Gas tariff hike – minimal impact on gloves sector

PETALING JAYA: MIDF Research, which is neutral on the recent gas tariff revision, expects the tariff hike to have minimal impact on the gloves sector as the increase is only 0.7% from the previous revised tariff.

The natural gas tariff will increase marginally by 23 sen or 0.7% to RM32.92 per MMBtu effective Jan 1, 2019.

At this juncture, the research house said it is making no changes to its recommendations, earnings estimates and target prices of the glove producers under its coverage, it said in a note today.

According to its calculation, the glove producers on average will experience less than 1% increment in effective gas tariff from the previous tariff.

MIDF said, on average, natural gas constitutes only about 10% to 12% of the total production costs for the glove producers under its coverage.

“Hence, according to our calculations, all four glove producers under our coverage will experience negligible impact on earnings of about less than 1% arising from this latest revision in natural gas tariff as the increase in effective gas tariff is only 0.7% compared to the previous period,” its analyst Nabil Zainoodin said.

“In addition, we believe that the impact on earnings will be fairly minimal due to the current low raw material costs, i.e. nitrile butadiene rubber and natural rubber; opening of new plants with latest technology which is energy efficient; and cost past-through mechanism whereby the cost increase will be shared with customers,” he added.

Additionally, MIDF believes that demand for glove will continue to increase, driven by more stringent hygiene requirement, noting that the glove manufacturers will capitalise on this demand by continuously expanding its production capacity.

However, it opined that there are risks that overexpansion in capacity would lead to downward pressure in average selling prices and higher operating costs.

“In order to maintain operating costs, we take comfort in knowing that glove manufacturers are actively looking at ways to reduce the escalating cost of labour and energy. Bearing this in mind, we expect that the glove player’s profit margin will remain stable,” Nabil added.

MIDF noted that currently glove producers under its coverage are trading at a premium of 20% above their historical two-year price-earnings ratio.

“As such, we recommend investors that have been accumulating on the stock to sell on strength. All things considered, we are maintaining our ‘neutral’ stance on the sector,” it added.

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