ATA IMS (AIB) reported a weak of results: FY20 core net profit fell by 29% yoy to RM79m. The higher-than-expected start-up expenses and higher material content in 3QFY20, exacerbated by the production halt from the Covid-19 Movement Control Order (MCO) in 4QFY20, were the main culprits for the weaker FY20 performance, in our view. All in, the results were within our expectations but below the street’s. Maintain BUY with an unchanged TP of RM1.40. AIB is our sector and country top pick.

4QFY20 Earnings Weaker Sequentially on MCO

As expected, AIB’s 4QFY20 core net profit dropped by 30% qoq to RM10m (-39% yoy) on weaker revenue (-17% qoq) and weaker EBITDA margin (-0.9ppts qoq to 3.2%), largely due to the production halt during the MCO imposed by the Malaysian government from March 18, 2020.

FY20 Core Net Profit Fell by 29% Due to Weaker 2HFY20 Performance

AIB’s FY20 core net profit was lower by 29% yoy to RM79m, due to soft 2HFY20 results. Besides the MCO-affected 4QFY20 results mentioned above, AIB’s 3QFY20 results were hit by multiple negative factors: i) higher-than-expected start-up expenses for new projects, ii) higher material content and iii) higher effective tax rate. All in, the results were below street but within our expectations, accounting for 85% and 101% of our respective estimates.

Orders From Key Customer Remains Intact; New Customers Growing Well

AIB is gradually ramping its production to pre-MCO utilization levels of 90% as they rush to fulfil orders from key customers. We are comforted that the order flow from its key customer remains largely intact, and the group is on track to commence production for the two new products in FY21E. Besides the key customer, AIB indicated that projects from 5 new customers (ex. Swiftlabs) are progressing decently at different stages: production for Sagemcom and Schneider is already ongoing whereas Cricut and Ecobee will commence production by July 2020. Elsewhere, we are positive on AIB’s ability to clinch new contracts – the group was recently awarded as an approved supplier for a new customer that specialises in household products (does not compete directly with its key customer).

Maintain BUY

We maintain our BUY rating and TP of RM1.40, pending the upcoming results briefing. We continue to like AIB as the group remains the purest proxy for the prominent global household brand’s resilient prospects and a potential beneficiary of the ongoing trade war. 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 - 30 Jun 2020