Investment Highlights

• We reiterate our SELL call on ATA IMS (ATA) with an unchanged fair value of RM0.29/share. This is based on a 40% discount to FY23F net tangible assets of RM0.52/share. We ascribe a 1-star ESG rating to ATA, discounting our valuation further by 6%.

• ATA’s FY22 core profit of RM8mil came in above our and consensus estimates. However, we maintain our loss forecast for FY23F–FY25F given the termination of contracts with Dyson effective 1 June 2022. Recall that Dyson accounted for 80% of the group’s revenue as at November 2021.

• Our loss forecasts also 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 3 years will only come from existing/remaining customers, which does not provide sufficient economies of scale to remain profitable.

• ATA’s FY22 revenue fell 38% YoY primarily due to lower production volume resulting from the termination of contracts by its customers. The diseconomies of scale further plunged the group’s core net profit by 95% YoY, excluding a litigation provision of RM1.6mil, impairment loss of RM12mil, allowance for slow-moving inventories of RM9.3mil, partially offset by gain on disposal for property, plant and equipment of RM3.6mil.

• On a QoQ basis, contract terminations also compressed the group 4QFY22 revenue by 37% to RM431mil, with a pretax loss of RM41mil, compared to a pretax profit of RM9mil in 3QFY22.

• ATA continues to undertake drastic downsizing measures to reduce cost. Thus far, measures that ATA has been working on include:
  • Reselling excess components and raw materials on hand to its customers and other manufacturers
  • Discussions with landlords to discontinue the leasing of 10 factories and warehouses before the expiry of tenancy agreements
  • Reducing production capacity by selling excess plant and machinery.
• During the quarter, the group entered into material litigation against United Max Construction (United Max), which is claiming RM4mil in compensation from ATA for failing to return vacant possession by the end of the factory tenancy agreement in February 2021. ATA conservatively made FY22 provision of RM1.6mil for the claim, which we have removed to derive our core profit.

• We remain cautious on the outlook for ATA despite efforts to mitigate the damage to its reputation and restore investors/stakeholders’ confidence. We reckon 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 Jun 2022