Investment Highlights

• We downgrade ATA to SELL from BUY with a lower fair value of RM0.56/share (from an earlier RM2.89/share). Our fair value is now based on its FY23F book value of RM0.58 from an earlier P/E benchmark. This also incorporates a 3% discount to reflect our lower ESG rating of 2 stars (from 3 stars earlier) given resurgent concerns over the group’s labour practices.

• Our lower valuation stems from drastic cuts to our forecasts to reflect the loss of ATA’s single largest customer Dyson, which contributes up to 80% of the group’s revenue.

• We have reversed our earlier profit forecasts to losses of RM13mil for FY22F, RM64mil for FY23F and RM55mil for FY24F. Recall that the labour shortages incident has dragged ATA’s 2QFY22 into losses.

• Following a major manpower shortage crisis and an audit of the company’s labour practices, ATA has announced the receipt of termination notices by Dyson on 3 contracts effective 1 June 2022.

• ATA’s obligations under the contracts include manufacturing and supplying products, components and tooling as well as providing services for and on behalf of Dyson. Until the termination date, Dyson and ATA continue to fully perform their obligations under the contracts.

• The company guided that management is now taking legal counsel on the validity of the notices of termination. However, assuming the realisation of the contract termination with Dyson, we expect the full impact of the withdrawal in FY23F, which would severely impact ATA’s FY23F earnings and beyond.

• We believe that the 7-month notice period could give ATA enough time to replace some of its lost orders with other existing customers who could expand faster with the extra capacity.

• However, we also foresee challenges ahead for the company to secure new orders given its dented reputation and ongoing labour shortage crisis, which is being viewed as an operational risk until a concrete solution emerges.

• In our forecasts, we are reflecting a more conservative scenario with only organic growth from the group’s existing remaining customers, coupled with some small new orders to be secured in FY23F and FY24F.

• We also assume a lower gross profit margin of 2.0–2.5% in FY23–24F (vs. 1HFY22 of 4.4%) from diseconomies of scale as the company’s current low utilisation rate is likely to affect productivity and cost efficiencies. In 2QFY22, ATA’s workforce size shrank by 20% with only a 50% utilisation rate.

• ATA may not be in the most favourable position to negotiate with potential new customers. Hence, we believe ATA’s recovery from the current crisis will be bumpy, exacerbated by the ongoing labour shortage crisis.

Source: AmInvest Research - 26 Nov 2021