Glovemakers to see negligible impact from gas price change

KUALA LUM{UR: Local glove producers are likely to experience a negligible impact of less than one per cent on their earnings from the recently announced gas price revision.

Last Friday, Gas Malaysia Bhd (Gas Malaysia) had announced the approval by Energy Commission of the revision of natural gas tariff for the non-power sector in Peninsular Malaysia from July 1, 2017 to Dec 31, 2017.

This revision is the result of a rebate of RM1.59 per one million British thermal units (MMBtu) under the Gas Cost Pass Through mechanism (GCPT) and on average, the effective gas tariff will be revised from RM28.05 per MMBtu to RM26.46 per MMBtu.

In a sector update, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) explained that the tariff revision was unexpected as Gas Malaysia had previously guided for an increase in tariff rates.

“Earlier this year, Gas Malaysia announced the schedule of gas price revision that will take place for the next three years until 2019.

“In the announcement, it indicated that it is expecting a 5.0 per cent increase in natural gas base tariff to RM28.05 per MMBtu from RM26.71 per MMBtu for the period of July 1, 2017 to Dec 31, 2017.

“However, due to the rebate from the GCPT mechanism, the increase in the average effective gas tariff is now reduced to 0.57 per cent as the average effective gas tariff for the said period is now reduced to RM26.46 per MMBtu.”

For glove players, the price revision is deemed to be a positive surprise as on average, natural gas constitutes for about 10 to 12 per cent of the total glove production costs for most major glove producers.

The cost savings from price revision will help assist players in lowering glove production costs and reduce volatility steaming from raw materials price and currency movement, guided the research arm.

However, on an earnings front, the research arm is expecting the impact to be negligible as most major glove players will only experience on average, a less than one per cent increment in effective gas tariff from the previous tariff.

“Hence, our preliminary calculation shows that all four glove producers under our coverage will have negligible impact on earnings of about less than one per cent arising from this latest revision in natural gas tariff.”

Besides that, MIDF Research is also expecting the overall impact on glove producers to be minimal as it would be likely that they will need to pass on the cost savings to their customers which will in turn lower average selling prices (ASPs).

Similarly, TA security – the research arm of the TA Securities Holdings Bhd – was also observed to share this sentiment.

The research arm shared, “While manufacturers could benefit slightly from any revisions to selling prices made in anticipation of the scheduled hike in natural gas base tariffs to RM28.05 per MMBtu without rebate mentioned on Dec 28, 2016, we opine that it would be transitory with offset from subsequent round of orders via downward revision to selling prices.”

Taking this into account, both research arms have decided to maintain their ‘neutral' ratings on the rubber glove sector with unchanged earnings estimates.

“We remain wary of the movements in raw material prices, movement in currency and slowdown in the industry expansion progress.”

Earlier this year, Gas Malaysia announced the schedule of gas price revision that will take place for the next three years until 2019. MIDF Research

MIDF Research is also expecting the overall impact on glove producers to be minimal as it would be likely that they will need to pass on the cost savings to their customers which will in turn lower average selling prices.