Investment Highlights

• We downgrade our recommendation on ATA IMS (ATA) to UNDERWEIGHT from HOLD, while our fair value is subsequently lowered to RM0.98/share (previously RM1.05/share), pegged to an unchanged CY21F PE of 10x.

• We are cutting our FY21F–FY22F forecasts by 4–16% to account for the gestation period for its new customers’ products leading to margin impact.

• ATA’s 4QFY20 core profit of RM10mill fell beneath expectations, bringing FY20 core profit to RM79mil. This is after excluding an exceptional loss of RM0.5mil mainly from net forex losses. The results missed ours and consensus’ full-year forecasts by 16% and 15% respectively.

• YoY: FY20 core profit declined 31% due to: (i) lower margins due to higher material contents and expenses related to marketing and additional manpower recruitment for its new customers’ projects; and (ii) higher effective tax rate of 27% (rose 0.7ppt) as some expenses were being disallowed for tax purposes. This was despite seeing a 15% rise in revenue due to higher sales orders from its key customer.

• QoQ: 4QFY20 core profit tumbled 22% in tandem with a 17% decline in revenue as the group’s factories saw closures during the movement control order (MCO) effective 18 March 2020.

• Covid-19 impact: ATA’s production was halted after the announcement of the MCO until mid-April 2020 where the group was allowed to resume operations at an initial limited capacity of 25% of its total workforce. The group expects the improvement in its earnings within the next two quarters after adjusting its operations in line with Covid-19 containment measures and cost controls.

• We expect to gather more updates on the group’s key customer and new customers’ order flow, progress of its vertical integration efforts as well as outlook from management from its upcoming results conference call.

• We continue to like ATA due to its longer-term prospects but we believe that weaker demand of its customers’ end products due to Covid-19 affecting global sentiments will impact the group’s short-term performance. ATA’s positive prospects arise from: (i) it being the purest proxy to its key customer growth prospects; and (ii) its move towards being a vertically-integrated player which will put it in a better position to secure more orders and/or customers.

Source: AmInvest Research - 30 Jun 2020