ATA reported a stronger revenue (+35% yoy) and core net profit (+3%) in 2QFY20. While core net profit margin was weaker yoy during the quarter, it continued to improved qoq. The results were within expectations. We expect margins to continue to recover in the coming quarters as the new assembly lines become more efficient. We reiterate our BUY rating on ATA with a higher TP of RM1.95 (from RM1.80) as we roll forward our base year to FY21E and raise our earnings forecasts for FY21-22 given the strong order flow from its key customer.

Revenue Continues to Chart New Highs

ATA’s 2QFY20 revenue grew 35% yoy, mainly driven by higher sales orders from its key customer. Notably, the group has seen an average quarterly revenue growth of 32% yoy in the past 7 consecutive quarters, and revenue for this quarter was a record high. In line with the strong revenue growth, its net profit grew 13% yoy in 2QFY20. Stripping off the exceptional items, core net profit increased 3% to RM31m in 2QFY20. While the core net profit margin was still low at 3.2% in 2QFY20 as compared to 4.3% in 2QFY19 due to higher material content costs and start-up costs for its new lines, it improved from 2.9% in 1QFY20. We believe this was due to better cost and operational efficiencies as the new lines became more efficient.

Margin Recovery Likely on the Way

While 6MFY20 core net profit comprised only 43-44% of the consensus and our full-year estimates, we deem the results as within expectations as we continue to expect a stronger 2HFY20 on the back of margin improvement. We expect the group’s growth to continue to be driven by growing orders from its existing key customer. We see margin improvement on the back of: 1) improving economies of scale and better operating efficiencies on achieving full efficiency as the new assembly lines go into full swing, and 2) higher margins as a result of vertical integration.

Maintain BUY With a Higher TP of RM1.95

We maintain our earnings forecast for FY20 but raise our earnings forecasts by 5-9% for FY21-22 given the strong orders from its key customer. We roll forward our base year to FY21E (FYE 31 March) and reiterate our BUY call on ATA with a higher TP of RM1.95 based on an unchanged target PER of 16x. Downside risks: i) key customer risk; ii) reliance on foreign labour, iii) stock liquidity risk, iv) downturn in the household appliances industry, and v) an economic slowdown

Source: Affin Hwang Research - 22 Nov 2019