Investment Highlights

• We maintain our HOLD recommendation on ATA IMS (ATA) with a higher fair value of RM2.22/share pegged to a higher CY21F PE of 18x (previously RM1.72/share, CY21F PE of 14x). We keep our forecasts unchanged.

• We have raised our target PE multiple to 18x, in line with our EMS benchmark forward PE. This represents a 2x premium above with its 1-year sector historical forward PE of 16x to reflect the sector’s brightened prospects. The EMS sector is benefitting from the US-China trade war diversion as companies seek to diversify their manufacturing bases to Southeast Asia, accelerated by the Covid-19 pandemic.

• ATA’s 2QFY21 came in within expectations at RM40mil, bringing 1HFY21 core profit to RM54mil after excluding RM16mil mainly from unrealized forex gains. Despite accounting for 42% of our full-year forecasts and 47% of consensus’ estimates respectively, we consider it to be in line. We are still expecting a stronger 2H with normalization of earnings in quarters ahead, as its key customer’s order forecasts remains strong with new customers’ projects commencing during the financial year.

• YoY: 1HFY21 core profit rose marginally by 0.6% due to the exclusion of larger one-off gains of RM16mil (vs. RM1mil in 1HFY20). Gross profit margins remained steady at 6.2% (vs. 6.7% in 1HFY20) despite the impact of factory closures due to the movement control order (MCO) in 1QFY21. Meanwhile, revenue increased by 18% amid higher sales which led to improved operational efficiencies. The group benefited from a lower effective tax rate due to the entitlement to claim Special Reinvestment Allowance (RA) for 2020 and 2021 under the Penjana stimulus package on 5 June 2020.

• QoQ: 2QFY21 core profit was 2.8x higher than 1QFY21, as revenue surged 80% amid strong recovery in sales orders and improved production efficiencies. Workforce capacity was back to 100% vs. previous quarter which was affected by the MCO up till early May 2020 with limited production capacity.

• Key customer pipeline remains strong: The group’s key customer’s projects for 2020 are all on track — personal care product commenced production in early 2020, 2nd product launched in July 2020 as scheduled, while the 3rd product has started production in October 2020 (ahead of schedule) with contribution expected to be seen in 4QFY21.

• Crafting customer updates: ATA started production on the crafting customer’s 1st project in September 2020, while the newly-secured 2nd project for larger cutting machines will begin production in March 2021 – with both projects’ expected annualized revenue to be RM600mil p.a., which we have factored into our forecasts. The group continues to be in active discussion to secure new ODM projects with said customer

• We 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 - 30 Oct 2020