Investment Highlights

• We upgrade our recommendation on ATA IMS (ATA) to BUY from HOLD with higher forecasts and fair value of RM2.46/share, pegged to CY21F PE of 18x (previously RM2.22/share).

• Our target PE multiple is in line with our EMS benchmark forward PE of 18x, which represents a 2x premium above its 1- year sector historical forward PE of 16x to reflect the sector’s brightened prospects. The EMS sector benefits from companies seeking to diversify their supply chain away from China to Southeast Asia due to rising costs in China, and amid the US-China trade tensions.

• We raise our FY21F–FY23F forecasts by 7-15% to account for higher volume and margin assumptions for its key customer and crafting machine customer which will extend into FY22F, following updates from its 2QFY21 conference call.

• Key takeaways from ATA’s 2QFY21 conference call:
  • Results highlights: 1HFY21 core profit of RM54mil rose marginally by 0.6% YoY after excluding larger-one-off gains of RM16mil mainly from unrealized forex gains. Revenue rose 18% YoY in 1HFY21 due to higher sales from its key customer as the demand for its products is holding up despite the Covid-19 pandemic in markets such as China, where The Economist says has managed a Vshaped recovery, with consumption on the rise. The higher orders led to optimized productivity and improved operational efficiencies for ATA. Meanwhile, the group benefited from a special reinvestment allowance (RA) for 2020 and 2021 under the Penjana stimulus package which led to a lower effective tax rate of 23% in 1HFY21.
  • Key customer order flow remains strong: The outlook for the rest of FY21 remains positive with expectations of a continued strong order momentum. To recap, ATA’s key customer launched three products in 2020: 1st personal care project in March 2020, 2nd project in July 2020 and 3rd project in October 2020 – with the group focusing on ramping up and timely delivery of orders, as well as bidding for new projects to be secured in 2021.
  • Crafting machines customer revenue projections raised: For this customer, ATA started production of its 1st project in September 2020 which is set to increase capacity going into early 2021, while production for its 2nd project for larger cutting machine is slated for early 2021. The expected annualized revenue for these projects has been increased from RM600mil to RM1bil due to better-thanexpected market response for the customer’s products. ATA continues to bid for additional ODM projects with the crafting machine customer.
  • Capacity expansion in Pasir Gudang: The group has 2 new Pasir Gudang facilities, one 228K sq ft factory for assembly of its new customers’ projects and molding which began operations in March 2020, and a new 150K sq ft warehouse which will be in use in 1H2021. Both facilities will be rented in line with the group’s asset light strategy and will increase ATA’s total production and warehouse space by 23% to roughly 1.96bil sq ft. Its Pasir Gudang factory will house its new injection moulding machine site which will be ready by end-2020. 50 new machines will arrive in December 2020 while an additional 35 machines will come in early 2021, bringing the group’s total injection moulding machines to approx. 610 machines (increased by 16%).
  • PCB and battery pack assembly update: Microtronics Sdn Bhd (Microtronics), a related company, currently has 14 surface mount technology (SMT) lines which are fully utilized, with one new additional SMT line set to be delivered in December 2020. Both printed circuit board (PCB) and battery pack assembly are self-sufficient and cater for >95% of ATA’s internal demand. The remainder of orders are still being made to external suppliers for older products and those reaching end-of- product life cycle. On a positive note, in October 2020, Microtronics received ISO13485:2016 certification for PCB and assembly of non-implantable E&E devices for the medical industry. The PCB and battery pack capabilities from Microtronics is set to be injected into ATA by mid-2021, where the certification related to the medical industry is in line with the ATA’s goal for customer diversification into higher margin segments.

• We came away feeling positive on the group’s strong order momentum going into 2HFY21 from its key customer and crafting machine customer, evidenced by higher moulding capacity and capacity expansion into Pasir Gudang to cater for the growth ahead. 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 - 5 Nov 2020