AmWatch - Rubber Gloves Sector : Another natural gas tariff hike, 30 Oct 2014

SECTOR FOCUS OF THE DAY

Rubber Gloves Sector : Another natural gas tariff hike   Neutral

Gas Malaysia Bhd announced that it has increased the natural gas tariff (selling price) for the non-power sector in Peninsula Malaysia. Based on the revised tariff schedule, the rubber glove manufacturers would see an average tariff hike of 2.3%. Note that some of the companies may enjoy a more favourable input price vis-à-vis their peers as they have exclusive deals with Gas Malaysia given the substantial volume demanded.

We are not surprised by this announcement as the government had previously stated that tariffs for both natural gas and electricity are subjected to adjustments every six months. The current natural gas tariff increase, which will be effective 1 November 2014, comes exactly 6 months after the last hike on 1 May 2014. The increase back then was a steep 19%.

At present, energy usage accounts for 10%-12% of the glove manufacturers’ total operating costs, with the largest portion attributed to natural gas. Raw materials, namely latex and nitrile, still make up the bulk of total costs at 45%-50%. The industry norm for such hikes has been to raise the ASP of products in accordance with their cost pass-through pricing mechanism. That said, we believe that some of the glove players will want to absorb the cost to gain additional sales and market share.

Even if a price increase is taken, the shorter time frame (2 days vs. 2 weeks for the earlier hike) for the rubber glove manufacturers to notify their customers of the higher ASP is expected to result in margin contractions in the upcoming quarters. As it is, the rubber glove manufacturers are likely to report sequentially softer earnings in the forthcoming results announcements given that the July-Sept quarter was the first full quarter to experience the impact of the previous natural gas tariff hike. We are keeping our estimates for now. We maintain NEUTRAL on the sector, with Kossan Rubber Industries being our only BUY.

QUICK TAKES

CIMB Group : Niaga’s 3Q clogged up by loan loss               Hold

MSM Malaysia : Marginally affected by gas tariff hike     Hold

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