Glove players’ profit margin to remain stable despite higher natural gas tariff


 The revised natural gas tariff by Gas Malaysia Bhd for the non-power sector in Peninsular Malaysia is viewed positively as analyst reckons it would have negligible impact on the gloves sector.

The natural gas distributor announced that the Energy Commission has approved higher natural gas tariff from Jan 1 to June 30, 2019 at RM32.92 per MMBtu, a 0.7% higher than the current RM32.69 per MMBtu.

MIDF Amanah Investment Bank Bhd Research said that it is neutral on this revision as the increase in effective gas tariff is only +0.7% from the previous revised tariff.  

“According to our calculation, on average, major glove players will experience less than 1% increment in effective gas tariff from the previous tariff.

“Moreover, on average, natural gas constitutes only about 10-12% of the total production costs for the glove producers under our coverage,” it said in a research note today.

As such, MIDF Amanah said based on its calculations, the four gloves producers under its coverage – Top Glove Corp Bhd, Hartalega Holdings Bhd, Supermax Holdings Bhd and Kossan Rubber Industries Bhd – will experience negligible impact on earnings.

“We believe that the impact on earnings will be fairly minimal due to the current low raw material costs such as Nitrile Butadiene Rubber (NBR) 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,” it added.

The tariff revision is in line with the national rationalisation plan and Gas Cost Pass Through (GCPT) mechanism which includes the revision of piped gas price taking place every six months as indicated by the Commission.

The research arm also said that there are no changes to its recommendations, earnings estimates and target prices of the glove producers under its coverage at this juncture.

“We view that the demand for glove will continue to increase, driven by more stringent hygiene requirement… Glove manufacturers will capitalise on this demand by continuously expanding its production capacity.

“However, there are risks that over the expansion in capacity would lead to downward pressure in ASP (average selling price) and higher operating costs,” MIDF Amanah said.

In order to maintain operating costs, the research firm takes 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.

“On another note, glove producers under our coverage are currently trading at a premium of +20.0% above their historical two-year price earnings ratio (PER),” it noted.

As such, MIDF Amanah maintains its ‘neutral’ stance on the glove sector.