Feature Higher electricity rates to hit gloves, building materials, auto, consumer sectors

by **hlk** Tue 03 Dec 2013, 19:49

Business & Markets 2013
Written by Jeffrey Tan of theedgemalaysia.com
Tuesday, 03 December 2013 16:35
A + A - Reset
KUALA LUMPUR (Dec 3): The electricity tariff hike announced yesterday is set
to hit heavy power users, which include rubber gloves, building materials,
automotive and consumer industries.
In a report today, CIMB’s economist Lee Heng Guie said industrial and
commercial users would be hit the most, as they collectively consume 78% of
the electricity generated.
“With the approved 14.89% hike in power rates effective Jan 1 next year, the
average tariff rate for industrial users is raised to 36.22 sen per kWh from 31
sen previously,” he noted.
“On the other hand, commercial users would suffer a higher 47.67 sen per kWh
from 40.8 sen previously.”
In a separate note, CIMB head of research Terence Wong said the price hikes
will have some -- though not substantial -- impact on the rubber glove
companies as electricity cost accounts for 3%-4% of their total cost.
He remarked the hike would cut glove companies’ FY14 net profits by
1.2%-4.5%.
“The cut in net profits is based on the assumption that glove makers are not
able to pass on the increase in electricity tariffs to their customers,” said Wong.
“But, glove makers are confident of passing on the higher electricity costs to
consumers,” he said.
Thus Wong is giving a ‘neutral’ recommendation for the sector and retaining his
earnings forecasts.
Among the glove makers, Kossan would be closely watched by investors given its strong earnings growth and more attractive valuation.
Hartalega may emerge stronger due to its high operating efficiency and margins.
However, Top Glove Corporation Bhd will be the most vulnerable due to its low margins as the group has put less emphasis on profitability
in the past.
Hong Leong Investment Bank Research said the hike in electricity tariff would further impair the domestic steel players’ earnings visibility,
when commenting on impact on building materials.
The research house said this is due to electricity being one of the major sources of energy for steel players.
“We believe it is tough for steel players to pass on the higher cost of production to end consumers, given the tough competitive
environment,” said Chye Wen Fei, a research analyst at Hong Leong IB. “In terms of cement, despite the good demand prospects, we believe Lafarge will still unlikely pass on the higher cost of production to
customers,” said Chye.
“This is in light of the relatively intense price competition within the cement industry. As a result, cement players are absorbing at least part
of the higher energy cost in order to maintain their market position.”
Maybank Investment Bank Research, in a note today, said it has downgraded steel maker Ann Joo to ‘sell’, after incorporating the revised
electricity tariff and cutting its earnings forecast.
For the automotive sector, Kenanga Research said the hikes in electricity and gas tariffs would have negative impact on the sector.
Sales growth for the auto sector is expected to slow down next year due to the corroding purchasing power arising from the electricity tariff
hikes.
Furthermore, such tariff hike could raise the expectation of a further cut in petrol subsidies that may dampen consumer sentiment, it said.
On the consumer sector, Chan said food & beverage companies can expect minimal impact from the electricity hike as the electricity cost
comprises only a small percentage of total cost.
He said retailers would also sustain minimal impact as electricity cost accounts for a small percentage of operating costs.
Chan also expects minimal impact on firms operating in the sin sectors (gaming, brewery and tobacco), as electricity cost also accounts for
a small percentage of total operating costs.