NATGATE’s 1QFY23 net profit met expectations. The group is currently in final discussions with various potential customers in the data computing and networking segments from China, with onboarding expected in 2HFY23. We keep our forecasts, TP of RM1.50 and OUTPERFORM call.

Within expectations. NATGATE’s 1QFY23 net profit of RM17.1m accounted for only 15% and 16% of our full-year forecast and the full-year consensus estimate respectively. However, we deem the result within expectations as we anticipate stronger quarters ahead.

Results’ highlights. YoY, in accordance with the group's commentary in its result announcement on Bursa (in the absence of historical quarterly numbers), its 1QFY23 net profit of RM17.1m (after adding back RM3.79m worth of listing expenses) marginally increased by 3% compared to 1QFY22.

QoQ, 1QFY23 revenue dropped by 48%, primarily due to reduced contributions from the networking and telco segment (-43%), offsetting gains in the industrial instrument (16%) and data computing (13%) segments. Furthermore, the reported quarter period typically experiences shorter working days during the Chinese New Year break. As a result, net profit also declined 43%.

Anticipating further improvements. It had guided for a weak 1QFY23, followed by an aggressive ramp-up in the subsequent seasonally strongest quarters. It is currently in final discussions with various potential customers in the data computing and networking segments from China, with onboarding expected in 2HFY23.

Forecasts. Maintained

We also keep our TP of RM1.50 based on 23x FY24F PER, representing 30% premium to peers’ forward mean. 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 - 25 May 2023