This article first appeared in The Edge Financial Daily on April 8, 2019

ATA IMS Bhd
(April 5, RM1.74)
Upgrade to buy from hold with a fair value of RM2.07: ATA IMS Bhd has recently taken a private placement of 5% of its issued share capital to raise RM103 million, of which 74% of the proceeds will be used for working capital and 24% for capital expenditure for its new facilities and production lines. The group has guided that its financial year 2020 forecast (FY20F) capital expenditure will be approximately RM50 million.

The group has added on four new capabilities, which are printed circuit board assembly (PCBA), battery pack, wire harness and brush bar assembly in order to be self-sufficient and reduce reliance on external suppliers. Furthermore, being vertically-integrated will put ATA in a better position to secure additional orders and/or customers.

The group currently has eight surface-mount technology (SMT) lines on the private side and plans to increase this to 18 lines by the second half of calender year 2019. The SMT lines producing PCBA and battery pack components are expected to be injected into the group by mid-2021.

The estimated total savings when ATA is fully self-sufficient in the four new capabilities in the next two to three years are RM60 million to RM70 million per annum, enhancing margins by 2% to 3%.

ATA has secured additional contracts to manufacture new products for its key customer, adding two assembly lines to 14 from 12 by FY20F and increasing its production space by an additional 110,000 sq ft (+10%).

Of the two lines, one line is for a household product, which commenced production in March 2019, while the other line for a personal care product is expected to commence by October 2019. We note that the group’s International Organization for Standardization accreditation for the automotive industry supply chain puts ATA in a better position to secure automotive-related contracts from its key customer.

Besides its 187,000-sq ft Jalan Hasil factory and 116,000-sq ft new warehouse, the group has a recently completed spray facility and a new plastic injection facility. The plastic injection facility is expected to be completed in June 2019, and will house 58 machines of different tonnages.  

ATA has secured a contract to produce Zimplistic’s product, Rotimatic, a flatbread maker with Internet of Things (IoT) capabilities. The group has allocated one assembly line for Zimplistic but the contribution is only expected to be negligible at 1% to 2% of group revenue. Although the production volume is low, ATA is keen to explore the potential of the IoT capabilities for the future.

We are positive on these recent developments and recommend a “buy” on ATA due to: i) it being the purest proxy for growth prospects for its key customer (by virtue of ATA being the key customer’s largest contract manufacturer producing the broadest range of products); ii) its move to become a vertically integrated player; and iii) its positive growth trajectory with a two-year compound annual growth rate of 13% from FY19F to FY21F, underpinned by its modular expansion strategy. — AmInvestment Bank, April 5