Investment Highlights

• We maintain our HOLD recommendation on ATA IMS (ATA) with a lower fair value of RM1.05/share (previously RM1.59/share), pegged to a lower CY21F PE of 10x (previously 14x), in line with its peer market cap weighted average forward PE.

• Our PE derating is based on expectations of slow recovery in demand for EMS players’ end products as consumer sentiments weaken globally.

• We cut our FY20F–FY22F forecasts by 5–9% to reflect the impact of the movement control order (MCO) on ATA’s operations as well as expectations of lower sales orders from its customers.

• Key updates are as follows:

• Production halted for a month due to the MCO: The production of local EMS players had been halted since 18 March 2020 to contain the Covid-19 outbreak in Malaysia. Despite ATA producing goods for the E&E sector which was a part of the list approved for critical manufacturing sectors during the MCO, the group was not given permission by the Ministry of Trade of Industry (MITI) until 13 April 2020, after nearly a month of closure. This was confirmed by its peer V.S. Industry (HOLD, RM0.83), which gained approval to resume operations around the same time on 10 April 2020. Since the initial 14-day MCO announcement on 18 March 2020, the Malaysian government has extended the MCO twice with the latest extension to end on 28 April 2020.

• Resumption in operations albeit at lower capacity: Following the receipt of approval to resume operations, ATA said that its production capacity had been limited to 25% of its total workforce, as well as being required to comply with certain conditions during the MCO which include Covid-19 containment measures. ATA is appealing to MITI to increase its production capacity, with its peer V.S. Industry having received approval yesterday to raise operations to 50% from 20%.
   
• We continue to like ATA for its longer-term prospects arising from: (i) it being the purest proxy to its key customer’s growth prospects; and (ii) its move towards vertical integration which will put it in a better position to secure orders and/or customers. However, its near-term outlook is clouded by uncertainties relating to Covid-19 which impact endproduct demand for its customers.

Source: AmInvest Research - 23 Apr 2020