News

• The Government has approved Gas Malaysia’s natural gas tariff revision for the non-power sector in Peninsular Malaysia from 1 January 17 to 31 December 2019.

• Under the Gas Cost Pass Through (GCPT) mechanism, a tariff rebate of RM0.40/MM Btu will applied for 1H17, translating to average effective tariff of RM26.31/MM Btu, a 3% reduction from previous average tariff of RM27.05/MMBtu

Comments

• Natural gas constitutes circa 10% of total production cost. A 3% reduced in average tariff will only translate to 0.3% reduction in total cost of production.

• For the full year of 2017, the approved average base tariff is RM27.18/MMBtu (average of 1H17 and 2H17 based tariff) as compare to our full year assumption of RM28.50/MMBtu. The difference only translates to 0.5% reduction in total cost of production. Given the minimal variation, we maintain our earnings forecast.

Rating

NEUTRAL ( ↔ )

• Overall, we are maintaining NEUTRAL stance on the sector. Stronger USD trend will provide favourable environment for rubber product companies to mitigate rising raw material cost (latex and nitrile) and easing margin pressure from pricing competition. Sector valuation is trading at 18x, slightly above sector average P/E band, which has already fully reflected its fundamental of the sector.

• For exposure in the sector, we continue to like TopGlove (HOLD; TP: RM4.91) for its exposure in the resilient export market and potentially benefiting from further strength in USD and softening of latex price (as a result of slow china auto sales).

Source: Hong Leong Investment Bank Research - 29 Dec 2016