Investment Highlights

• We maintain our BUY call but with a lowered fair value (FV) of RM2.89/share (from RM3.34/share previously). This is pegged to our revised FY23F forecast. PE of 18x is unchanged based on 3-year historical average. There is no adjustment to our FV based on a 3-star ESG rating as appraised by us (Exhibit 2).

• Our lower valuation stems from cuts to our earnings forecasts by 53% for FY22F, 14% for FY23F and 19% for FY24F to reflect the near-term manpower shortages challenge face by ATA, which has affected the productivity of the company, and in turn, lowered margins from diseconomies of scale. We are also reflecting a more conservative assumption for our FY24F revenue now to account for a potentially slower capacity expansion following the recovery from its current labour crisis.

• We believe the situation will gradually ease as the economies and borders around the world reopen. Hence, the group’s long-term prospects remain positive, supported by sustainable strong demand for its floor and personal care products.

• ATA’s 1HFY22 core net profit of RM10.9mil came in below expectations, accounting for only 6% and 7% of our earlier full-year forecast and the full-year consensus estimates respectively. We believe the key variance came largely from the lower-than-expected sales, impacted by the reimposition of lockdowns and restriction in workforce capacity, coupled with labour shortages, which led to diseconomies of scale.

• ATA’s 1HFY22 turnover shrank by 29% YoY mainly attributed to the reimposition of lockdowns and a 60% cap on the workforce capacity mandated by the authorities to curb the spread of Covid-19, as well as manpower shortages experienced by the group, which resulted in under-utilisation of factory capacity. This caused 1HFY22 core net profit to plunge by 79% YoY.

• QoQ, ATA’s turnover declined by 33% from labour shortages during the quarter given the freeze in foreign worker recruitment which caused challenges for the group in replacing old foreign workers who have returned to their home countries during the lockdown. Not helping either is the workforce capacity restriction imposed by the government since May 2021. This reversed 1QFY22 core net profit of RM23mil to a 2QFY22 loss of RM12mil.

• ATA is in the midst of sourcing new factories with plans to expand its current factory floor space by more than 10% in anticipation of more orders over the longer term. Meanwhile, the group has almost achieved full vaccination for its entire workforce and was allowed to resume full operations since October 2021. We gather that ATA will not be affected by the Prosperity Tax as subsidiaries within ATA will not generate FY22F earnings exceeding the RM100mil taxable income benchmark.

• We continue to like ATA for its medium-to-longer term positive prospects arising from: (i) being the purest proxy to its main customer’s growth prospects; (ii) its efforts towards vertical integration; and (iii) customer diversification opportunities arising from the US-China trade war diversion which supports the group’s modular expansion strategy.

Source: AmInvest Research - 15 Nov 2021