THE latest legal claims pursued by former ATA IMS Bhd’s worker against UK-based household appliance manufacturer Dyson for extensive labour violation could trigger a long-drawn battle which that will overshadow sentiment on the electronic manufacturing service (EMS) provider.
Dyson is currently ATA IMS’ main customer until the latter’s production contract expires on June 1 following a termination notice on Nov 24 last year.
As Dyson remains committed to invest massively, UOB Kay Hian Research expects industry peers with proven track records to stand to benefit by different magnitudes.
“Assuming RM3.6 bil worth of orders given out evenly to five other contract manufacturers, each could get around RM750 mil worth of orders,” opined analyst Desmond Chong in a technology sector update focusing on the EMS industry.
“Based on our back-of-the-envelope calculation, should this order quantum be secured by SKP Resources Bhd and VS Industry Bhd in FY2023 individually, the earnings potential could be RM45 mil (accretion of 25%/12% for SKP’s/VS Industry’s FY2023 net profit).
According to UOB Kay Hian Research, the structural shortfalls pertaining to the industry’s labour practices have partially hindered investor participation following issues highlighted by migrant worker rights specialists.
“The affected EMS players have been proactively engaging independent parties to resolve the issues,” observed the research house.
“SKP has held positive and constructive discussions with right specialists to resolve the shortfalls while VS Industry has appointed an independent third-party to review its labour practices for migrant workers hired through the recalibration programme after constructive discussions with worker rights specialists.”
Based on UOB Kay Hian’s channel checks, local EMS players are still receiving many enquiries from new customers for production transfers.
“If not for the workforce constraint, most of the EMS players could have benefitted more from this imminent structural shift,” reckoned the research house. “At this juncture, local companies have turned selective on new job opportunities and allocated priorities to products with sustainable demand and margins.”
While the EMS sector’s investability has been eroded by the COVID-19 pandemic and more stringent worker welfare practices, it is not all doom and gloom for players who are able to stand out from their peers.
“Re-rating catalysts at the company level could come from key customers’ encouraging loadings, ramp-up of trade diversion-related orders as well as reasonable valuations,” noted UOB Kay Hian Research.
“VS Industry is our top pick as it offers a better investment proposition than peers due to its exposure to strategic customers and as the clear winner of the trade diversion. We also like SKP as it could be the prime beneficiary from the shortfall of orders ramp-up from other contract manufacturers.”
All-in-all, UOB Kay Hian Research retained its “sell” rating on ATA IMS with an unchanged target price of 52 sen but reiterated its “buy” call on both SKP and VS Industry with unchanged target prices of M2.30 and RM1.90 respectively. – Feb 16, 2022
