Investment Highlights

• We maintain our BUY recommendation on ATA IMS (ATA) with a lower fair value of RM3.34/share, pegged to an FY23F PE of 18x (previously RM3.45/share). We make no changes to its share price to reflect a 3-star ESG rating as appraised by us (Exhibit 3).

• We maintain our FY21F forecasts but trim our FY22F– FY23F forecasts by 3-6% to factor in the potential impact of tightened movement control order (MCO) restrictions, given the high incidence of Covid-19 cases locally and fears regarding spread of coronavirus variants within the community which could impact production efficiency. However, we also note that Covid-19 vaccination programmes are being rolled out.

• We joined an online briefing with ATA and came away with the following key updates:
   
  • Denies forced labour allegations: ATA rejects allegations circulating that it has been using forced labour as the company complies strictly with Malaysian labour laws. Furthermore, foreign worker recruitments also comply with international standards whereby a zero recruitment cost policy is in place where foreign workers are not required to pay any third-party or agent fees as the group also ensures that its recruitment agents undergo due diligence to comply with such practices.
    
    Additionally, all workers are paid above minimum wage and overtime (OT) work is done on a voluntary basis with compulsory rest days in place. Hostel accommodation is provided for its foreign labour and is regularly audited by its key customers, global retailers, and external independent auditors. ATA has a SEDEX membership and OHSAS 18000 certification which ensure its practices are in adherence with internationally recognized standards.
     
  • Changes under MCO 3.0: As Malaysia grapples with rising Covid-19 restrictions, the whole country has been placed under MCO 3.0 from 12 May to 7 June 2021. The government then decided to tighten MCO 3.0 SOPs by restricting 40% of private sector staff to work from home. As such, ATA is only allowed to have 60% of its workforce production capacity during the period which we anticipate would affect 1QFY22 performance. Recall that in March 2020 (MCO 1.0), ATA’s production was halted for approximately a month until it was allowed to resume operations gradually at 25%, 50% and later back to full workforce capacity in early May 2020. The group shared that it had been able to make up for the order backlogs last year.
    
    However, we note that transmission of newer Covid-19 variants poses a larger risk of spread this time around and an extension to MCO 3.0 seems likely at this juncture with a longer extension posing a larger risk to earnings. We have thus trimmed our forecasts to take into account this uncertainty.
     
  • Planning to expand capacity further: ATA is working with some local developers to build another 200K sqft factory for future use to cater for growth in orders from its current and new customers. The group did not share on the capex allocation for this facility. 
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  • After factoring potential impact from MCO 3.0, we view that the correction in ATA’s share price presents an opportunity to accumulate the stock. We continue to like ATA for its medium-to-longer term positive prospects arising from: (i) it being the purest proxy to its main customer’s growth prospects; (ii) its efforts towards being vertically integrated; and (iii) customer diversification opportunities arising from the US-China trade war diversion which is supported by the group’s modular expansion strategy.

Source: AmInvest Research - 25 May 2021