ATA IMS eyes 45% contribution from new customers

ATA IMS Bhd is aiming for 40% to 45% of its revenue to be contributed by new customers in two to three years’ time. By growing its business with them alongside that of its key customer, the company hopes to allay fears of concentration risk.

Nevertheless, ATA IMS executive chairman Datuk Seri James Foo stresses in an exclusive interview with The Edge that the company’s dealings with its key customer will continue to expand.

“In the first year, the contribution from the new customers will not be much — just about RM150 million. However, we will see it multiply over the next two to three years because usually customers will only want to start with you on a small scale.

“They would want to see how you perform, your capability, and build a working relationship first. Then, once they are comfortable, there could be more orders,” he says when met at the group’s printed circuit board assembly (PCBA) plant in Johor Baru.

In November last year, ATA IMS announced at an analyst briefing that it had secured five new customers — Sagemcom, Schneider Electric, Swiftlabs, Ecobee and Cricut — for its turnkey manufacturing solutions business.

To manufacture the applications of the new customers, ATA IMS is leasing a new factory in Pasir Gudang with a gross floor area of 250,000 sq ft. This adds to the group’s existing production floor area of 1.26 million sq ft, almost all of which is in Johor.

“We started sourcing for new customers around July last year. Within a few months, we had secured the five new customers. This is because we have a proven track record. When the customers saw our set-up, they gained confidence in our capabilities,” Foo explains.

“Our key customer is a premium brand. The fact that we have been producing for it for so many years shows our capabilities. Our contract with it has become a good reference point for us.”

France-based Sagemcom is a high-value communication solutions provider while Schneider Electric is an energy and automation digital solutions provider. The latter is a Fortune 500 company that recorded a turnover of €25.7 billion in 2018.

For Sagemcom, ATA IMS will be manufacturing two plastic injection mouldings for a customer router product while for Schneider Electric, it will do the final assembly of switches that will be supplied to the Public Works Department.

Swiftlabs produces low power data-transmitting cellular radio for smart city applications while Ecobee makes smart thermostat and light switches for smart home applications. Cricut manufactures smart electronic crafting machines.

In the first half of its financial year ending March 31, 2020 (FY2020), ATA IMS recorded a net profit of RM55.62 million, down 4% year on year. However, its top line grew 39.4% year on year to RM1.77 billion during the period.

ATA IMS attributes the decline in profitability during the period to the higher material content of the new models produced and higher start-up costs for the new assembly lines that went online in the first quarter of FY2020.

Apart from diversifying ATA IMS’ customer base, Foo also intends to inject Microtronics Technology Sdn Bhd — a printed circuit board (PCB) and battery pack assembly business — into the company in FY2021.

With the business part of ATA IMS, the group will have complete electronic manufacturing solutions (EMS) capabilities to offer its existing and potential customers, says Foo, adding that this will help in securing more customers in the future.

Microtronics now operates 16 surface mount technology lines with the capacity to produce 80,000 PCBs a year. It is in the process of adding another two lines by the end of FY2020. The company produces 70% of ATA IMS’ PCB requirements at the moment.

Higher labour costs

Malaysia’s labour costs are expected to rise in the years ahead as the government tries to fulfil an election pledge of a basic salary of RM1,500 per month compared with RM1,200 at present.

When asked how this will affect ATA IMS’ competitiveness in securing contracts from its existing and new customers, Foo says, “Definitely, it will affect some of our customers. From their perspective, they will evaluate the rate of increase in wages. Just like in China, when I was there in 2001, the average salary was US$600 per month. Nowadays, it is close to US$3,000.

“It has increased very fast in China. So, customers have been evaluating the pace of labour cost increments on a yearly basis. That is one of the factors that affect their decision as to where to manufacture their products.”

ATA IMS is also considering setting up operations elsewhere in Southeast Asia. The Philippines, Vietnam and Thailand are some of the beneficiaries when it comes to EMS production in Asia, Foo says.

ATA IMS is still evaluating whether to open shop in another country, he adds, although he acknowledges the fact that the generalised system of preference (GSP) that some of the neighbouring countries enjoy is attractive as it provides tariff rebates of between 7% and 10%.

The Organisation for Economic Cooperation and Development (OECD) countries usually provide GSP to the least developed nations in the world. Those that benefit from the EU’s GSP include the Philippines, Indonesia and Vietnam.

“We are constantly evaluating the possibility of doing businesses outside Malaysia. We are considering Southeast Asia because China is no longer a cheap destination for investments,” says Foo.

“We have to plan carefully before investing in another country. First, we have to understand the government’s policy. How easily can a factory be set up? In some of the countries, the administrative work before production can start takes a very long time.”

ATA IMS closed at RM1.78 last Thursday, valuing it at a trailing four-quarter price-earnings ratio (T4Q PER) of 19.38 times. By comparison, its competitors SKP Resources Bhd and V.S. Industry Bhd were trading at a T4Q PER of 20.96 times and 15.95 times respectively.

All the analysts covering ATA IMS have a “buy” recommendation on it with a consensus target price of RM1.98.