Investment Highlights

• We maintain our HOLD recommendation on ATA IMS (ATA) with a higher fair value of RM1.72/share, pegged to a CY21F PE of 14x (previously RM1.47/share). We raise our FY21F–FY23F forecasts by 10–18% on account of: (i) higher contribution from its main customer and new crafting customer from securing new projects; and (ii) margin improvements expected following better cost controls and higher operational efficiencies following the strong order flow post-movement control order (MCO).

• Key takeaways from ATA’s 1QFY21 conference call:
  • Results summary: 1QFY21 core profit of RM14mil dropped 36% YoY mainly due to the impact of factory closures during the MCO up till early May. Despite April being loss-making, the group was able to catch up in the two months after, with core profit rising 38% QoQ and registering a PBT margin of 3% (from 0.5% in the previous quarter) due to resumption of strong order flow, cost-cutting measures and lower effective tax as it benefitted from a special reinvestment allowance under the Penjana stimulus package.
  • Main customer pipeline on track: Its main customer’s new product was launched in July 2020 as scheduled, while an additional model scheduled for end-CY2020 production is also on track. Overall, strong order momentum is seen for the main customer, with utilization back to at least pre-MCO levels.
  • 2nd project awarded for crafting customer: ATA will start production for the customer’s first project in September 2020 and has been awarded with a second project to produce larger-sized cutting machines in early CY2021.
    The expected annualized revenue for both projects is ~RM600mil with expectations of a five-fold increase in production volume, which we have factored into our forecasts. The group is also in active discussion for new projects with ODM capability with the same customer.
  • Updates on PCBA and battery pack: PCBA and battery pack production has reached self-sufficiency, producing 95% and 100% of ATA’s internal demand. Currently having 14 surface mount technology (SMT) lines, two more lines are due to be added in December 2020.
    Furthermore, two customers have been secured where PCBA will be produced for an IoT solution and GPSenabled dog collar. Plans to inject the capabilities into ATA are still intact and targeted for end-FY21.
  • Going into mask production: The group set up a mask production facility with its first production line for in-house usage, while it plans to bring in a second line. ATA targets to produce 6mil masks monthly and is in the midst of getting the relevant certifications and licences to produce medical-grade surgical masks. The group foresees that masks will contribute to a new revenue stream leveraging ATA’s strength on filtration products and is planning to distribute the masks via its subsidiary Lean Teik Soon Sdn Bhd, a wholesaler/retailer of foodstuff and consumer goods.
  • Update on facilities and capacity expansion: Its Pasir Gudang factory has been operational since April 2020 and will be used to house new customer projects. It has a plastic injection molding site expected to be ready by November 2020. Meanwhile, the group is acquiring 70 plastic injection molding machines and aims to add another 50 machines in CY2021 to cater for the increase in demand.
  • Fully-vertically integrated business model: ATA seeks to differentiate itself from its competitors through its focus on design and technical offerings by adding value to customers’ product developments and shortening the time to market. The group will continue to ride on this edge to expand its customer base.
• Overall, we came away feeling optimistic from the group’s updates and continue to like ATA due to its positive prospects. Nevertheless, we believe that the stock is fairly priced. ATA’s positive prospects arise from: (i) it being the purest proxy to its key customer’s growth prospects being the largest contract manufacturer producing the broadest product range; (ii) its efforts towards being vertically integrated; (iii) its customer diversification opportunities ahead from the US-China trade war diversion supported by its modular expansion strategy.

Source: AmInvest Research - 27 Aug 2020