KUALA LUMPUR (June 14): TA Securities Holdings Bhd raised its Supermax Corp Bhd share target price (TP) to RM4.30 from RM3.62 after increasing Supermax's price-earnings (PE) multiple estimate to 19 times from 16 times.

In a note today, TA Securities said Supermax's higher PE multiple estimate is in line with the glove sector's five-year historical average. At Bursa Malaysia, Supermax shares rose 19 sen to RM4.10 at 12:30pm.

TA Securities said: "We maintain our Neutral stance on the sector with Buy for Top Glove (Corp Bhd) (TP: RM12.20/share), Kossan (Rubber Industries Bhd) (TP: RM9.04/share). We also take this opportunity to raise Supermax PE multiple to 19.0x (previously 16.0x), in line with glove sector five-year historical average."

"Maintain Buy on Supermax with a higher TP of RM4.30/share (previously RM3.62/share), and Sell on Hartalega (Holdings Bhd) (TP: RM4.52/share)," TA Securities said.

TA Securities' TP and recommendations today for rubber glove producers followed Gas Malaysia Bhd's announcement yesterday on the revision of natural gas base tariff for the non-power sector in Peninsular Malaysia to RM31.92/MMBtu from RM30.90/MMBtu from July 1 to Dec 31, 2018. Gas Malaysia said the government has approved the natural gas tariff hike.

Gas Malaysia said under the gas cost pass through mechanism, a surcharge of 77 sen/MMBtu will apply to all tariff categories due to the higher actual gas cost against the reference gas cost in the base tariff during the period. As such, this translates to an average effective tariff of RM32.69/MMBtu, Gas Malaysia said.

Today, TA Securities said: "As per the (glove) sector norm, tariff increases will be passed through to customers via revision of higher average selling prices (ASPs). As the increases have been charted out long ago, we believe it will come as no surprise for glove manufacturers. Our channel checks with glove manufacturers under our coverage revealed that they might raise ASPs slightly."

"However, we note that the pricing mechanism with customers also depends on a couple of factors such as forex movements and raw material prices. In view of this, we opine that the impact is minimal, albeit with a time lag of around two months. As such, we maintain our earnings projections for glove companies under our coverage. Note that natural gas accounts for ~10-14% of glove manufacturers cost, our sensitivity analysis suggests an upward revision of 0.1% to selling prices is required to offset the 0.5% hike," TA Securities said.