ecovery in the data computing segment on an upcoming new model launch by a customer, and (iii) increased orders from its customer in the optical transceiver space. It will start producing for xFusion, an AIbased data centre customer, in 2QFY24, while another two customers in the same space may come onboard later. We keep our earnings forecasts, TP of RM1.70 and OUTPERFORM call.

We came away from a meeting with NATGATE yesterday feeling positive on its outlook. The key takeaways are as follows:

1. NATGATE has seen a bottom in the recently reported 3QFY23 results and is now realigned back onto a path of strong growth trajectory. The group attributed the softer demand for optical transceivers in the recent 3QFY23 to the relocation of its key customer out from China to Penang. This temporary transition presents significant opportunities for NATGATE, benefiting from higher volume allocation. The current 30% outsourcing to NATGATE by the customer is expected to increase to 70% over the next 18-24 months. To facilitate the move, NATGATE will lease its entire Plant 8 (c.248k sq ft) to the customer that is slated to be completed by end-2023.

2. Orders from the telco segment are rising due to increased demand for military communication devices amid Middle East geopolitical tensions. In addition, demand from the data computing segment is showing signs of meaningful order recovery as its customer is rushing to push out existing models in anticipation to kick start a new model in early 2024. It is also a norm that a launch of a new model typically follows with robust order visibility over the next 12 months.

3. The onboarding of xFusion, an AI-based data centre customer, is currently underway, primarily focusing on final assembly works. Managing the intricate procedure of sourcing AI-related components from the USA, the group is sanguine on initiating a gradual ramp-up in the 2QFY24, which will then involve the PCBA process on top of the final assembly works. Success in securing necessary supplies is expected to attract interest from two additional customers in the same sector, eager to entrust jobs to NATGATE.

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 can 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 - 16 Nov 2023