KUALA LUMPUR: The 0.7 per cent average increase in natural gas tariff is expected to only marginally impact rubber gloves players’ earnings.
It will be by 0.2 per cent to 0.5 per cent based on Kenanga Investment Bank Bhd’s back-of-envelope calculations, assuming a “no-cost pass through”.
Kenanga IB said fuel accounted for an average of 10 per cent of production cost, of which natural gas making up for an average of seven per cent of the production cost.
“Players can easily raise their average selling prices to pass cost through. Generally, its takes between one and three months to pass through the cost increase,” it said in a note today.
Gas Malaysia Bhd in an announcement to Bursa Malaysia on Wednesday informed that the government had approved a natural gas tariff revision for non-power sectors in Peninsular Malaysia with effect from January 1, 2019 to June 30, 2019 by an average of 0.7 per cent.
Kenanga IB said following a period of capacity consolidation starting back in mid-year 2016, which led to falling average selling prices (ASPs), nascent signs of glove-makers ramping up capacities were emerging again.
It said the robust demand was attracting players to ramp up production.
“In anticipation of higher demand and switching from vinyl gloves, players are raising capacities again.
“Our analysis suggests that potential oversupply is looming. Note that previous two oversupply occurs back in year 2014 and 2016,” it said.
Kenanga IB reiterated its “underweight” stand on the rubber gloves sector due to rich price earnings ratio (PER) valuations and flat sequential earnings growth.
“Anecdotal evidence suggests that rubber gloves stocks’ share price rally was led largely by massive PER expansion as earnings growth has been pedestrian over the past eight quarters.
“Our analysis suggests that the strong surge in share prices of glove stocks was mainly due to changes in the PER multiple and not so much on earnings growth. On the flipside, key upside risk is stronger-than-expected demand,” it said.
Kenanga IB’s top pick in the sector is Kossan Rubber Industries Bhd following its strong high teens year-on-year earnings growth expected in subsequent quarters underpin by new capacity expansion.
ends