KUALA LUMPUR: AmInvestment Bank Bhd has upgraded the electronics manufacturing services (EMS) sector recommendation to overweight for the next 12 months from neutral previously.
The investment bank believes there are positive prospects for manufacturers tied to the production of general household products boosted by recent job wins, with the potential to secure additional customers/orders as opportunities arise from the US-China trade war on top of organic growth.
“Our top pick for the sector is ATA IMS Bhd with a target price (TP) of RM2.02 due to its positive prospects arising from it being the purest proxy to the robust growth prospects of its key customers.
“The company’s move to become a vertically integrated player will put it in a better position to secure orders and/or customers,” it said in a research note today.
AmInvestment Bank is also positive on ATA’s move to venture into production for Internet of Things-related products through the securement of its five new customers, namely Sagemcom, Schneider Electric, Swift Labs, ecobee and Cricut.
It also picked VS Industry Bhd (VSI) with a TP of RM1.48 following its recent job wins on printed circuit board assembly orders from a new customer in July 2019 which is forecast to contribute RM200 mil revenue in financial year 2020 (FY20) and a full-assembly customer secured in early October 2019 which will contribute RM100 mil revenue yearly.
In addition, VSI’s agreement with Bissell in March 2019, where the company has dedicated a 160,000 sq ft plant that is equipped with injection moulding facilities, assembly lines, a warehouse and test lab, is expected to contribute around 10% to 23% of VSI’s earnings from FY20 to FY22.
“ATA and VSI are continuing their efforts to secure more customers and/or orders as well as seizing opportunities that arise from the US-China trade war causing diversion of order flows into Southeast Asia.
“In the long term, both companies target their key customers to contribute around 40% to 50% of total group revenue to reduce customer concentration risk,” said AmInvestment Bank.
On downside risks, it said the recommendation for EMS could be downgraded if weakening global economic conditions dampen demand in customers’ products; labour issues arise relating to labour costs and worker shortages; sudden loss or orders and/or key customers; and the overseas operations of certain players worsen if continued deterioration of sales orders plunges further and offsets any cost-saving measures taken.
At 10.33am, ATA’s share price was flat at RM1.77 with 27,300 shares traded, while VSI’s share price was also flat at RM1.34 with 11.97 million shares changing hands. – Bernama