- An article in The Star today quoted Energy, Green Technology and Water Minister Datuk Seri Dr Maximus Ongkili as saying that electricity tariffs could rise by up to 20% next year. The quantum and timing of the hike are yet to be finalised.

- The minister said that the move, which is in line with the government’s larger plan to progressively reduce subsidies, was to improve efficiency and competitiveness in the Malaysian power industry and to ensure sufficient returns to capital for the national utility company, Tenaga Nasional Bhd (TNB).

- The government currently foots a RM150mil subsidy bill for the power sector while Petronas bears the remainder. Total subsidies for the sector range between RM8bil and RM12bil per annum, depending on prevailing gas prices.

- The electricity tariff was last reviewed in June 2011 when the government increased gas prices for the power sector by 28% (from RM10.70/mmbtu to RM13.70/mmbtu). This resulted in overall average power 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%.

- Our in-house numbers show that the present average tariffs for industrial users, commercial and residential are 32.2 sen/kWh, 42 sen/kWh, and 29.7 sen/kWh, respectively. Note that the current industrial tariff is 24% below the commercial segment’s as the government had hoped to promote the country’s industrialisation by setting it at a lower rate.

- We view this announcement with little surprise given that this is the third warning of a power tariff hike in recent months (refer to our earlier reports dated 9 July 2013 and 21 November 2013). To recap, our July note reported that TNB will resume its fuel cost passthrough (FCPT) mechanism next year while our report last week highlighted a Business Times article on the possibility of a 25% tariff hike.

- We reckon that a hike in electricity tariffs will not significantly impact the rubber glove manufacturers as electricity expenses make up only 3% of their total production costs. As this is also an industry-wide issue, we believe the manufacturers will be able to pass on the cost increases to its customers. Pass-through rates range from 80%-100%.

- We reaffirm our OVERWEIGHT stance on the sector at this juncture. Further strengthening of the USD against the RM, soft input prices and robust demand will underpin the sector’s earnings in the coming year. Our top picks remain Kossan Rubber Industries (BUY, FV:RM3.80/share) and Top Glove Corp (BUY, RM7.08/share) while Hartalega Holdings (FV:RM6.50/share) and Supermax Corp (FV:RM2.15/share) remain HOLDs.

Source: AmeSecurities