Investment Highlights

• We maintain our BUY recommendation on ATA IMS (ATA) with marginally changed forecasts and fair value of RM1.84/share (previously RM1.85/share), pegged to an FY21F PE of 14x after updating our financials with the latest audited FY19 statements.

• ATA’s 1QFY20 results came in within expectations at RM25mil, accounting for 19% of our full-year forecasts and 18% of consensus’ full-year estimates. Despite the weaker 1Q results, the subsequent quarters are expected to normalize with FY20F earnings to be supported by strong top-line growth with the addition of two new assembly lines, increasing ATA’s assembly lines to 14.

• 1QFY20 net profit dropped by 20% YoY despite higher topline growth amid higher material contents of new models produced and higher start-up costs associated with new assembly lines that came onstream, which we believe was related to the production of a household product for its key customer which started in March 2019. Furthermore, 1QFY20 saw higher taxation due to some expenses being disallowed for tax purposes.

• Group revenue soared 45% YoY on the back of higher boxbuild orders from its key customer as ATA produced a broader range of products, enabled by its production capacity expansion after the addition of four assembly lines to its Jalan Dewani factory in FY19 as well as the newer aforementioned household product line.

• On a QoQ basis, 1QFY20 PBT was 11% lower despite 4% higher revenue due to the impact of lower efficiency and productivity amid the festive seasons. However, the relatively lower effective tax rate of 25% in 1QFY20 (vs. 42% in 4QFY19) boosted net profit by 16% vs. a lower base.

• Update on new assembly lines: ATA’s new household product line’s efficiency has improved after the initial learning curve, while its new personal care product line is slated to commence production in October 2019.

• Update on vertical integration efforts: As for ATA’s wire harness and brush bar assembly capabilities, samples have been submitted for evaluation and approval, with production most probably only starting in early CY2020.

• We reiterate our BUY recommendation on ATA due to: (i) it being the purest proxy for the growth prospects of its key customer, (ii) its move to become a vertically-integrated player will improve margins and put it in a better position to secure additional orders and/or customers, and (iii) its positive growth trajectory with a 3-year core profit CAGR of 19% for FY19- FY22F underpinned by its modular expansion strategy.

Source: AmInvest Research - 28 Aug 2019