- According to The Edge Financial Daily, Tenaga Nasional Bhd (TNB) will resume its fuel cost pass-through (FCPT) mechanism next year. The FCPT system, which was introduced in mid-2011, was meant to enable any changes in fuel cost to be passed on to users through tariff rates determined by the government.

- Deputy Energy, Green Technology and Water Minister Datuk Seri Mahdzir Khalid was quoted as saying that this mechanism was part of the incentive base regulation programme which was aimed to curb electricity wastage by means of various penalties while incentivising those who are more economical.

- We understand that the mechanism was to be reviewed every six months to better track fuel price movements and to be in tandem with the half-yearly natural gas price revisions of +RM3/mmbtu.

- The previous round of power tariff adjustments (in 2011) was due to a 28% hike in gas prices (RM10.70/mmBTU to RM13.70/mmBTU). This resulted in average tariff increases of 7.1%, excluding an average 2% used to subsidise electricity supply costs from June 2006. Industrial and commercial customers recorded a greater average rise of 8.4%.

- Note that since December 2011, TNB had also imposed a 1% charge as Feed-in-Tariff (FiT) for the renewable energy fund for domestic customers who consume less than 300 kilowatt-hours (kWh) or an equivalent RM77 per month.

- All in, we believe this announcement would be welcomed by rubber glove players as the companies have already been challenged by the minimum wage implementation earlier this year. At present, fuel (natural gas and electricity) costs make up 10%-12% of the rubber glove makers’ total production costs. Along with raw materials (50%-60%) and labour (11%), they form the bulk of expenses.

- Our channel checks have also revealed that natural gas subsidy pullbacks are unlikely to happen this year. We had earlier expected at least one round of gas and electricity tariff revision by the government given the long lull in revisions.

- We maintain our OVERWEIGHT stance on the sector as key factors affecting the industry are in their favour, namely: (1) low and stable raw material prices (latex: -13% YTD); (2) strong global glove demand (2013: +12%); and (3) strengthening of the USD against the RM to RM3.20/USD (+4.7% YTD). Top Glove Corp (FV:RM7.15/share) and Kossan Rubber Industries (FV:u.r.) remain our top BUYs.

Source: AmeSecurities