PETALING JAYA: The gas tariff hike of 5.3% is expected to only minimally impact glove manufacturers’ earnings in the third quarter, said CGS-CIMB.
The additional cost from the tariff hikes is expected to be manageable, as gas makes up only 8% to 10% of the total cost for glove makers.
In the event that glove manufacturers fully absorb the additional cost, CGS-CIMB estimates a net increase of 0.4% to 0.5% in total costs. This will result in a minimally negative impact to the sector’s earnings by 0.4% to 1.2% for 2019 to 2021.
“We believe glove makers are likely to pass on these additional costs, given that this is an industry-wide phenomenon and they have a cost pass-through mechanism in place.
“However, the three-day notice period given this time is shorter than expected, as the past three hikes had an average three weeks notice.
“This may result in short-term margin compression as glove makers typically lock in orders and selling prices at an estimated one and a half to three months in advance.
“Nevertheless, we believe the recent decline in key raw material prices should help to offset any near-term margin pressure,” said CGS-CIMB.
In June, natural rubber prices declined 5% month-on-month while nitrile butadiene (NBR) declined 2.3%. Last Friday, Gas Malaysia announced that the effective average natural gas tariff for non-power sectors will be increased to RM34.66 per million British Thermal Unit (MMbtu).
This marks an increase of 5.3% from the average effective natural gas price of RM32.69 from January 1 to July 14, 2019.
The tariff revision is in line with the national rationalisation plan and Gas Cost Pass Through (GCPT) mechanism that includes the revision of piped gas price taking place every six months as indicated by the Energy Commission.
Going forward, CGS-CIMB believes the glove operating environment will turn favourable in the second half of the year, on the back of easing pricing competition and improved supply-demand dynamics.
The research house expects Malaysia to remain a dominant force in the glove sector due to higher operating efficiencies, wider product offerings from better R&D efforts and aggressive capacity expansion plans.
In 2018, Malaysia made up 64% of global glove exports. Global demand growth is projected at 8% to 10% per annum.
“The supply-and-demand dynamics have turned more conducive for glove makers due to efforts to slow down commissioning of new capacity; this should ease the oversupply concerns that have bogged down the sector in the first half of 2019, in our view.
“The glove sector now trades at a forward price-earnings (PE) multiple of 26.3 times, less than one standard deviation above its five-year mean PE of 29.4 times. In our view, this is justified and the sector will continue to trade above its current P/E given its defensive nature due to resilient glove demand, higher earnings growth as compared to the KLCI, as well as its strong fundamentals with low gearing and high return on equity (ROE),” said CGS-CIMB.
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