KUALA LUMPUR (Dec 16): CIMB IB Research has upgraded Top Glove Corp Bhd to "add" with a higher target price of RM5.65 based on a higher 19 times calendar year 2018 (CY18) price earnings ratio (PER) (previously 16 times), in line with +1 standard deviation of its five-year historical mean, as the research house sees the glove maker to be a key beneficiary of a strong US dollar and as a stock that investors should accumulate.

In a note yesterday, CIMB Research said Top Glove is the biggest beneficiary in the sector from the recent weakening of the ringgit.

"First, it has a higher natural rubber product mix (bulk of latex raw material is procured in ringgit versus nitrile in US dollars). Thus, production cost in ringgit is higher for natural rubber gloves, leading to margin expansion from currency gains.

"Also, Top Glove has the sector's largest production capacity at 48 billion units per annum, which allows it to benefit more from the excess demand flowing to Malaysia as the ringgit depreciates more than the currencies of other glove-making nations versus US dollar," the research house wrote.

With Top Glove now posting an earnings before interest, tax, depreciation and amortisation (EBITDA) margin expansion after three consecutive quarters of quarter-on-quarter EBITDA margins declines, the research house also believes the worst is over.

"Moving forward, we expect a better outlook for Top Glove given a pickup in demand as well as the recent weakness in the ringgit. This, added with a more favourable external environment as well as expected easing of pricing competition from a more gradual ramp-up in incoming new sector capacity, should lead to sequentially stronger earnings ahead," it said.

Although the group's aggressive expansion plans of growing its capacity by 26% by May 2018 remain a concern, management has highlighted plans to slow down or gradually begin commercial production of these new lines.

"We believe that this is positive in ensuring better supply-demand dynamics as a sharp influx of capacity into the sector may lead to persisting pricing competition. Furthermore, the group has plans to undertake revamp work of older lines which will offset the new capacity kicking in," it added.

"Post release of Top Glove's annual report, we bump up our financial year ending Aug 31, 2017 (FY17F) to FY19F estimates by 2% to 4.9% for bookkeeping purposes and higher US dollar assumptions of RM4.35 from RM4.15," said the research house.