Despite recording higher revenue (+3% yoy), ATA’s core net profit declined 54% yoy to RM15m in 3QFY20. The results tracked behind both our and consensus’ expectations. The weak performance was mainly dragged by higher-than-expected start-up expenses for new projects, higher material content and tax expenses in 3QFY20. We trim our FY20- 22E earnings forecast by 11-22% to factor in a higher start-up expenses, higher effective tax rate and negative impact from Covid-19. Post-revision, we lower our TP to RM1.75 (from RM2.00). Maintain BUY.

Hit by Start-up Expenses and Production Delay

ATA’s core net profit declined by 54% yoy due to expenses incurred for marketing and recruiting of additional manpower to manage new customers’ turnkey projects as well as the delay of the commencement of mass production for the new personal care product (from September to December 2019). Adding to the woes were higher material contents and the under provision of tax in FY19. On a positive note, while 9MFY20 core net profit came in below expectation, revenue was within – at 77% of our full-year forecast. Revenue grew 3% yoy in 3QFY20, driven by higher sales orders from its key customer.

Potential Risk of Lower Demand and Supply Chain Disruption

While orders from ATA’s key customer remain intact at this juncture, we foresee demand to be affected by the outbreak as China is one of the main growth markets for its key customer. Besides, there is also potential risk of supply chain disruption should the outbreak prolong as c.30% of its components are sourced from China. On a brighter note, the group’s inventory levels are adequate until early-March and it has started to receive some shipments from its suppliers in China.

Maintain BUY With a Lower TP of RM1.75

We trim our FY20-22E earnings forecast by 11-22% to factor in a higher startup expenses to support its new turnkey projects and its key customer’s new products, higher effective tax rate and negative impact from COVID-19. We maintain our BUY call on ATA with a lower TP of RM1.75 (from RM2.00), based on an unchanged 16x FY21E PER. While we were negatively surprised by the weak margin in 3QFY20, we note that the group’s order flows from its key customer remain strong. So far, the group has secured 2 new projects from its key customer, likely to commence mass production in FY21E. Downside risks: i) key customer risk; ii) reliance on foreign labour, iii) higher-than-expected start-up expenses, and iv) an economic slowdown.

Source: Affin Hwang Research - 27 Feb 2020