Investment Highlights

• We maintain our BUY recommendation on ATA IMS (ATA) with a lower fair value of RM1.75/share (previously RM1.84/share), pegged to an FY21F PE of 14x after reducing our FY20F–FY22F forecasts by 5% as we have adjusted margin assumptions in line with guidance.
• We attended ATA’s 1QFY20 results briefing and came away with the following key highlights:
• 1QFY20 results recap: 1QFY20 core profit came in at RM25mil, lower by 20% YoY despite revenue soaring 45% attributed to lower efficiency and productivity amid the festive seasons, newer models having higher material contents and higher startup costs associated with new assembly lines.

• FY20F outlook ahead: The group’s subsequent quarters are expected to improve, with 2QFY20 expected to be stronger than 1QFY20. ATA’s order growth momentum of 15% YoY for its key customer is intact, with the addition of one household product which began production in March 2019 as well as a personal care product targeted to start production in Nov 2019. Margins for 3QFY20 are anticipated to remain sturdy despite commencing the production of the personal care product due to expectations of strong orders. Accounting for the weaker 1QFY20 results, the group guided that full-year PBT margins will be above 4.5%.

• The group managed to secure an additional contract from its key customer, which is likely to only begin production in FY2021. Box-build order volume from its existing customer is expected to remain robust as the addition of new products is anticipated to offset a natural slowdown in some of the key customer’s older product orders which will eventually be reaching their end-ofproduct life cycles.

• New strategic partnership with Swift Labs: Swift Labs specializes in wireless and Internet of Things (IoT) product development and testing services. Through the partnership, ATA aims to extend its capabilities to include IoT and to collaborate with Swift Labs (Canada) on ODM manufacturing in future.

• New customer diversification opportunities arising from the US-China trade war: The group is in the quoting and feedback stage for some of its prospective customers, some of which are IoT-related manufacturing. ATA is looking to the IoT customer segment as products usually consist of a good blend of electronic and mechanical components, and this fits well with the group’s vertically integrated capabilities.

• Update on vertical integration efforts:

o PCBA: Microtronics Technology Sdn Bhd currently has 14 surface-mount technology (SMT) lines catering for ~60% of ATA’s printed circuit board assembly (PCBA) and battery pack requirements. Four lines are expected to be added by end-CY2019. In order to develop self-sufficiency and reduce purchases from external suppliers, the aforementioned PCBA capability will be injected into ATA by mid-CY2021.

o Brush bar and wire harness assembly: ATA has submitted brush bar samples to undergo reliability tests, while its wire harness capability requires certain certifications, and its site is being audited by the key customer. Both capabilities are expected to begin production only in CY2020.

• Capex utilization so far: ATA has utilized ~73% (approx. RM40mil) of its FY20F capex of RM55mil on plastic injection molding machines of different tonnages in its new facility. The group plans to continuously invest in automation to improve its production efficiencies. A summary of the group’s facilities and production space are illustrated in Exhibit 1.

• We reiterate our BUY recommendation on ATA due to its positive prospects arising from: (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 orders and/or customers; and (iii) its positive growth trajectory with a 3-year core profit CAGR of 17% for FY19–FY22F underpinned by its modular expansion strategy.

Source: AmInvest Research - 5 Sept 2019