressed optimism that sales would soon normalise,” it said.

“Our channel checks support our view that the industry would have to endure a 5% fall in TIV and margin compression, with June sales possibly weaker mom. The worst impacted remains Proton, while the non-national car segment continues to engage in price discounts,” it said.

The research house said that in its earlier reports in April 2015, the gaming, tobacco and telco sectors did not pass on costs and bore the full brunt of the GST impact (although the tobacco sector has finally raised prices a couple of weeks back).

The gaming sector (particularly the NFO segment) was most affected, suffering steep margin cuts and on-year revenue contraction.

Although the NFOs did not lower prize payout for their games, we understand punters could have possiblly cut their discretionary spending on betting. We estimate the sector-wide absorption of GST costs, coupled with an expected mid-single digit yoy revenue fall, would effectively cause an industry-wide 1.5 percentage point to 2 percentage points dent in margins.

“We gather that prepaid top-ups were weak post-GST implementation, in part due to confusion over GST among buyers, dealers and distributor outlets being raided by officials to stem elements of profiteering, and modest overstocking by prepaid customers towards end-March 2015.

“While the confusion has been resolved in the telco sector (prepaid mobile users will pay GST based on usage effective January 2016), we notice that discounting continues to be rather steep,” it said.

As for the tobacco sector, it has settled on a modest 30 sen pack price hike after a series of about-turns (that saw the market leader raised prices, reduced the quantum of increase and subsequently reverted to pre-GST prices within weeks).

“The move, which defends margins in the face of rising operating costs post-GST, will likely see continued volume weakness. We expect BAT’s sales volumes to fall 3%-7% in 2015-2017 amid softening discretionary consumption,” it said.