Highlights

Government announced that effective 1 Jan 2014, average electricity tariff in Peninsular will increase from 33.54 sen/kWh to 38.53 sen/kWh (+14.89%), taking into account:

1. 1.52% or 0.51 sen/kWh for domestic gas price adjustment from RM13.70/MMBtu to RM15.20/MMBtu;

2. 10.17% or 3.41 sen/kWh for imported LNG price fixed at RM41.68/MMBtu;

3. 0.51% or 0.17 sen/kWh for coal price adjustment from US$85/mt to US$87.5/mt.

4. 2.69% or 0.90 sen/kWh on base tariff (TNB), which will be regulated through IBR mechanism.

Commercial and industrial users are expected to experience an average electricity bill increase of 16.85% (ranging 0.9% to 18%), while Special Industrial tariff (SIT) users experienced an average increase of 19%.

Comments

Rubber glove players’ electricity cost as percentage of turnover is insignificant within the range of 3.0% - 3.5%, the 15% hike is likely to elevate this ratio to 3.5% - 4.0% and the impact to bottom line is perceived to be negligible.

On the contrary, the gas price elevation of 1.52% (we assume the gas subsidy removal will also apply to industrial users) is more of a concern as this accounts for 8% - 9% of their overall cost base. However, this is something that we have already taken into consideration and imputed into our modelling.

The eventual impact to the rubber glove makers will depend on how soon they are able to cascade the cost increase down to their end clients (likely to be about 3-months lagged).

All in, this development is negative to the sector.

Catalysts

Surge in demand in the event of a disease outbreak; more stringent requirements and increased spending in the healthcare sector; appreciation of USD against MYR and lower rubber prices to boost profitability.

Risks

Uptick in natural and/or synthetic latex prices will inevitably erode profitability, depreciation of USD against MYR, natural gas price hike and price undercutting.

Forecasts

Unchanged.

Rating

Neutral

Positives: Latex prices have fallen significantly, production efficiency to continue improving and production shift to nitrile gloves from NR gloves will lead to better cost management.

Negatives: Weakening of USD against MYR.

Valuation

Maintain NEUTRAL stance on the sector with the following stock ratings:

• Hartalega (SELL , TP: RM6.37 based on 17.5x CY14 EPS).
• Top Glove (HOLD, TP: RM6.09 based on 16.0x CY14 EPS).
• Kossan (HOLD, TP: RM3.65 based on 12.8x CY14 EPS)

Source: Hong Leong Investment Bank Research - 3 Dec 2013