This article first appeared in The Edge Financial Daily on December 11, 2019

Rubber sector
Maintain neutral: On Monday, Gas Malaysia Bhd announced the government had approved for the group to effect the natural gas selling price for the distribution segment for Jan 1, 2020 to Dec 31, 2021 — the annual review of the selling price. As such, the average natural gas selling price for Jan 1, 2020 to Dec 31, 2020 is set at RM33.65 per million British thermal units (MMBtu) — a 2.91% or RM1.01 per MMBtu decrease from the previous average selling price of RM34.66 per MMBtu.

For rubber glove manufacturers, we are mildly positive as the gas selling price will now be revised annually instead of semi-annually, allowing manufacturers to better manage costs. Take note that natural gas accounts for roughly 10% of glove manufacturers’ total costs, and our sensitivity analysis suggested the rubber sector’s profit would increase 0.9% per year until the average selling price is lowered 0.3% to neutralise the impact of a 2.9% cost-benefit.

Based on channel checks, manufacturers have managed to pass through the gas tariff hike in July 2019. As such, we believe manufacturers will pass the cost savings to customers, albeit at a two-month lag. In view of this, we believe the impact is minimal — less than 1% of earnings. As such, we make no changes to our earnings estimates for glove companies under our coverage.

Our “neutral” stance on the sector is maintained. We still like Kossan Rubber Industries Bhd, with a target price (TP) of RM4.93 per share, and Supermax Corp Bhd (TP: RM1.66 per share) due to their double-digit earnings growth and trading at an unjustified discount to peers’. — TA Securities, Dec 10