NATGATE’s FY22 results exceeded expectations. Net profit climbed 43% thanks to increased orders from the networking and data computing segments, and improved ASP for new networking products. The group anticipates another strong year ahead as a slew of higher-margin NPI transitions into mass production. We raise our FY23F net profit by 16%, lift our TP by 76% to RM1.50 (from RM0.85) and maintain our OUTPERFORM call.

Above expectations. FY22 earnings of RM85.3m (+43.2% YoY) surpassed our forecast and consensus estimate by 13% and 9%, respectively. The variance against our forecast came largely from betterthan-expected margins realised from higher-value products.

Results’ highlights. YoY, FY22 revenue jumped 24% on the back of robust demand coming from the networking segment as well as the data computing segment. Net profit increased at a quicker pace of 43% as the group benefited from positive operating leverage with the transitioning of several new product introductions (NPI) from prototyping to mass production stage. As a result, gross profit margin rose 3.3ppts to 16.9% while net profit margin inched 1.2ppts to 9.0%.

Charting another strong year. 1QFY23, being one of its seasonally weaker quarters (as with 4QFY22), is expected to show flattish performance. However, this will normally be followed by an aggressive ramp-up in the subsequent seasonally strongest quarters. The group expects the positive momentum to continue into FY23 as more NPIs are beginning to enter the mass production stage, especially with newer models of optical transceiver modules (capable of higher speed and distance) which yields higher margin. Margins are expected to further improve as the group is able to raise ASPs for these products which will offset the impact of higher electricity cost that took effect since January 2023.

Forecasts. We raise our FY23F earnings by 16% and introduce FY24F numbers.

We raise our TP by 76% to RM1.50 (from RM0.85) based on 23x FY24F PER (from 18x FY23F PER previously), representing 30% premium to peers’ forward mean (see Page 2). We believe the higher valuation is justified by the group’s favourable exposure to the fast-growing networking product and its advanced capabilities which yield better margins and increase customer stickiness. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment thesis. We like NATGATE for its: (i) exposure to the fastgrowing industrial and commercial products used in the networking and telecommunication sectors, (ii) 4IR-ready facilities that is able to take on higher complexity jobs, and (iii) added-value services such as chip-on-board (COB) that enhance customer stickiness and yield better margins. Maintain OUTPERFORM.

Risks to our call include: (i) heavy reliance on the networking segment which contributes c.70% of group revenue, (ii) competition from foreign EMS players that have presence in Malaysia, and (iii) adverse impact from component shortage which could delay delivery schedule.

Source: Kenanga Research - 24 Feb 2023