ATA IMS sees selling pressure after flagging FY23 revenue drop on severed Dyson ties

ATA IMS sees selling pressure after flagging FY23 revenue drop on severed Dyson ties
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KUALA LUMPUR (Nov 30): Shares in ATA IMS Bhd faced selling pressure on Tuesday (Nov 30) after the group projected another 40% drop in revenue for the financial year ending March 31, 2023 (FY23), following the termination of its contracts with Dyson amid allegations of forced labour.

The counter slipped as much as 14 sen or 26.92% to 38 sen on Tuesday, before paring some losses to settle at 45 sen, still down seven sen or 13.46%.

The counter, which was the most actively traded stock, saw 930.72 million shares traded.

The counter had fallen 82.49% from RM2.57 on Nov 12, when it announced a net loss of RM11.17 million for the second quarter ended Sept 30, 2021 (2QFY22) — compared with a net profit of RM52.29 million a year ago — with RM2.55 billion in market capitalisation wiped off in the past three weeks.

ATA IMS told a bourse filing on Monday that cost-cutting measures will be undertaken in response to the termination of contracts with Dyson and that the group is working towards maintaining profitability by lowering costs to ensure sustainability. Dyson was the largest customer of the company, contributing 80% of the company's revenue.

Besides the 40% drop in FY23 revenue, ATA IMS also forecast that its FY22 revenue will fall 30% due to the impact of the movement control order and labour shortages.

“The major financial impact would be the impairment test of the goodwill on consolidation of RM76.5 million, a discounted cash flow, and a sensitivity test has been performed on the new projection with the termination of the customer's contracts. The company is of the view that there is no material impairment on the goodwill on consolidation, provided that new customers continue to load the company with new orders,” it said.

Meanwhile, the group said it was only provided with a summary of the audit report on its labour practices following an on-site investigation, in which the findings were inconclusive. It also highlighted the auditors’ view that the findings are “easily remediable with the commitment of the company’s management” and suggested that the parties involved discuss the findings in detail and develop a comprehensive strategy to address the issues.

In a note on Tuesday, AmInvestment Bank Research kept its "sell" call on ATA IMS and revised its fair value down to 30 sen from 56 sen.

“Our change in valuation largely stems from concerns over an asset overhang after the loss of ATA IMS’ major customer (which accounts for 80% of the group’s sales and recently terminated its contracts with the company), as well as potential goodwill impairment,” the research house said, adding that it remains cautions on ATA IMS' outlook.

“While efforts have been made to mitigate the damage to its reputation and recoup investors/stakeholders’ confidence, we reckon any concrete progress/results from the proposed solutions can only be seen over the medium term (six to nine months), with no guarantee of a positive outcome.

“As such, we opine that the company’s short-term operational risks remain high (largely stemming from the ongoing manpower shortage crisis, forced labour allegations, potential asset overhang, diseconomies of scales and its dented reputation), which intensify the challenges in securing new customers and orders,” the research house said.

As such, it did not share the company’s optimistic post-June 2022 guidance of a profit before tax margin of 5%.

It maintained its loss forecasts for FY22 to FY24, reflecting only organic growth from the group’s existing remaining customers, coupled with some small new orders to be secured in FY23 and FY24 at a gross profit margin of 2% to 2.5% in FY23 to FY24 (versus 4.4% in the first half ended Sept 30, 2021 or 1HFY22) from diseconomies of scale.

“In our view, ATA IMS may not be in the most favourable position to negotiate with potential new customers. Hence, we believe ATA IMS’ recovery from the current crisis will be bumpy, exacerbated by the ongoing labour shortage crisis,” the research house added.

Read also:
ATA IMS expects another 40% drop in revenue for FY23 amid Dyson termination

Surin Murugiah