No slowdown in ATA IMS earnings at all — chairman

This article first appeared in The Edge Financial Daily, on March 25, 2019.
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KUALA LUMPUR: Earnings disappointment has not been that rare for many quarters on Bursa Malaysia due to a combination of reasons, including external headwinds.

But it is unlikely the case at Johor-based ATA IMS Bhd (formerly known as Denko Industrial Corp Bhd).

Its executive chairman Datuk Seri James Foo is not just confident that the electronic manufacturing services (EMS) player is on track to chart record earnings for the financial year ending March 31, 2019 (FY19), he is expecting the growth momentum to continue in FY20 thanks to higher sales volume from its existing customers.

The outlook is “very good” — that is how Foo described when asked about the company’s prospects.

He is expecting a minimum of 20% revenue growth in FY20.

“I believe we are one of the companies that are still seeing very strong growth in our business ... in both top line and bottom line,” Foo told The Edge Financial Daily.

“We are really in one of the bright spots in Malaysia now, because many sectors in Malaysia now are [finding it very] challenging to see this kind of growth ... Even [for] next year, we are expecting to see this kind of growth,” said Foo, who believes that perseverance in meeting customers’ requirements is the way to maintain sustainable growth.

Foo’s confident of a record-breaking FY19 is not wishful thinking, judging by ATA IMS’ performance for the nine-month period ended Dec 31, 2018 (9MFY19). The company’s cumulative net profit grew 18.7% year-on-year to RM91.73 million for 9MFY19, which is a whisker away from its annual profit of RM92.51 million in FY18.

Revenue for 9MFY19 exceeded RM2 billion mark. It came in 23% higher at RM2.11 billion against RM1.71 billion a year ago.

ATA IMS’ stellar set of financial results did not go unnoticed. Its share price has been on a steady climb in the past two years after the reverse takeover exercise.

It is currently hovering near the record high of RM1.88. The stock closed at RM1.77 last Friday, giving it a market capitalisation of RM2.13 billion.

 

Expansionary mode

According to Bloomberg data, there are three research houses covering the stock with two “buy” calls and one “hold” rating.

The consensus target price of ATA IMS is pegged at RM1.94.

Foo, who is optimistic about the company’s and industry’s outlook, sees ATA IMS to be likely ranked as one of the world’s Top 30 EMS companies.

“The ranking list is not out yet, but it is likely that we should be in the Top 30 in the world,” said Foo.

UOB Kay Hian Research analyst Desmond Chong forecasts that ATA IMS’ net profit will be at RM124 million and RM165 million in FY19 and FY20 respectively, on revenue of RM2.75 billion and RM3.35 billion respectively.

“As opposed to other listed EMS players, ATA IMS is still in an aggressive expansionary mode, with at least two additional final assembly lines to commence this year to cater to new products. All in all, this would anchor a two-year net profit compound annual growth rate (CAGR) of 33% (or PEG of 0.7 times),” he said.

ATA IMS is upping its ante for prospective contract wins, which Chong notices. He pointed out that the company’s accredited ISO on quality specification for the car industry supply chain will give it an upper hand in clinching automotive-related contracts.

ATA IMS completed its placement of 57.35 million shares and raised RM103.23 million fresh capital, of which about a quarter will be used to set up new facilities and infrastructure for new production lines. The balance will be kept for working capital.

For FY20, the company has earmarked some RM50 million capital expenditure, which will be funded via internally-generated funds and bank borrowings.

Foo said it will be used for renovation of facilities and new machines to cater to the production of two new products for its anchor customer.

He noted that one of the new products is a fan, while he declined to reveal the other one.

 

Overseas markets

Besides, Foo is also mindful of cost management knowing that cost efficiency will put ATA IMS in a better position to win fresh contracts.

To do that, the company will be manufacturing its own wire harness and brush bar assembly, according to Foo, explaining that such vertical integration should “enhance [its] margin slightly”.

“We have been buying [these two items] from external source. And now we are going to manufacture them on our own. For the wire harness, we are buying [it for] about RM100 million annually, while for the brush bar, it’s about RM130 million,” said Foo.

With some 90% of revenue derived from its anchor client currently, which Foo declined to reveal because of the signing of the non-disclosure agreement, he expects that ATA IMS will continue to ride on the anchor client’s “very strong growth trajectory”.

Given its current capabilities and existing facilities, Foo said, ATA IMS is ready to expand its customer base to reduce is overreliance on a single customer, adding that the company will be looking for innovative customers that allow the company to ride on their sustainable long-term growth.

Looking ahead, the company is exploring the possibility of expanding its business operations into overseas markets. But Foo is tight-lipped on the details of the plan, saying that announcement will be made once it is confirmed.

ATA IMS currently exports to some 70 countries.