UOB Kay Hian Research has downgraded the prospect of Malaysia’s electronics manufacturing services (EMS) industry to “market weight” (from “overweight” previously) on concerns over what it described as “systemic issues sweeping across the board”.
The EMS sector has not been spared from the industry-wide component shortages and COVID-19 disruption, chiefly the 60% workforce restriction which has somehow affected the sector’s 3Q 2021 earnings even as such restriction was gradually lifted in stages starting from end-August.
“While sector investability erodes – with it being more vulnerable in times of COVID-19 disruption (high labour intensity) – the shortfall is counterbalanced by key customers’ encouraging loadings, ramp-up of trade diversion-related orders as well as reasonable valuations,” observed analyst Desmond Chong in an EMS sector update.
Of the three EMS players under its radar, UOB Kay Hian Research regarded ATA IMS Bhd as having experienced the full brunt of 60% workforce restriction, COVID-19 disruption and manpower shortages which resulted in the company recording its first-ever quarterly loss.
“(ATA IMS is) worst hit by manpower shortages given the frozen recruitment of foreign workers since 2020 as well as workers returning back to their home countries,” contended the research house.
“While there is no product pull-out from the group, there could be orders being temporarily diverted to other contract manufacturers. (The company is) expected to register muted earnings in FY6/2022 as the blip could persist in the near term.”
Reiterating its “hold” rating on ATA IMS with a target price of RM2.08, UOB Kay Hian Research, however, brushed aside concerns of renowned migrant worker rights specialist (Andy Hall) having filed a petition with the US Customs and Border Protection (CBP) to investigate ATA IMS.
“Subsequently, the company’s management has refuted the claims and provided feedback to all of its customers,” the research house pointed out.
“While such accusations raise concerns about the authority imposing restrictions on all EMS players’ product exports to the US, we believe such a possibility is remote, as most EMS players under our coverage (i) prioritise labour welfare as seen in the past; (ii) have stepped up initiatives consistently to improve their labour practices.”
Aside from ATA IMS, UOB Kay Hian Research maintained its “buy” rating on two other EMS players, namely SKP Resources Bhd (target price lowered to RM2.05 from RM2.10 previously) and V.S. Industry Bhd (target price lowered to RM1.80 from RM1.86 previously)
“While SKP is no exception, we believe its profitability-oriented business model could partially negate the impact. We expect it to report decent results sequentially on the back of its main customer’s continuous order loadings,” justified the research house.
“For V.S. Industry, while we expect its 1H FY7/2022 sales to be temporarily side-lined by component shortages (highlighted in briefing) given its wide customer exposure, lucrative margins and order replenishment from new/existing customers could support structural growth beyond here.” – Nov 18, 2021
