RHB maintains ‘Overweight’ on EMS sector despite ATA woes

by S BIRRUNTHA / pic by TMR FILE 

ATA IMS Bhd’s shares look set to face further selling pressure today after trading yesterday saw no fresh buying interest from investors scared away from the counter after Dyson Ltd decided to cut ties with the company last week. 

The downward trajectory in ATA’s shares was stalled yesterday after its shares were bound to lower limit price of 52 sen after two trading days of hitting limit down on the Dyson’s contract termination news. 

“The lack of fresh buyers yesterday is indicating the shares are set to see selling pressure tomorrow,” said an analyst with a local broker. The stock has already lost over RM2 billion in market value since last Thursday. 

There were some 5.12 million ATA shares traded yesterday, nevertheless, after the company denied any forced labour allegations and stated it was seeking legal advice on the matter. 

RHB Investment Bank Bhd has, however, maintained its ‘Overweight’ call on the electronics manufacturing service (EMS) sector despite the termination of three contracts by Dyson Operations Pte Ltd and Dyson Manufacturing Sdn Bhd with ATA’s wholly-owned unit, ATA Industrial (M) Sdn Bhd. 

Its analyst Soong Wei Siang stated that the broker remains positive on the EMS sector is near-term to mid-term as it expects incumbents to gain market share from the Dyson’s decision. 

“While we think the key customer may start to reduce its concentrated exposure in Malaysia, its fast growth rate and entrenched fundamentals of the local EMS industry should continue to support robust job orders and earnings growth. 

“Enhanced efforts in maintaining high labour standards and ambition to diversify revenue streams will be key to sustaining the positive prospects, in our view,” he said in a recent research note. 

RHB is of the view that the contract termination may prompt Dyson to deconcentrate its exposure and dependence on Malaysian suppliers over a longer-term. 

Soong added that the heavy reliance on migrant workers and potential emergence of labour issues that could pose risks to the key customer’s brand image and reputation. 

RHB believes the robust job flows for both VS Industry Bhd and SKP Resources Bhd from companies like Dyson will continue. 

“We believe a total exit is unlikely at this juncture given the established supply chain in place as well as the expertise and multi-year track record of the Malaysia-based contract manufacturers,” he added. 

Should Dyson’s contract peers like VS Industry and SKP Resources continue, RHB estimates VS Industry’s financial year 2023 forecast (FY23F) and SKP Resources’ FY23F earnings could be lifted by 12% and 25% should the jobs be distributed evenly. 

“We understand that VS Industry presently has spare capacity to absorb the new jobs but SKP Resources’ capacity is fully occupied until the expansion of new capacity by the end of 2022,” the analyst wrote. 

The contract termination with ATA is on June 1, 2022. ATA has denied the forced labour allegations.