Gas price hike minimal impact on glove makers

A report says demand growth for gloves will continue to remain resilient as it is still the most basic and affordable form of protection against viruses and disease outbreaks.

KUALA LUMPUR: CIMB Equities Research expects 5.96% increase in the average gas tariff for non-power sectors, which comes into effect on July 15, to have a minimal impact on glove makers.

“The hike was expected by the glove industry and glove manufacturers have already raised prices to account for the increase,” it said on Thursday, adding the hike would have minimal impact on the sector’s earnings as it retained its Overweight call.

Gas Malaysia announced the average gas tariff for these sectors would be increased by RM1.52 (5.95%) to RM27.05 per MMbtu.

CIMB Research said the announcement was not a surprise as gas prices are typically revised every six months based on the regulatory framework for natural gas tariffs.

“We believe the quantum of the increase is manageable and within the expectations of the glove industry. We understand that certain glove manufacturers have raised their average selling prices (ASPs) ahead of this announcement,” it said. 

The research house pointed out this was in line with the Malaysian Rubber Glove Manufacturers Association’s (MARGMA) announcement on April 21 that ASPs for medical and surgical gloves would be raised to account for cost increases.

“As this is an industry-wide phenomenon and there is a cost pass-through mechanism in place, glove makers should be able to increase ASPs to pass on the extra cost with minimal difficulty. However, in the event that manufacturers absorb the additional cost, the quantum of increase would be minimal. 

“We estimate net increase of 0.4% of total costs, as gas cost makes up 7% of glove makers’ total operating costs. Hence, we believe that the impact on sector earnings would be immaterial,” it said.

CIMB Research said the 2% uptick in US$/RM rate to RM4.05 on June 29 following the Brexit vote would be conducive to glove manufacturers. 

However, the positive impact on 2016 earnings will be muted compared to the forex impact on 2015 earnings, given the limited forex upside and steady RM/US$ rates of 4.00-4.20, which are unlikely to push earnings to previous peaks unless there is sharp appreciation in a short period of time, leading to further arbitrage opportunities.

“We make no changes to our earnings forecasts and sector recommendation. As this announcement was within expectations, we believe that glove manufacturers will have no difficulty in passing on the additional cost by raising ASPs.

“Kossan remains our sector top pick, given its undemanding valuations and diversified earnings base. Downside risks to our view are stronger-than-expected pricing competition and sharp appreciation of RM/US$ rate,” said the research house.