Investment Highlights

• We downgrade our BUY call on ATA IMS (ATA) to HOLD albeit with a higher fair value of RM2.59/share, pegged to a rolled forward FY22F PE of 18x which is in line with the sector’s historical forward PE (previously RM2.46/share, CY21F PE of 18x). We maintain our forecasts.

• Our target PE multiple is in line with our EMS benchmark forward PE of 18x, which represents a 2x premium above its 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 USChina trade tensions.

• Meet expectations: ATA’s 3QFY21 core profit of RM54mil, brings 9MFY21 core profit to RM107mil after excluding RM17mil exceptional gains mainly due to RM15mil unrealized forex gains and RM2mil insurance claims relating to a fire incident. We consider the 9MFY21 results to be in line, although accounting for 78% and 82% of our and consensus estimates respectively, as 2Q and 3Q are seasonally stronger quarters due to production related to year-end sales of its end customers’ products.

• YoY: 9MFY21 core profit soared by 49% due to: (i) 24% higher revenue as sales orders for its key customer rose; (ii) higher gross profit margin of 6.9% (vs. 6.3% in 9MFY20) due to improved operational efficiencies; and (iii) lower effective tax rate benefitting from eligibility to claim the special reinvestment allowance under the Penjana Stimulus for 2020 and 2021.

• QoQ: 3QFY21 revenue fell 12% vs. 2QFY21’s strong recovery in revenue following limited production capacity seen in 1QFY21 due to the movement control order (MCO). However, core profit climbed 24% due to better operational efficiencies and better product mix.

• 4Q outlook: We believe its 4Q will normalize with lower profits QoQ due to a slight seasonal effect – 4Q accounted for 14– 18% of full-year profits for the past 3 financial years.

• Customer updates: The group’s 3rd project for its main customer started production in late 2020, with meaningful contribution expected in FY22. We do not have the details on 2021 bids for its key customer although we have allocated job wins in our forecasts beforehand. Updates on securement of 2021 jobs might be shared in an upcoming conference call.

• Meanwhile, the group’s 2nd project to produce larger cutting machines for its crafting machine customer will begin production in March 2021 and we expect contribution to kick in starting FY22F. The group is making “good progress” in its active discussion to secure a new ODM project.

• We continue to like ATA but we believe that the stock is fairly priced at current valuations. ATA’s positive prospects arise from: (i) it being the purest proxy to its key customer’s growth prospects; (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 - 24 Feb 2021