Investment Highlights

Natural gas price hike

• Gas Malaysia has announced that it is raising the natural gas selling price in Peninsular Malaysia beginning 31 March 2021 following the government’s directive for an upward revision.

• According to its announcement to Bursa Malaysia, the base average gas tariff has increased to RM2.05/MMBtu from RM1.88/MMBtu. The approved surcharge remains at RM0.62/MMBtu.

• More specifically, the natural gas average selling price (ASP) moving forward is RM22.31/MMBtu (+0.77% from RM22.14/MMBtu).

• We are neutral on this news as we believe that the margin of increase is far too small to have any material effect. On average, natural gas makes up circa 10–15% of total operating costs. We are keeping our earnings estimates.

Regulatory and ESG concerns

• Recently, the US Customs and Border Protection (CBP) has found evidence that Top Glove products are manufactured with the use of convict, forced, or indentured labour. It seems unlikely that the company will resolve this issue anytime soon.

• Given that the 25% of total sales were from the US in FY19, Top Glove could be looking at a sizeable drop in their customer base as glove urgency begins to fall. For now, high spot demand will cushion the company from any severe losses.

• It is likely that glove ASP will be similarly affected, given that gloves sold to the US typically command an estimated 5% premium. Additionally, Top Glove could further cut its ASP in an attempt to maintain its market share.

• However, we maintain our earnings forecasts for now. We feel that further clarification on contingency plans, the status of their appeal and its HKEX listing will be necessary before making any changes.

• As a result, we lower Top Glove’s PER to 20x to account for heightened regulatory and reputational risks as well as a potential drop in its customer base and glove ASP.

• Thus, we maintain our HOLD call on Top Glove with a lower fair value (FV) of RM4.75/share based on a PER of 20x CY22F FD EPS, incorporating an ESG-adjusted discount of 3% for our rating of two stars.

• Similarly, we cut our PER for its peers Hartalega and Kossan to reflect higher regulatory risk in export markets, as glove companies in general may be under heightened scrutiny following Top Glove’s recent debacle. We lower Hartalega’s PER to 22x and Kossan’s PER to 18x respectively.

• For Hartalega, we maintain our HOLD call with a lower FV of RM9.86/share based on a PER of 22x CY22F EPS. There is no ESG-related adjustment based on our rating of 3 stars.

• For Kossan, we maintain our HOLD call with a lower FV of RM3.60/share based on a PER of 18x FY22 EPS. There is no ESG-related adjustment based on our rating of 3 stars.

Source: AmInvest Research - 1 Apr 2021