Analysts are mixed on the impact of the price hike of natural gas towards the rubber glove sector, dependent on whether the costs are passed on to customers.
The research division at TA Securities Holdings Bhd (TA Research) believed the higher natural gas tariff will have a detrimental impact on all glove manufacturers under its coverage as natural gas is an important part of the glove manufacturing process, used primarily for the heating of gloves.
It makes up nine to 11 per cent of total production cost for most industry players.
“Assuming no cost pass-through is done, our calculation suggests Top Glove Corporation Bhd (Top Glove) will be the most affected with a 12.2 per cent predicted decrease in earnings,” it
estimated.
“In contrast, Hartlalega will be least impacted at a 4.6 per cent decrease in earnings due to their industry high profit margins.”
An analyst with Alliance Research Sdn Bhd (Alliance Research) was generally unconcerned from this piece of news as he anticipated glovemakers to be able to pass on the cost increase to their customers, thanks to their dominance in the global glove market.
“In any case, we believe the negative impact will be short lived due to time lag on cost pass through as glove makers normally take one to one and a half months to adjust their product pricing based on the latest input cost structure.
“On the flip side, we are getting more cautious and concern that the potential continuation of water rationing in Selangor could pose more threats to glove makers, as glove production could be disrupted due to water shortage, particularly for the new expansion projects which could be delayed due to water supply shortage,” he added.
Based on Alliance Research’s channel checks, glovemakers have started to see some disruptions in their production, although it was still manageable as industry players took steps to improve the efficiency of water usage internally.
On a positive note, production disruption due to water rationing could help to ease oversupply pressure and lift selling prices and profit margins in the glove industry.
With this move in mind, analysts with CIMB Research advised investors to choose the right company.
“While we believe that Hartalega Holdings Bhd (Hartalega) will emerge as the strongest given its huge margin buffer, although it may lose some market share or face pricing pressure earlier as its new capacity will only be ready at end-2014,” it said.
“We prefer Kossan under this competitive environment as we think that the impact on Kossan Rubber Industries Bhd will be manageable given its lower pricing than Hartalega’s, strong delivery track record for nitrile and its more diversified earnings.
“It also has its capacity ready and is trading at a lower calendar year 2015 price earnings ratio of 14 times than Hartalega’s 15.8 times.”