Affin Hwang Capital Research Highlights

ATA IMS - Bags 5 New Customers

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Publish date: Tue, 26 Nov 2019, 07:06 PM
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This blog publishes research highlights from Affin Hwang Capital Research.

We attended ATA’s 2QFY20 results briefing yesterday and remain positive on the group’s growth prospects. ATA’s ability on securing 5 new customers in less than a year is a testament of its ability and shows the customers’ confidence in the group. These wins also further diversify ATA’s customer mix and will likely help boost investor sentiment. We reiterate our BUY rating on ATA with a higher TP of RM2.00 (from RM1.95) as we raise our earnings for FY21-22E to factor in the contribution from the new customers.

5 New Customers in the Bag…

ATA announced that it has been awarded plastic injection molding and final assembly projects by 5 new multinational European, Canadian and US-based customers, namely Sagemcom, Schneider Electric, Swift Labs, ecobee and Cricut. While the quantum of the volume is not certain at the moment as ATA is still in the discussion stage with the customers, the group estimates revenue contribution of c.RM150-200m from these new customers in FY21E. To cater for this, ATA has rented a new manufacturing site and expects to commence production for all these five new customers early next year.

… and More to Come

While the contribution is minimal (3-4% to the group’s revenue) in the first year, we believe there is more upside once ATA gains its customers’ confidence and builds the relationship with the customers. Besides, the applications of these new customers’ products are very wide and hence have high potential for ATA to grab a pie and ride on the growth potential, especially in the area of IoT. Moreover, despite already securing five new customers, ATA indicated that it will continue to focus on new customer diversification, which should further reduce customer concentration risk.

Reiterating Our BUY Call With a Higher TP of RM2.00

We maintain our earnings for FY20E but raise those for FY21-22E by 3- 4% to factor in the contribution from the five new customers. We reiterate our BUY call on ATA with a higher 12-month TP of RM2.00 (previously RM1.95), based on an unchanged target PER of 16x applied to our FY21E EPS. Going forward, we continue to expect the group’s growth to be driven by healthy sales orders from both its existing key customer and new customers, and margin improvement on the back of better efficiencies. Downside risks: i) key customer risk; ii) reliance on foreign labour, iii) stock liquidity risk, iv) downturn in household appliances industry, and v) economic slowdown

Growth Momentum Remains Intact

We attended ATA’s 2QFY20 results briefing yesterday, hosted by Dato’ Sri James and the management team. The briefing was well attended by over 70 analysts and fund managers. Key takeaways from the meeting included updates for its project pipeline from its key customer and the announcement of 5 new customers.

Recap on 2QFY20 Results

To recap, ATA achieved its highest quarterly revenue in 2QFY20 (+35% yoy), mainly driven by higher overall sales orders from its key customer, and not merely from the new line that started in March. In view of the volume visibility, ATA expects 2HFY20 growth momentum to be intact. In terms of core net profit margin, while it 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. The margin recovery was mainly due to better efficiencies and higher yield on new production lines as the new lines are running at more efficient rate.

Margin recovery likely on the way, on the back of better efficiencies and vertical integration

We continue to expect gradual 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) vertical integration. ATA has started production for its brush-bar assembly and plans to increase capacity and be 100% self-sufficient by 4Q FY20. Meanwhile, wire harness is expected to start production in 4Q FY20 following the scheduled audit by it key customer. The wire harness will also be involved in the production for new customer projects. With the wire harness and brush bar produced in-house, this will save on the group’s average annual purchases of about RM230m from external suppliers and the cost savings arising should eventually enhance its margins and bottom line.

Key Customer’s Project Pipeline Remain Healthy

Currently, ATA has 3 new projects in the pipeline with its key customer, which should continue to drive the group’s growth momentum. Of the 3 new projects, the new personal care product and light product are expected to commence production next month (December 2019), while the new floor-care product is expected to commence production in April 2020. All these 3 new projects have yet to be commercially launched at this juncture.

PCB and Battery Pack Assemblies – Working Towards Self-sufficiency

Microtronics Technology Sdn Bhd (MTSB), which was separately established prior to the reverse takeover exercise by ATA’s major shareholders and which is also part of the management team, involved in printed-circuit-board (PCB) assembly and battery-pack assembly has turned profitable with PBT of RM7m in FY19 (FYE 30 September). Currently it has 14 surface-mount technology (SMT) lines, which are able to fulfil around 75% of ATA’s internal PCB and battery-pack requirements. It plans to increase this to 16 lines early next year, with a target to be 100% self-sufficient in 4Q FY20. The divisions are expected to be fully integrated into the listed ATA group in CY21.

Key Customer’s Products Selling Well in China

The key customer maintains a strong foothold in China as seen from the sales performance during the recent 2019 Singles Day Event. According to reports on JD.com, i) the sales of the key customer’s floor-care product from midnight 12am to 1am (in just an hour) exceeded its entire day sales at the 2018 Singles Day, ii) sales of its air treatment product doubled yoy, and personal care products sold more than 20,000 units in 10 mins.

Into Turnkey Manufacturing

Unveiling 5 New Customers

ATA announced that it has secured 5 new multinational European, Canadian and US-based customers which is involved in different industries, namely Sagemcom, Schneider Electric, Swift Labs, ecobee and Cricut. The production for these 5 new customers are expected to commence in CY20E, and to collectively contribute RM150-200m to ATA’s revenue, or approximately 3-4% of the group’s revenue in FY21E. While we conservatively forecast RM150m and RM250m as a start for the contribution from these five new customers in FY21E and FY22E, respectively, we believe there is more upside once the group gains its customers’ confidence and build the relationship with the customers. Moreover, the applications of these new customers’ products are very wide and, hence, have high potential for ATA to grab a pie and ride on the customers’ growth potential.

Leasing a New Manufacturing Plant to Cater for the New Customers

ATA has rented a new site with a built-up area of 250,000 sq. ft. which was dedicated for plastic injection molding, final assembly and warehouse for its new customers, and has recently secured permits to bring in around 800 workers to support the growth. The group expects to incur RM50m in capex for these new customers. These five new customers are expected to take up 30-40% of the new rented site in the first year, and potentially increase further once the customers have the confidence in the group’s quality and delivery.

Start-up Cost Likely Offset by High Margin as Turnkey Manufacturer

While the commencement of production for the new customers would likely result in higher initial start-up costs, management expects to maintain PBT margins of 4-5% in FY21E as it expects the initial start-up cost to be offset by higher margins as a turnkey manufacturer. Moreover, the applications of these new customers’ products are very wide and hence have high potential for ATA to grab a pie and ride on the customers’ growth potential.

More in the Pipeline

In addition to these 5 new customers, ATA is also in discussion with other prospective customers, with preference towards Internet of Things (IoT) related opportunities. In securing new customers, ATA has committed that it will not be involved in any competing products especially those that are similar to its key customer’s product. Going forward, the group targets to reduce its reliance on its key customer to less than half of its total revenue.

Outlook Remains Favorable, Maintain BUY With Higher TP of RM2.00

On the whole, we continue to expect the group’s growth to continue to be driven by healthy sales orders from both its existing key customer and new customers, and expect margin improvement on the back of better efficiencies, higher yield on new production lines and vertical integration. We maintain our earnings forecast for FY20E but raise those for FY21-22E by 3-4% to factor in the contribution from the five new customers. Downside risks: i) key customer risk; ii) reliance on foreign labour, iii) stock liquidity risk, iv) downturn in household appliances industry, and v) economic slowdown.

Source: Affin Hwang Research - 26 Nov 2019

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