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Tough times ahead for ATAIMS (8176): ATA IMS BHD

DESPITE rising demand for electrical goods as people spend more time at home during the pandemic, Johor-based electronic manufacturing services (EMS) company ATA IMS Bhd is facing a challenging future after losing its major customer, Dyson, and seeing its reputation take a hit amid allegations of forced labour.

Analysts covering the stock have largely downgraded their calls on ATA as a result of the announcement last week by Dyson that it is cutting ties with the Johor-based EMS company.

On Nov 25, ATA announced that it had received notices of termination of its contract manufacturing agreements with Dyson Operations and Dyson Manufacturing effective June 1, 2022. The termination of the contract came on the back of an audit of ATA’s operations by Dyson.

“This is a grim development, in our view, as Dyson historically accounted for 81% to 88% of ATA’s revenue,” Nagulan Ravi, an analyst at CGS-CIMB Research, who covers the stock, writes in a note last Friday.

Meanwhile, AmInvestment Bank says in a note last Friday that while the seven-month notice period could give ATA enough time to replace some of its lost orders with other existing customers, the research firm foresees challenges ahead for the group in securing new orders given its dented reputation.

Losing more than 80% of its revenue would have a major impact on any company and with its reputation dented in an environment of heightened awareness of workers’ rights, it could be a huge task for ATA to replace the lost revenue before June next year.

While ATA has been diversifying its customer base over the past few years, the addition of new customers has done little to reduce Dyson’s contribution to its overall revenue and profitability.

The allegation of forced labour at ATA has been around since May this year, when news broke that the US Customs and Border Protection (CBP) confirmed that it is investigating the group over the allegations.

ATA denied the accusations at that time, saying it adheres to international best practices relating to the workplace, community and marketplace. It also said that it strictly follows Malaysian labour laws and regulations.

This is the position ATA has maintained until today, even as its major customer Dyson has decided to cut ties with the group following its audit of ATA’s operations. ATA did not disclose the findings of the audit to this writer when requested.

On Friday, ATA announced that it had taken immediate action by appointing a firm of consultants to review and verify the summary of the audit and take remediation steps if necessary.

It added that it has also appointed a law firm “to conduct an independent review of the allegations of physical abuse by the former ATA worker”, as reported by Reuters.

“The preliminary findings of the independent law firm indicate that the allegations may be unjustified. The detailed report and findings will be finalised soon. The company will make a further press release when the independent report is completed,” it says in the Nov 26 announcement.

The labour practices of local and foreign companies operating in Malaysia have been under scrutiny in recent years.

On Nov 23, Reuters reported that investigators from the US Department of Homeland Security had interviewed workers at Goodyear Tire & Rubber Co’s Malaysian factory about their working and living conditions.

On Oct 21, Supermax Corp Bhd announced that its representatives in the US are in touch with the CBP to obtain more clarity and information on the Withhold Release Order (WRO) issued on the group’s rubber gloves.

In a statement to Bursa Malaysia dated Oct 21, Supermax states that it has embarked on its undertaking to meet International Labour Organisation (ILO) standards on migrant workers since 2019, and that it is surprised that the CBP has not given due consideration to the fact that corrective steps have started, and improvements made to labour welfare.

Other companies, such as Top Glove Corp Bhd, FGV Holdings Bhd and Sime Darby Plantation Bhd, have also had their products banned from entering the US on issues related to forced labour. The import ban on Top Glove’s products was lifted in September.

It is also worth noting that in June 2021, the US Department of State downgraded Malaysia to Tier 3 — which is the worst ranking — in its annual Trafficking in Persons (TIP) Report, from the Tier 2 Watch List designation in the previous report. Violations in Malaysia run from sex trafficking to debt bondage.

However, ATA’s loss of its biggest customer is a major blow given Dyson’s contribution to the group.

Meanwhile, analysts believe ATA’s loss could be other EMS’ gain, as Dyson and other brands could be diverting their orders to other players.

“Among the EMS companies we cover, we think both SKP Resources [Bhd] and VS [Industry Bhd] could be key beneficiaries of Dyson’s trade flow away from ATA in the medium term.

“Nevertheless, we prefer VS as our top pick in view of its diversified business model, given the potentially rising trend of major clients diversifying their contract manufacturers,” says Nagulan of CGS-CIMB Research in last Friday’s report.

ATA’s share price has been plunging since Nov 15, even before news that Dyson had terminated its contracts with the group surfaced. The weakness could be due to speculation over its problems with Dyson, but on Nov 12, ATA released a poor set of financial results for its second quarter ended Sept 30, 2021 — a net loss of RM11.17 million compared to a net profit of RM52.3 million in the previous corresponding period.

The net loss was attributed to the shortage of manpower due to the government’s foreign worker recruitment freeze since June last year.

Between Nov 12 and Nov 26, ATA’s share price fell 79.8% to 52 sen apiece as a result of the double whammy of reporting a net loss and Dyson’s termination of contract. While ATA will still have another seven months with Dyson, it is almost certain that its FY2022 results will be lower than those in FY2021.

“ATA may not be in the most favourable position to negotiate with potential new customers. Hence, we believe ATA’s recovery from the current crisis will be bumpy, exacerbated by the ongoing labour shortage crisis,” AmInvestment says in the note.

http://www.theedgemarkets.com/article/tough-times-ahead-ata-ims

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