Highlights

• The Government has approved Gas Malaysia’s natural gas tariff revision for the non-power sector in Peninsular Malaysia, effective 1 January 2016. Average natural gas tari ff will increase from RM21.80/MMBtu to RM25.53/MMBtu (+17%).

• Tari ffs for customers under category A (residential segment) will remain at RM19.52/MMBtu. Tariff for other categories will change by 17%.
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• Gas Malaysia noted that the revision is in line with the national rationalization plan which includes the adjustment of piped gas price every six months, with the implementation of the gas cost pass through mechanism.

• The approval of tari ff 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

• Any revision on natural gas tari ff will impact rubber glove manufacturers as on average, it constitutes about 10% of total cost production. However, this is something that we have already taken into consideration and imputed in our financial modelling.

• The final impact of the hike will actually depends on how soon rubber glove manufacturers are able to pass it to thei r end clients, which in our opinion, likely to be about 3-month lag.

Catalysts

• Surge in demand in the event of a disease outbreak; more stringent requi rements 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 al ready 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: RM5.08, 22.8x CY16 EPS pegged to 1SD above 5-year historical average P/E).
• Top Glove (BUY, TP: RM16.38, 19.9x CY16 EPS pegged to 2SD above 3-year historical average P/E).
• Kossan (HOLD, TP: RM8.64, 22.9x CY16 EPS pegged to 2SD above 3-year historical average P/E).
• Karex (HOLD, TP: RM3.51, 23.8x of CY17 EPS pegged to historical 2-year average P/E multiple.

Source: Hong Leong Investment Bank Research - 23 Dec 2015