Highlights

The Government has approved Gas Malaysia’s natural gas tariff revision for the non-power sector in Peninsular Malaysia, effective 1 May 2014. Average natural gas tariff will increase from RM16.07/MMBtu to RM19.32/MMBtu (+20.2%).

Tariffs for residential and retail commercial segments will remain at RM19.52/MMBtu and RM20.61/MMBtu respectively. This tariff revision does not apply to Liquefied Petroleum Gas (LPG) and Natural Gas for Vehicle (NGV) (See Figure #1).

Comments

Generally, natural gas made up about 6% of rubber glove players’ overall cost base.

We understand from the key industry players that the increase of the natural gas tariff revision is around 18%. Based on natural gas contribution of 6% to total cost, this will raise cost of production by 1.1% (18% of 6%).

The eventual impact on the rubber glove players will depend on the demand-supply situation. Given the current imbalance condition in rubber gloves, we believe that cost pass-through will be challenging, particularly for the producers of lower-end gloves.

Aside from gas tariff hike, the glove industry faces headwinds from the recent strengthening of MYR against USD. Also, Malaysia has graduated from the preferential tax treatment from EU. This implies that Malaysian glove exporters face 2- 6% increase in tax from EU.

The neutralisation factor for the players is the current softening in latex costs despite wintering season, which has fallen to RM4.83/kg.

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

Mismatch between demand and supply in rubber gloves; potential increase in natural and/or synthetic latex prices; further depreciation of USD against MYR.

Forecasts

Unchanged, as we have already factored this impact in our forecasts.

Rating

Neutral

Positives – Softening of natural and/or synthetic latex prices, continuous improvement in cost efficiency.

Negatives – Weakening of USD against MYR.

Valuation

With the recent sharp fall in share prices of glove counters, valuation remains undemanding. Hence, we maintain our NEUTRAL stance on the sector with the following ratings:

• Hartalega (HOLD, TP: RM6.37 based on 17.5x CY14 EPS). Rating upgraded as share price has retracted to near our TP.
• Top Glove (HOLD, TP: RM5.31 based on 15.7x CY15 EPS).
• Kossan (HOLD, TP: RM4.81based on 12.8x CY14 EPS).

Source: Hong Leong Investment Bank Research - 14 Apr 2014