CIMB Research: Glove makers able to absorb tariff hike

by **hlk** Tue 03 Dec 2013, 19:59

KUALA LUMPUR: CIMB Equities Research says the glove makers are confident that they will be able to pass on the increase in electricity tariffs to their customers.
It said on Tuesday that assuming that they fail to do so, the hike will cut the companies’ FY14 net profits by 1.2%-4.5%.
“We retain our earnings forecasts and Neutral recommendation on the sector given that the glove companies are likely to pass on the higher cost to their customers,” it said.
The research house said despite the intensifying competition, it believes that the companies will not have issue in passing on the cost as long as all the big four companies choose to do so.
“Kossan remains as our top pick given its strong earnings growth and more attractive valuation,” it said.
To recap, on Monday, the government announced that effective from Jan 1, 2014, the average electricity tariff in Malaysia will rise by 14.98%.
Based on Tenaga’s announcement, industrial consumers will experience an average increase of 16.85% (ranging from 0.9% to about 17%).
“The price hikes will not have a substantial impact on the rubber glove companies as electricity costs account for only about 3%-4% of the total cost of goods sold.
“Our checks with the companies reveal that a one month period is sufficient for them to inform their customers of any price increases, and they are confident that the higher costs can be passed on,” said the research house.
CIMB Research said based on its analysis which assumes that the companies absorb 100% of the electricity tariff hike, the net profits of the glove makers will be impacted negatively by 1.2%-4.5%, which is not substantial.
“The increase in electricity tariff could catalyse further industry consolidation as small glovemakers will find it difficult to survive. We believe that Hartalega will emerge stronger due to its high operating efficiency, and hence higher margins.
“Top Glove is the most vulnerable due to its low margins as the group has tended to put less emphasis on profitability in the past,” it said.