ATA IMS contracts termination deemed short-term positive but long-term negative

KUALA LUMPUR, Nov 26 ― RHB Research said the termination of three contracts by Dyson Operations Pte Ltd and Dyson Manufacturing Sdn Bhd with ATA IMS Bhd’s wholly-owned unit, ATA Industrial (M) Sdn Bhd while deemed short-term positive for incumbents, may prompt key customer to deconcentrate its exposure and dependence on Malaysian suppliers over the longer term.

In a research note today, the brokerage said the move could have been considered following 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.

“That said, we believe the key customer’s fast growth pace, after taking into account the diversification, is still strong enough to underpin the robust job flows for both VS Industry and SKP Resources to prosper.

“In addition, 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,” it added.

On Thursday, electronics manufacturing service (EMS) provider ATA IMS said Dyson Operations and Dyson Manufacturing had issued the notices of termination without cause pursuant to the terms of the respective contracts.

The company will continue to fully perform its respective obligations under the contracts until the effective date of termination on June 1, 2022.

RHB Research maintains its “overweight” call on the EMS sector.

“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,” it added.

The brokerage believes the termination would be positive for the EMS sector in near- to mid-term, assuming the ensuing reallocation of ATA’s production lines to other existing contract manufacturers.

As of 10.25am, ATA IMS continued its downtrend, shedding 30 sen or 36.59 per cent to 52 sen, with 18.06 million shares traded. ― Bernama