NATGATE’s 1HFY23 results met expectations. It is poised for a stronger 2H on production ramp-up for existing customers and the onboarding of new Chinese customers in the AI-related fields. It is expanding to capitalise on a new wave of China-based vendors. We fine-tune up our FY23F net profit by 5% and raise that of FY24F by 15%. We lift our TP by 25% to RM1.75 (from RM1.40) and reiterate our OUTPERFORM call.

Within expectations. NATGATE’s 1HFY23 net profit of RM31.4m accounted for 30% and 28% of our full-year forecast and the full-year consensus estimate, respectively. However, we deem the result within expectations as we expect a stronger 2H on production ramp-up for existing customers and the onboarding of new ones.

Results’ highlights. QoQ, NATGATE’s 2QFY23 revenue experienced a marginal dip of 8.7% which was well guided by the management. During the quarter, the group saw lower contributions from the networking and telco segment (-18.7%) and data computing division (-24.8%) which offset better contributions from the industrial instruments (+5.8%) and semiconductor (+13.9%) segments. Consequently, its net profit came off by 15.8% which resulted in a cumulative 1HFY24 net profit of RM31.4m after adding back RM3.84m worth of one-off listing expenses.

Production ramp-up in 2H. NATGATE is positioned for a stronger 2HFY23 as it ramps up production to make up for the short fall in 1HFY23. This is due to its key customers in the networking and telco segment deferring order delivery schedules to the 2H of the year. Additionally, NATGATE has initiated a new project with a Chinese client related to data centre equipment supporting artificial intelligence (AI). With the growing demand for AI, particularly in China, the company is attracting prospective customers seeking its manufacturing expertise and access to critical components. As such, the group is aggressively expanding its floor space by building its Plant 8 (248k sq ft) that will be ready by end-2023, bringing its total floor space to c.951k sq ft.

Forecasts. We fine-tune up our FY23F net profit but raise that of FY24F by 15% to reflect its stronger prospects.

We also raise our TP by 25% to RM1.75 (from RM1.40) based on a higher 25x (from 23x) FY24F PER, as we maintain a 30% premium to peers’ forward mean which has trended upwards. 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 - 30 Aug 2023