Glovemakers can cover price hike

Research firm expects them to manage despite higher cost of gas

PETALING JAYA: Glovemakers are not expected to face much difficulty raising their average selling prices although the quantum of gas price increase was higher than expected.

CIMB Equities Research said in a note that glovemakers are should be able to manage the additional cost given the early notice and even if all additional costs are absorbed, there would be minimal earnings impact.

“In the event that glovemakers decide to fully absorb the additional cost, which we believe would be highly unlikely, the impact on their earnings would be immaterial.

“As gas cost currently makes up 8%-10% of a glovemaker’s total operating cost, we estimate a net increase of 1.8%-2.3% of total costs. Hence, the impact on sector earnings is minimal at -0.2% to -1%,” it said in its research report yesterday.

On Wednesday, Gas Malaysia Bhd announced that the effective average natural gas tariff for non-power sectors will be increased to RM32.52 mmBtu for Jan 1 to June 30, 2018.

As the average effective natural gas from July 1 to Dec 31, 2017 was set at RM26.40, this marks a 22.9% increase.

On top of the based tariff (RM30.90/mmBtu) set for Jan 1 to June 30, 2018 under the prescribed incentive based regulation (IBR) framework, an extra surcharge of RM1.62/ mmBtu would be applied due to the recent spike in LNG prices.

“Although the announcement of a tariff hike was not a surprise to us, the quantum of increase is higher than expected due to the additional surcharge. We believe glovemakers will still be able to manage the additional gas costs.

“This is due to the fact that this is an industry-wide phenomenon and there is a cost pass-through mechanism in place,” said the research firm, which retains its overweight on the gloves sector.

It said the robust demand for rubber gloves (due to lower supply of vinyl gloves from China) has led to all glove makers under its coverage running at utilisation rates of above 85%, higher than their average rates.

The current robust demand should allow glovemakers to have more bargaining power when raising prices.

“As such, we believe glovemakers are likely to adjust their average selling prices higher to pass on the bulk, if not all, of the cost increases.

“On the bright side, Gas Malaysia has provided a month’s notice this time around versus around two weeks, on average, for previous tariff hikes.

“This should give glovemakers ample time to reflect the cost increases into their average selling prices with minimal time lag, in our view.”

CIMB Research said that Kossan Rubber Industries Bhd remains its top pick for the sector as it is a laggard play versus its peers such as Top Glove Corp Bhd and Hartalega Holdings Bhd.

Moreover, it expects Kossan’s earnings to improve from the fourth quarter of financial year 2017 on the back of a substantial increase (13.6%) in its production capacity. Downside risks to its view are a sharp decline in US dollar against ringgit and stronger pricing competition.

Meanwhile, TA Research said channel checks with glove manufacturers under its coverage revealed that renegotiation of selling prices with customers is currently conducted on average, monthly or whenever the urgent need arises.

“In view of this, we opine the impact would be minimal, at most, denting one month of profitability.

“With natural gas accounting for about 10% of glove manufacturers’ cost, we estimate upward revision to selling prices of around 2.3% is required to offset the 22.9% hike,” it said in a report.

Shares of Top Glove and Kossan trended lower, shedding five sen and 16 sen to RM6.73 and RM7.69, respectively. Supermax Corp Bhd closed one sen down to RM1.89, while Hartalega gained six sen to RM9.56.