PROSPECTS are still positive for the electronics manufacturing services (EMS) sector amid expectations of strong order flow from multiple customers supported by capacity expansion plans.
For now, the sector has been a beneficiary as companies diversify their supply chains away from China and into Southeast Asia, leading to the securement of higher orders and/or new customers.
As such, the pullback in prices of EMS stocks following recent news flow presents a window of opportunity for investors, according to AmBank Research.
Currently, the research house has an “overweight” outlook on the sector but may downgrade the sector to “neutral/underweight” for the following reasons:
- COVID-19 weakens global economic conditions which could potentially dampen demand in customers’ products, especially if vaccine progress is delayed;
- Arising labour issues relating to labour costs and worker shortages;
- Sudden loss or orders and/or key customers; and
- Worsening performance of overseas operations due to longer-than-expected recovery in sales orders.
Zooming in on ATA IMS Bhd, the research house foresees order forecasts to remain strong across the company’s multiple customer base despite disruptions brought about by the COVId-19 pandemic.
“Furthermore, the said customer (referring to a major client) aims to double its product portfolio by 2025, expanding its existing product categories as well as venturing into new areas such as in artificial intelligence, robotics, and batteries,” revealed analyst Dalilah Fairoz in a sector update.
“We believe this would benefit ATA due to the group’s position as the main customer’s largest contract manufacturer globally, producing the broadest range of products.”
All-in-all, AmResearch maintained its “buy” rating on ATA IMS with a target price of RM3.34 due to its:
- Role as the purest proxy to its main customer’s growth prospects by virtue of being its largest contract manufacturer;
- Efforts towards being vertically integrated; and
- Customer diversification efforts driven by strong order momentum for both its key customer and other customers which is supported by the group’s modular expansion strategy.
“The group has a three-year profit CAGR (compound annual growth rate) of 22% for FY2021–FY2024F,” projected AmResearch. “We prefer ATA IMS as the recent correction in its share price presents an opportunity to accumulate the stock.”
At 11.10am, ATA IMS was up 10 sen or 3.77% to RM2.75 with 769,900 shares traded, thus valuing the company at RM3.31 bil. – June 16, 2021