- In a filing to Bursa Malaysia yesterday, Gas Malaysia Bhd announced that it has increased the natural gas tariff (selling price) for the non-power sector in Peninsula Malaysia following the government’s approval for an upward tariff revision.

- Based on the revised tariff schedule, the rubber glove manufacturers would see an average tariff hike of 2.3%. Note that some of the companies may enjoy a more favourable input price vis-à-vis their peers as they have exclusive deals with Gas Malaysia given the substantial volume demanded.

- We are not surprised by this announcement as the government had shown that it remains committed to its subsidy rationalisation plans; it raised the retail price of petrol and diesel by 20 sen/litre on 1 October.

- The government had also previously stated that tariffs for both natural gas and electricity are subjected to adjustments every six months.

- Although an electricity tariff revision has yet to be announced since the last hike in January 2014, the current natural gas tariff increase, which will be effective 1 November 2014, comes exactly 6 months after the last hike on 1 May 2014. The increase back then was a steep 19%.

- At present, energy usage accounts for 10%-12% of the glove manufacturers’ total operating costs, with the largest portion attributed to natural gas. Raw materials, namely latex and nitrile, still make up the bulk of total costs at 45%-50%.

- The industry norm for such hikes has been to raise the ASP of products in accordance with their cost pass-through pricing mechanism. That said, with competition remaining stiff in certain segments, namely the nitrile gloves segment, we believe that some of the glove players will want to absorb the cost to gain additional sales and market share.

- Even if a price increase is taken, the much shortened time frame (2 days vs. 2 weeks for the earlier hike) for the rubber glove manufacturers to notify their customers of the higher ASP is expected to result in margin contractions in the upcoming quarters.

- As it is, the rubber glove manufacturers are likely to report sequentially softer earnings in the forthcoming results announcements given that the July to Sept quarter was the first full quarter to experience the impact of the previous natural gas tariff hike.

- We are keeping our estimates for now pending further information (e.g. new pricing structure) from the respective managements. Our NEUTRAL call on the sector remains, with Kossan Rubber Industries (FV: RM5.85/share) being our only BUY. 

Source: AmeSecurities