Highlights

• The Government has approved Gas Malaysia’s natural gas tariff revision for the non-power sector in Peninsular Malaysia, effective 1 January 2018. The average natural gas tariff will increase from RM28.05/MMBtu to RM32.52/MMBtu (+15.9%).

• 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 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

• Any revision on natural gas tariff will impact rubber glove manufacturers as on average, it constitutes about 9-10% of total production cost. Nonetheless, this is something that we have already taken into consideration and imputed in our financial modelling. Our average FY18 gas price assumption is c.RM40.50MMBtu.

• The final impact of the hike will depend on how soon the glove players are able to pass the increase to their respective customers, which we reckon is around 1 quarter.

Catalysts

• Surge in demand in the event of a disease outbreak; more stringent requirements and increased spending in the healthcare sector globally and sector capacity expansion.

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: RM7.45 ↔ , 26x CY18 EPS pegged to the 5-year historical average P/E).

• Top Glove (HOLD ↔ , TP: RM6.33 ↔ , 20.2x CY18 EPS pegged to 1SD above historical average P/E).

• Kossan (HOLD ↔ , TP: RM7.10 ↔ , 16.9x CY18 EPS pegged to 5-year historical average P/E).

• Karex (SELL ↔ , TP: RM1.04 ↔ , 28x of CY19 EPS pegged to historical 3-year average P/E multiple).

Source: Hong Leong Investment Bank Research - 30 Nov 2017