Investment Highlights

• We reiterate our SELL call on ATA IMS (ATA) with a slightly lower fair value of RM0.29/share (from an earlier RM0.30/share). This is based on a 40% discount on FY23F net tangible assets of RM0.52/share. Our lower valuation stems from a 6% discount from 3% previously due to an ESG rating downgrade to 1 star from 2 stars earlier upon reviewing our ESG metrics.

• ATA’s 9MFY22 came in above our and consensus estimates. However, we maintain our loss forecast for FY22F as labour shortages remain an ongoing concern to the group. Recall that the labour shortages dragged ATA’s 2QFY22 into losses.

• As for FY23F–24F, our loss forecasts stem from concerns regarding the group’s ability to secure fresh orders from new customers. We conservatively assume that the group’s growth over the next 2 years will only come from existing/remaining customers, which does not provide sufficient economies of scale to remain profitable.

• ATA’s 9MFY22 revenue fell 33% YoY primarily due to manpower shortages, which led to underutilization of factory capacity. This resulted in the group’s 9MFY21 core profit plunging 88% YoY to RM13mil.

• QoQ, ATA’s 3QFY22 revenue increased by 15% to RM684mil, driven by the resumption of factory operations since October 2021 following Phase 4 of the National Recovery Plan. Excluding a reversal of TNB legal provision of RM5mil, core net profit managed to just break even in 3QFY22 from a loss of RM11mil in 2QFY22.

• Following the termination of contracts from its largest customer (which accounted for 80% of revenue), the group has undertaken drastic downsizing measures to reduce cost. Thus far, measures that ATA is working on include:

• Reselling 50% of its excess raw materials and components on hand to its customer or other manufacturers.

• Discussions with landlords to discontinue leasing 10 factories and warehouses before the expiry of tenancy agreements.

• We remain cautious on the outlook for ATA despite efforts to mitigate the damage to its reputation and restore investors/stakeholders’ confidence. We view that any concrete progress/results from the proposed solutions can only materialise over the medium term (6–9 months) with no guarantee of a positive outcome.

• As such, we opine that the company’s short-term operational risks remain high (largely stemming from the ongoing manpower shortage crisis, forced labour allegations, potential asset overhang, diseconomies of scales and dented reputation), which intensify the challenges in securing new customers and orders.

Source: AmInvest Research - 1 Mar 2022