Coming quarters expected to improve for ATA IMS

TheEdge Fri, Sep 06, 2019 10:46am - 4 years View Original


ATA IMS Bhd
(Sept 5, RM1.35)
Maintain buy with a lower fair value (FV) of RM1.75 (previously RM1.84):
We maintain our “buy” recommendation on ATA IMS Bhd with a lower FV of RM1.75 a share (from RM1.84 a share), pegged at a forecast financial year 2021 (FY21F) price-earnings ratio of 14 times after reducing our FY20 to FY22 forecasts by 5% as we adjusted our margin assumptions in line with guidance.

We attended ATA’s first quarter (1Q) of FY20 results briefing and came away with some key highlights.

Its 1QFY20 core profit came in at RM25 million, lower by 20% year-on-year (y-o-y) despite revenue soaring 45%, attributable to lower efficiency and productivity amid the festive season, newer models having higher material contents and higher start-up costs associated with new assembly lines.

The group’s subsequent quarters are expected to improve, with 2QFY20 expected to be stronger than 1QFY20. ATA’s order growth momentum of 15% y-o-y for its key customer is intact, with the addition of one household product which began production in March as well as a personal care product targeted for production from November. Margins for 3QFY20 are anticipated to remain sturdy despite commencing the production of the personal care product due to expectations of strong orders. Having already accounted for the weak 1QFY20 results, the group guided that its full-year profit before tax margin will be above 4.5%.

The group managed to secure an additional contract from the key customer, which is likely to begin production in FY21. The box-build order volume from its existing customer is expected to remain robust as the addition of new products is anticipated to offset a natural slowdown in some of the key customer’s older product orders reaching their end-of-product life cycles.

Through a new strategic partnership with Canada’s Swift Labs, which specialises in wireless and Internet of Things (IoT) product development and testing services, ATA aims to extend its capabilities to include the IoT and collaborate with Swift Labs for original design manufacturing in the future.

There are also new customer diversification opportunities arising from the US-China trade war. The group is in the quoting and feedback stage for some prospective customers, some of which are IoT-related manufacturers. ATA is looking at the IoT customer segment as the products usually consist of a good blend of electronic and mechanical components, fitting well with the group’s vertically integrated capabilities.

As for ATA’s vertical integration efforts, Microtronics Technology Sdn Bhd currently has 14 surface-mount technology lines catering for approximately 60% of ATA’s printed circuit board assembly (PCBA) and battery pack requirements. Four lines are expected to be added by end-calendar year 2019 (CY19). To develop self-sufficiency and reduce purchases from external suppliers, the aforementioned PCBA capability will be injected into ATA by mid-CY21.

Meanwhile, ATA has submitted brush bar samples to undergo reliability tests, while its wire harness capability requires certain certifications, with its site being audited by the key customer. Production of both is expected to begin in CY20.

So far, ATA has utilised approximately 73% (RM40 million) of its FY20 capital expenditure of RM55 million for plastic injection molding machines of different tonnages in its new facility. The group plans to invest continuously in automation to improve its production efficiencies.

We reiterate our “buy” recommendation on ATA due to its positive prospects arising from: i) it being the purest proxy for the key customer’s growth prospects; ii) its move to become a vertically integrated player that would improve margins and put it in a better position to secure orders and/or customers; and iii) its positive growth trajectory with a three-year core profit compound annual growth rate of 17% for FY19F to FY22F, underpinned by its modular expansion strategy. — AmInvestment Bank, Sept 5

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