- Yesterday, the government announced several revisions to Budget 2015 amidst concerns over the impact of the crude oil price slide on the financial health and economy of the country. The revision included several measures to strengthen the economy which are related to the rubber gloves industry.

- In a bid to increase exports of goods and services, the government has proposed to review the foreign worker levy. Rubber glove manufacturing is still very labour intensive although there have been ongoing efforts to automate the process.

- As most of the factory workers employed are foreigners, it would be positive for the glove manufacturers should there be a downward revision. Labour costs for the rubber glove manufacturers have crept up by an average of 3ppts-4ppts since the introduction of the minimum wage in 2012. On average, it currently makes up 13% of total production costs.

- Besides the possibility of a reduction in labour expenses, the rubber glove manufacturers can look forward to status quo fuel prices in 2015. We understand that the scheduled 6-month hike reviews for electricity and natural gas tariffs have been deferred for a year to help lower cost structures for the industrial sector.

- This would be a welcome reprieve to the manufacturers, which were hit with a 14% hike in electricity tariff in January 2014 and two rounds of natural gas tariff hikes of 19% and 2% in May and November 2014, respectively.

- While a rise in electricity tariff would have been negligible, a further pullback in subsidyfor gas would have dented earnings more significantly given that they form ~10% of production costs (vs. electricity’s 2%-3%).

- With these announcements, cost pressures for the rubber glove players appear to be easing and margin compression bottoming. In addition to the above-mentioned items, we note that raw material prices (the largest cost factor at 45%), remains low and stable.

- All in all, we reaffirm our OVERWEIGHT stance on the sector. Our positive outlook is further supported by our view of a USD bull market in 2015, of which the sector would be a prime beneficiary.

- Our top sector picks are Kossan Rubber Industries (FV: RM5.65/share) and Hartalega Holdings (FV: RM7.90/share). Top Glove and Supermax remain HOLDs with fair values of RM5.15/share and RM2.40/share, respectively.

Source: AmeSecurities