Investment Highlights

• We maintain HOLD on ATA IMS (ATA) with a higher fair value of RM1.83/share (previously RM1.72/share) after marginally tweaking our FY19F-FY21F earnings for housekeeping reasons and pegging our FV to a rolled-forward FY20F PE of 13x (from CY19F).

• ATA’s 2QFY19 results came in within our expectations at RM27mil, bringing 1HFY19 net profit to RM58mil. This accounts for 48% of our full-year forecasts and 46% of consensus estimates.

• 1HFY19 net profit climbed 25% supported by higher turnover of 21% on the back of stronger box-build orders from its key customer.

• On a QoQ basis, 2QFY19 net profit dropped 10% despite revenue rising 20% due to higher material content and start-up costs of the new assembly lines producing newer models of its key customer’s floor-care product at its Jalan Dewani factory that came on stream for the quarter.

• Higher turnover expected in the quarters ahead: Despite the weaker-than-anticipated 2Q, revenue for the next two quarters (3Q and 4Q) are expected to be stronger supported by the fullscale production of the four assembly lines at Jalan Dewani.

• Status of capacity expansions:

• Of the four assembly lines in its Jalan Dewani factory, two lines producing the key customer’s healthy lifestyle product have commenced production in early 3QFY19. Meanwhile, the other two lines producing the key customer’s floor-care product are reported to have stabilized since beginning production in 2QFY19.

• The acquisition of the group’s Jalan Hasil factory has been completed as at October 2018. However, ATA is relooking at what the factory will be used for. We are awaiting clarity regarding the earnings contribution of the factory, which may be revealed in an upcoming analyst briefing.

• Its additional 116K sq ft warehouse has been completed and is up and running as at October 2018. The additional warehouse space (+55%) benefits the group by generating workflow efficiencies and supporting their capacity expansion plans.

• We believe that ATA’s current price reflects its positive earnings prospects stemming from: 1) it being a prime proxy to its key customer’s continuous innovation and robust growth prospects, 2) its position as the largest supplier of filters for its key customer globally with a formidable market share of 80-85%; and 3) an expected FY18-FY21F PAT growth at a stunning 3-year CAGR of 24%.

• ATA’s key re-rating catalyst would be the announcement of further capacity expansions in line with securing new orders from its key customer for CY2019.

Source: AmInvest Research - 23 Nov 2018