Investment Highlights

• We maintain our BUY recommendation on ATA IMS (ATA) with a lower fair value of RM1.91/share (previously RM2.07/share) pegged to a FY21F PE of 14x after reducing our FY20F–FY21F forecasts by 8–16% to account for lower assumption of growth in box-build units and adjusted margin assumptions for its key customer.

• Results highlights:

• ATA’s 4QFY19 core net profit came in below expectations at RM21mil, bringing FY19 core net profit to RM113mil. The results missed our and consensus’ fullyear estimates by 7% and 8% respectively. The deviation from our forecasts was likely due to lower box-build orders and higher taxation seen in 4QFY19.

• FY19 core net profit rose 20% YoY due to higher turnover (+26%) attributed to the four assembly lines added to Jalan Dewani i.e. two floorcare product lines that commenced production in 1QFY19 and two healthy lifestyle product lines that commenced production in 3QFY19.

• On a QoQ basis, 4QFY19 core profit was lower by 37% compared with 3QFY19 as revenue declined 4% due to a slowdown in demand of box-build orders from existing customers and as higher taxation was incurred due to some expenses being disallowed for tax purposes.

• For FY20F, ATA is adding two new assembly lines for its key customer on the back of growing orders, increasing its number of assembly lines to 14 from 12 and expanding production space by 110K sq ft (+10%). Of the two lines, one is for a household product that has commenced production in March 2019 while the other line is for a personal care product expected to commence production in October 2019.

• As for its vertical integration efforts, the production of wire harness will start in August 2019 which will see contribution in 2HFY20 while brush bar assembly will start at the end of CY2019 with contribution only impacting 4QFY20. Meanwhile, the full integration of its PCBA and battery pack divisions is slated by mid-2021.

• We reiterate our BUY recommendation on ATA due to its positive prospects arising from: (i) it being the purest proxy for the growth prospects for its key customer (by virtue of ATA being the key customer’s largest contract manufacturer producing the broadest range of products), (ii) its move to become a vertically-integrated player which will improve margins and put it in a better position to secure potential orders and/or new customers, and (iii) its positive growth trajectory with a 3-year CAGR of 18% from FY19–FY22F underpinned by its modular expansion strategy.

Source: AmInvest Research - 30 May 2019