Investment Highlights

• We maintain our BUY recommendation on ATA IMS (ATA) with unchanged forecasts but higher fair value of RM2.02/share (previously RM1.75/share), pegged to a rolled-forward CY21F PE of 14x.

• ATA’s 2QFY20 core profit came in line with expectations at RM31mil, bringing 1HFY20 core profit to RM56mil. The results account for 45% of both our full-year forecasts and consensus’ estimates. We maintain our forecasts as we anticipate 2HFY20 results to be slightly better than 1HFY20.

• 1HFY20 core profit declined 4% YoY despite revenue increasing mainly due to higher material contents of newer models produced and higher start-up costs for newer assembly lines that came onstream in 1QFY20. We believe the new lines were for the production of a household product which began in March 2019. Revenue rose 35% YoY owing to higher box-build orders from its key customer due to the group producing a broader range of products.

• On a QoQ basis, 2QFY20 saw a 26% higher PBT and 12% higher revenue, which we believe was due to an improvement in efficiency compared to the previous quarter when margins were impacted by festive seasons.

• Update on product assembly lines: ATA’s March 2019 household product line is seeing a stabilization in its efficiency while its personal care product line is starting production (midNovember 2019) with meaningful contribution expected 4QFY20 onwards. We note the expectation of initial startup costs and inefficiencies associated with the new line but have factored this into our forecasts.

• For its vertical integration efforts, we gathered that Microtronics Technology Sdn Bhd currently still has 14 surfacemount technology (SMT) lines for its printed circuit board assembly (PCBA) and battery pack assembly, catering for 60% of ATA’s internal requirements. The group targets to increase its lines to 18 by end-FY2020.

• Progress of customer diversification efforts: ATA has been actively looking to diversify its customer base and is in various stages of discussion with several prospects. The group hints at progress in its efforts and we expect to gather further details on the status of negotiations from the briefing.

• We continue to like ATA due to its positive prospects arising from: (i) it being the purest proxy to the growth prospect of its key customer, (ii) its move to become a vertically-integrated player will put it in a better position to secure orders and/or customers, and (iii) its 3-year profit CAGR of 17% for FY19- FY22F underpinned by its modular expansion strategy

Source: AmInvest Research - 22 Nov 2019