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Thursday, March 26, 2020

EMS companies face more downside from prolonged production halt

Thursday, 26 Mar 20209:33 AM MYT

KUALA LUMPUR: Electronics manufacturing services companies (EMS) are likely to see further earnings erosion following the extension of the government's movement control order, which has halted production at their facilities.

According to Affin Hwang Capital research, a 28-day factory closure would negatively impact EMS players' earnings as they would continue to incur fixed costs such as rental and staff costs.

"Even if they are allowed to resume production, they are required to operate at a minimal workforce (capped at 50%), according to National Security Council (NSC). This would result in lower production and adversely impact their earnings," it added.

Among stocks under its coverage, Affin Hwang has sell calls on ATA (55 sen) and VS Industry (60 sen), and downgraded MTAG (20 sen) to a sell call.

It maintained its underweight call on the sector, having slashed its earnings forecasts on the respective stocks by 9% to 22%, in addition to an earlier reduction of 16% to 36%.

"We believe the weak consumer sentiment and global economic slowdown are likely to dampen discretionary spending, and the EMS players are not likely to be spared as they are mainly involved in the manufacturing of consumer products such as household appliances, coffee machines and pool cleaners," it said.

The EMS players are awaiting the Ministry of International Trade and Industry's clarification and approval to resume production as it is not clear which types of E&E are allowed to operate.

While Affin Hwang remains positive on the sector's long-term outlook, it cautioned that any further extension of the MCO would further limit production and pose downside risk to the already weak earnings for 2020.

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