- Yesterday, the Minister of Energy, Green Technology and Water, Datuk Seri Maximus Ongkili, announced an electricity tariff hike of 15% (4.99 sen/kWh) in Peninsula Malaysia and 16.9% (5 sen/kWh) in Sabah. The higher rate will take effect on Jan 1, 2014.

- Following that, Tenaga Nasional Bhd (TNB) announced that commercial and industrial users will see an average increase of 16.85% with the former’s ranging from 1.2% to 18% and the latter’s from 0.9% to 17%. We gather that the present average tariff for industrial users is 30.94 sen/kWh while for commercial users, it is 41.01 sen/kWh.

- More importantly, however, we highlight that domestic natural gas prices have also been revised upwards, from RM13.70/mmbtu to RM15.20/mmbtu (+11%).

- 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%.

- Energy expenses currently account for 10%-12% of glove manufacturers’ total operating costs, with the largest chunk for natural gas. Raw materials, namely latex and nitrile, still make up the bulk of total costs at 50%-55%.

- While this development is negative for the rubber glove manufacturers, we are not surprised as the increase in energy costs has been largely anticipated given the government’s well publicised intention to reduce subsidy levels and warnings of a power tariff hike in the last few months (refer to our reports dated 9 July, 21 and 28 November).

- We suppose that these adjustments would have a minimum adverse impact on the manufacturers’ earnings given the relatively small quantum of electricity expenses vis-à-vis total production costs (only 3% of the total) and the hike in domestic gas prices that came in at the lower end of our estimates of 10%-20%.

- Although the hike is an industry-wide issue, and hence, the players may raise ASP to offset the cost increases, we believe that the more palatable hikes and stiff price competition in certain glove segments will make them avoid doing so in order to gain market share.

- Our preliminary channel checks reveal that the glove manufacturers are still deliberating on their response given that the quantum and timing had just been made known. We are keeping our earnings estimates for now, pending further details from the management of the respective companies under our coverage.

- Our OVERWEIGHT stance on the sector remains at this juncture with BUYs on Top Glove Corp (FV: RM7.08/share) and Kossan Rubber Industries (FV: RM3.80/share (u.r.)).

Source: AmeSecurities