KUALA LUMPUR (Nov 25): Shares in Thong Guan Industries Bhd surged as much as 6% in the morning trades today, after CIMB IB Research upgraded the rating of the stock to Add, with higher target price of RM5.72 (from RM4.05).

At 12.30 pm, the stock gained 13 sen or 3.14% at RM4.27, with 1.02 million shares exchanging hands, making it the fifth top gainer across the exchange.

It had earlier climbed to a high of RM4.39. At RM4.27, it has a market value of RM500.37 million. 

Yesterday, the company reported a 38.3% jump in net profit to RM15.57 million in the third financial quarter ended Sept 30, 2016 (3QFY16), from RM11.26 million a year ago; while revenue was up 3.1 to RM187.92 million, versus RM182.35 million.

Net profit for the nine months surged 87.7% to RM43.16 million, from RM22.99 million, though revenue only gained 6.7% to RM551.11 million, from RM516.37 million a year earlier. 

In a note to clients yesterday, CIMB Research said Thong Guan's management expects to take delivery of its seventh PVC food wrap machine in the fourth quarter of 2016 (4Q16).

"What was a surprise to us, as announced during its result note, is that the company is adding a second 33-layer nano-technology line, indicating strong demand for the output from the first line," said CIMB Research analyst Nigel Foo. 

"Given the strong US$ and yen exchange rates, management is looking to focus more on the export markets," Nigel said, adding that the company plans to invest RM100 million capital expenditure (capex) over 2014-2016.

Given the positive indications, Foo raised his FY16 to FY18 earnings per share (EPS) forecasts by 13% to 16% to reflect the strength of the US$ and yen against the ringgit, without having assumed any potential earnings from delivery of its second 33-layer nano-technology line.

"FY18 EPS could see a major boost, if the company can fill up the capacity of this second nano-technology line quickly," he added. 

"Its share price has declined 7% over the past three months and valuation is now attractive," he added.