Investment Highlights

• We maintain our HOLD recommendation on ATA IMS (ATA) with unchanged fair value of RM1.83/share, pegged to an FY20F PE of 13x. We have factored in higher capex for FY20F, which marginally alters our forecasts after attending ATA’s 1HFY19 analyst briefing.

• Key takeaways from the briefing are as follows:

1. . Further expansion plans indicate strong orders growth: Management has shared the need for substantial capex to further expand its production capabilities on the back of growth in indicative orders from its main customer in 2019. ATA will be investing in more injection molding machines as well as investment in its facilities.
2. Stronger 2HFY19 expected from contribution of Jalan Dewani assembly lines: In 2QFY18, ATA’s net profit declined 10% as the assembly lines producing newer models of its key customer’s floorcare products had higher material contents and higher start-up costs. Since then, the production of these two lines are reported to have stabilized. Meanwhile, two lines producing the key customer’s healthy lifestyle product have commenced production in 3QFY19. Moving forward, the group’s topline is expected to benefit from full-scale production of these four lines at its Jalan Dewani factory but overall margins will continue to fluctuate due to the timing of production of its new lines and product mix.
3. Renegotiating higher labour costs with its key customer: The group is in the midst of discussion with its key customer with regards to higher labour costs after the Malaysian government announced the increase in minimum wage to RM1,100 nationwide effective 1 Jan 2019. ATA currently has a total workforce of 7,000 workers where 70% are foreign workers. Historically, justifiable increases in operating expenses would be passed on to the key customer. However, the negotiations would take approximately 6 months.
4. Printed circuit board assembly (PCBA) plans: ATA currently outsources its PCBA requirements, however the group is working on acquiring its own PCBA capability as part of its aspiration to become vertically integrated and self-sufficient.

• The group has set a dividend payout ratio of at least 35% for FY19 to be paid as a final dividend.

• We opine that ATA’s positive earnings prospects have been factored in at the current price and maintain our HOLD recommendation on the group.

Source: AmInvest Research - 27 Nov 2018