Kenanga Research & Investment

Nationgate Holdings - V-Shaped Recovery on the Cards

Publish date: Mon, 04 Mar 2024, 11:15 AM

NATGATE expects a V-shaped recovery upon the completion of the migration of a networking product customer’s operation from China to Penang by May 2024. Meanwhile, its data computing segment will ride on a customer’s new model launch. NATGATE has also been qualified to purchase AI GPUs. We fine-tune down our FY24-25F net profit forecasts by 3% and 2% respectively, trim our TP by 2% to RM1.58 (from RM1.62) but maintain our OUTPERFORM call.

We came away from NATGATE’s post-4QFY23 results briefing feeling upbeat on its prospects. The key takeaway as follows:

1. NATGATE expects a V-shaped recovery (surpassing the FY22 levels) upon the completion of the migration of the operations of a networking and telecommunications product customer from China to Penang by May 2024. Recall, NATGATE reported weak earnings in 4QFY23 due to poor absorption of additional cost incurred from the increased headcount by 400-500 workers in anticipation of the surge in orders from this customer that did not come about as soon as it had expected.

2. It expects a higher loading volume from its data computing division, driven by a new DeFi equipment model recently launched by a customer. While the growing orders may potentially exceed its current capacity, the group will choose to increase shifts rather than expanding the lines to comply with its internal risk management policy that flags customer concentration risk.

3. It has been qualified as an official cloud partner of a well-known US GPU manufacturer, which allows it to procure AI GPUs for its project with xFusion, an AI-based data centre customer. While the group has placed orders for the next 12 months, the lead time could potentially take 6 months or more before the first delivery arrives, cutting it close to its 3QFY24 timeline where it aims to scale up its production with the PCBA process on top of the final assembly works.

Forecasts. We fine-tune down our FY24-25F net profit forecasts by 3% and 2%, respectively.

Valuations. Correspondingly, we tweak our TP down by 2% to RM1.58 (from RM1.62) 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 case. We like NATGATE for its: (i) exposure to the fast-growing industrial and commercial products used in the networking and telecommunication sectors, (ii) 4IR-ready facilities that can take on higher complexity jobs, and (iii) value-added 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 - 4 Mar 2024

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