Kenanga Research & Investment

NationGate Holdings - 3QFY23 Earnings Improve QoQ

Publish date: Wed, 15 Nov 2023, 09:36 AM

NATGATE’s 9MFY23 results met expectations. We are unperturbed by the slight delays in the production ramp-up in its networking and telco segment, pending the relocation of the production base of its key customer from China to Penang. Meanwhile, the onboarding of new Chinese customers in the AI-related fields is underway with contributions from 2QCY24. We keep our forecasts, TP of RM1.70 and OUTPERFORM call.

Within expectations. NATGATE’s 9MFY23 net profit of RM45.6m accounted for only 64% and 65% of our full-year forecast and the fullyear consensus estimate, respectively. However, we deem the results within expectations as we expect a bumper 4Q.

Results’ highlights. YoY, NATGATE’s 9MFY23 revenue declined by 36.2% due to a 55.3% top line contraction at its network and telco segment. The temporary hiccup had been very well guided by the company. It was due to its key customer currently relocating out from China to Penang, affecting the ramp-up of the production of new optical transceiver models. Thankfully, the decline was partially cushioned by an uptick in orders from the data computing segment (+13.5%) as well a multi-fold increase in demand from the consumer segment (+496%), albeit from a low base.

Keeping up the pace. NATGATE is confident that the positive earnings momentum in 3QFY23 will be extended into 4QFY23. The group is taking on the production of a broader range of products of its key customer specialising in optical transceivers, as the customer relocates its base from China to Penang. This is at the expense of the customer’s China-based contract manufacturers. At present, the customer outsources 30% of its contract manufacturing to NATGATE, with the balance 70% to its China-based contract manufacturers. However, this is set to reverse over the next 18-24 months. In addition, the onboarding of a data centre customer, xFusion, is underway with plans to initiate a gradual production ramp-up in 2QCY24, involving the PCBA process.

Forecasts. Maintained

We keep our TP of RM1.70 based on an unchanged 25x FY24F PER. This represents a 30% premium to peers’ forward mean, justified by the group’s favourable exposure to the fast-growing networking product segment and its advanced capabilities which yield better margins as well as enhancing 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 - 15 Nov 2023

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