SINGAPORE (July 17): DBS is remaining positive on Malaysia’s glove manufacturers despite the recent gas tariff hike.
Gas Malaysia has revised the natural gas tariff to an average gas tariff of RM28.05/MMBtu ($8.95/MMBtu) for the period of July 1, 2017 to Dec 31, 2017.
Fortunately, the Malaysian government will be subsidising RM1.59/MMBtu, which brings the average base tariff to RM26.46/MMBtu, a 0.57% increase from RM26.31/MMBtu previously.
In a Monday report, analyst Siti Ruzanna Mohd Faruk expects this hike to have a minimal impact on the glove players in Malaysia, as they are already prepared for a 7% hike instead.
Mohd Faruk also anticipates that other upcoming hikes will likely have a minimal impact to the glove players, given the option to tap into alternative sources, such as biomass, and the bulk of natural-gas costs should eventually be passed on to customers under the cost-pass-through mechanism.
The price adjustments, however, may see a time lag of one to two months.
“Based on our sensitivity analysis, a hike of 0.57% will only impact glove players’ earnings by less than 1% if it is absorbed fully. Note that natural gas cost only makes up about 10-11% of total costs,” says Mohd Faruk.
The top sector buy pick is Riverstone with a target price of $1.07.
Meanwhile, the “hold” picks include Hartalega, Top Glove and Kossan, with target prices of RM5.70, RM5.30 and RM6.85 respectively.
As of 11.26am on Monday, shares of Riverstone, Hartalega, Top Glove and Kossan are trading at $1.055, RM6.85, $1.79 and RM7.06 respectively.
