Investment Highlights

We maintain our HOLD recommendation on ATA IMS (ATA) with an unchanged fair value of RM1.59/share, pegged to a CY21F PE of 14x.

We fine-tune our FY20F forecasts downwards by 3% amid guidance on the impact of the coronavirus disease 2019 (Covid-19) on ATA’s 4Q results due to supply chain disruptions, while keeping our FY21F–FY22F forecasts unchanged.

We had a conference call with management post-3QFY20 results and came away with the following key highlights:

• Results summary: 3QFY20 core profit fared beneath expectations at RM20mil, tumbling 35% QoQ due to lower sales orders from its key customer.
• Group GP margin was 1.7ppt lower QoQ at 5.5% (vs. 2QFY20’s 7.2%) due to: i) lower sales causing suboptimal capacity utilization and resulting in the group enjoying less economies of scale; ii) higher material content of its key customer’s newer models; iii) higher marketing expenses; and iv) manpower recruitment costs for new projects relating to its five new customers and for its key customer’s personal care product that had undergone reengineering changes.

• Update on key customer’s latest projects: The personal care product has commenced production in mid-January 2020 following a 2-month delay after undergoing reengineering changes. Meanwhile, the other new project secured is targeted to begin production in August 2020.

• Update on vertical integration:

1. Brush bar: ATA’s key customer has decided that 70% of the group’s requirements will be produced in-house and the remaining 30% would still be purchased from external suppliers. Currently, ATA is producing 30% of its requirements internally, with three machines. The group plans to add two more machines to cater to the remaining 40% of in-house requirements.
2. Wire harness: Production for its main customer has been delayed as the customer has an existing agreement with another supplier for the capability. With ongoing negotiations, ATA is unable to confirm on when the wire harness production will start but will update accordingly
3. PCBA & battery pack: Microtronics Sdn Bhd currently has 14 surface mount technology (SMT) lines, with two more lines being installed. The 16 lines would be able to cater to 75–80% of ATA’s requirements. The group said that this capability would also not be fully self-sufficient as some technical issues arose causing some of the SMT lines to not be transferred to ATA as they will be reaching end of life soon. The injection of Microtronic’s PCBA and battery pack assembly into ATA is still slated for mid-2021.

• Covid-19 impact: As factories resume operations, the gradual return of workforce in China has caused supply of materials to be impacted as the factories are not yet running at full capacity. The group reiterated that it has raw material inventory to last up till mid-March 2020. The second half of the month will be critical to access the situation and ATA’s key customer has been focusing its efforts on minimizing the impact to operations and the supply chain.

• 4Q and FY21 outlook: The Covid-19 outbreak has disrupted its supply chain and will potentially impact the demand of its customers’ products due to weaker sentiments, and thus also ATA’s sales orders. As such, 4Q is expected to show similar results to 3Q. Meanwhile, the group had guided for FY21F PBT margins to be around ~4%, which we have already factored into our forecasts.

We continue to like ATA due to: (i) it being the purest proxy to the robust growth prospects; (ii) its move to become a verticallyintegrated player will put it in a better position secure more orders and/or customers; and (iii) its 3-year profit CAGR of 8% for FY19–FY22F underpinned by its modular expansion strategy. However, we believe that the company is fairly valued at its current price

Source: AmInvest Research - 3 Mar 2020