We came away from our recent company visit feeling more optimistic on the prospects for Top Glove. Upgrade to BUY (from Neutral) with a revised TP of MYR9.09 (from MYR8.17, 14% upside). We expect 4QFY15 earnings to improve 19-22% QoQ on the back of stronger-than-expected sales volume, increased operating efficiency, a stronger USD/MYR and a better product mix.

Expect a better 4QFY15. We expect 4QFY15 (Aug) earnings to grow19-22% QoQ on the back of stronger-than-expected sales volume, increased operating efficiency, a stronger USD and a better product mix. Management shared that manufacturing utilisation rate improved to >80% in the quarter (3QFY15: 75%), which we estimate would translate to a 5-7% improvement in sales volume. We expect the higher sales volume to gear Top Glove’s product mix towards higher-margin nitrile gloves, in line with industry demand since the beginning of the year, and consistent with management’s aim of achieving a 50% nitrile glove mix by FY20. Coupled with the 6.3% strengthening of the USD/MYR during the quarter, we forecast 4QFY15 revenue to grow 12-15% QoQ.

Margin improvement. We expect EBIT margins to improve 0.5-1.0ppts in 4QFY15 on the back of a better product mix, a stronger USD andincreased operating efficiency due to economies of scale from higher manufacturing utilisation rates, as well as better yields from further automation drive. Thus, we expect 4QFY15 earnings to be c.MYR86m-88m, which are markedly higher than consensus estimate of MYR73m.

Assumptions/forecasts/risk. We lift FY16/FY17 USD/MYR assumption to our in -house forecasts of 4.34/4.30 (from 3.75/3.67) and update ourutilisation rate assumptions. We thus upgrade our FY15-17 earnings forecasts by 6-11%. We raise our CoE assumption to 9.0% (from 8.6%) to reflect current macroeconomic uncertainties. The main risk to our forecast is the de-rating of the sector driven by liquidity, should investors switch out of non-cyclical stocks on signs of abating market uncertainty.

Upgrade to BUY. We upgrade our recommendation to BUY and lift our TP to MYR9.09 (14% upside, CoE: 9.0%, TG: 2%), with an implied 18.7x FY16F P/E. We think that Top Glove, which is currently trading at 16.4x FY16F P/E, could close the significant 20.8% discount gap relative to the industry’s P/E average of 20.7x, on the back of continued margin expansion from a better product mix and increasing operating efficiency.