On 29th October, Gas Malaysia announced a price hike for natural gas prices for non-power sector in Peninsular Malaysia. This will see natural gas prices increase by an average of 2.3% to RM19.77 from RM19.32 effective 1 Nov 2014. (Source: Bursa announcement)

Comment: Following the government subsidy reduction on petrol prices earlier this month, we are not surprised over the natural gas price hike as government continues its subsidy rationalisation program.

That said, we opine that that the impact of the increase in natural gas prices on the glove companies under our coverage will be minimal. This is because natural gas only makes up of 5-7% of total production costs and  can  be  passed  on  to  customers  (as  per  usual  industry  practice). Based on our analysis (assuming zero cost pass-through), net earnings of  glove  companies  will  only  be  impacted  by  1-3.5%  even  with  a  5% increase in natural gas prices.

Therefore we make no changes to our earnings forecast for all the glove companies under our coverage. Maintain OVERWEIGHT on the sector, with our top pick Kossan (KRI MK, BUY, TP: RM5.95).

Source: Affin Hwang Capital Research - 30 Oct 2014