KUALA LUMPUR (July 17): Rubber glove manufacturers that use about 10% of natural gas are expected to see less than 1% of selling price hike passed through as incremental cost to customers as a result of gas tariff rise effective July 1.

On Friday, the Energy Commission approved Gas Malaysia Bhd's revision of the tariff for the non-power sector in Peninsular Malaysia.

The average gas base tariff was adjusted to RM28.05 per MMBtu (one million British Thermal Units) for the second half of 2017, and a rebate of RM1.59 per MMBtu was given to all tariff categories under the gas cost pass through mechanism.

This translates into an average tariff of RM26.46 per MMBtu, which is an increase of 0.6% from the previous average effective tariff of RM26.31 per MMBtu.

TA Securities said the rebate of RM1.59 per MMBtu positively gives rise to a smaller increase in natural gas tariff of 0.6% from RM26.31 per MMBtu to RM26.46 per MMBtu compared to 6.6% (from RM26.31 per MMBtu to RM28.05 per MMBtu) if there was no rebate.

"With natural gas accounting for about 10% of rubber glove manufacturers' costs, we estimate a smaller increase to selling prices of 0.1% versus more than 0.7% without rebate to pass through the incremental cost to customers.

"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," it said in a note to clients.

As such, TA Securities kept its earnings estimates unchanged and maintained a "neutral" rating on the rubber glove sector.

It placed a "buy" call on Karex Bhd (target price: RM2.20), "hold" on Kossan Rubber Industries Bhd (RM7.60) and Top Glove Corp Bhd (RM6.05), and "sell" on Hartalega Holdings Bhd (RM6.80) and Supermax Corp Bhd (RM1.80).

Meanwhile, MIDF Research said the reduction in the hike of natural gas tariff is a positive surprise for the glove producers as the quantum of increase is less than the initial 5%, which would assist in lowering gloves production costs and offset some of the impact of volatility coming from raw materials price and currency movements.

"Most of the major glove players fall within the category F and L where according to our calculation will experience on average less than 1% increment in effective gas tariff from the previous tariff.

"We believe that the impact on the glove producers will be minimal as the glove producers will have to pass on the cost savings to their customers that would in turn result in lower average selling prices," its analyst Noor Athila Mohd Razali said in a note today.

MIDF maintained a "neutral" call on the sector as the sector lacks re-rating catalyst at this juncture.

"We remain wary of the movements in raw materials price, and currency, slowdown in industry expansion progress," she added.

It picked Hartalega for its earnings visibility, superior profit margins compared to its peers, efficient cost management and uninterrupted capacity expansion, and Kossan for its earnings visibility, prudent management, revamped old production lines and three billion new nitrile capacity coming in July.

At 11.05am, Hartalega dipped 12 sen or 1.72% to RM6.86 with 143,300 shares done for a market capitalisation of RM11.48 billion.

Kossan rose to a one-year high of RM7.06, which is two sen or 0.28% higher, with 64,700 shares done for a market capitalisation of RM4.52 billion.

Supermax remained unchanged at RM1.91 with 4,900 shares traded for a market capitalisation of RM1.27 billion.

Top Glove slipped one sen or 0.18% to RM5.65 with 148,400 shares transacted for a market capitalisation of RM7.09 billion.

Karex climbed one sen or 0.64% to RM1.57 with 321,100 shares changing hands for a market capitalisation of RM1.56 billion.