Highlights 

The  Government  has  approved  Gas  Malaysia’s  natural  gas tariff  revision  for  the  non-power  sector  in Peninsular Malaysia, effective  1  November  2014.  Average  natural  gas  tariff  will increase from  RM19.32/MMBtu  to RM19.77/MMBtu  (+2.3%).

Tariffs  for  customers  under  category  A  (residential  segment) will  remain  at  RM19.52/MMBtu  while  tariffs  for  other categories will change  by 1% to 3%

This  tariff  revision  does  not  apply  to  Liquefied  Petroleum  Gas (LPG).

The  approval  of  tariff  revision  by  the  Government  will  be subject  to  a  bi-annual  adjustment  of  both  buying  and  selling prices in an effort  to address subsidy rationalisation.

Comments 

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

Based  on  natural  gas  contribution  of  6%  to  total  cost,  the increase in cost of production caused by the  slight revision will be very minimal at less than 0.5%.   Hence, we believe that the impact will be ins ignificant.

On  a  side  note,  the  deadly  Ebola  disease  turned  out  to be a false  catalyst.  Some  indus try  player  shared  that  the contribution  of  increased  demand  received  from  customers (suppliers  of  WHO,  UNESCO,  etc.)  to  total  volume  is insignificant  due  to  t he  large  base,  while  others  have  not noticed any hike in demand  yet.

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   into  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

Maintain  NEUTRAL  on the sector with the following  ratings:

• Hartalega  (HOLD,  TP:  RM6.12,  16.2x  CY15  EPS pegged  to 1SD above  5-year historical average  P/E).
• Top  Glove  (HOLD,  TP:  RM4.56,  13.5x  CY15  EPS pegged  to 1SD below 3-year  historical average  P/E).
• Kossan  (SELL,  TP:  RM3.70,  12.8x  CY14  EPS pegged  to 4x discount to peers ).

Source: Hong Leong Investment Bank Research - 30 Oct 2014