NATGATE’s 1QFY24 results met expectations. Its 1QFY24 core net profit jumped 40% as orders from its key client in the networking segment resumed after its relocation from China. NATGATE has begun the production of AI servers which will be ramped up in 2HFY24. We raise FY25F earnings forecast by 19%, lift TP by 30% to RM2.06 (from RM1.58) and maintain our OUTPERFORM call.

NATGATE’s 1QFY24 core net profit of RM20.4m accounted for only 16% and 15% of our full-year forecast and the full-year consensus estimate, respectively. However, we deem the results within expectation given the seasonally weak 1Q.

YoY, NATGATE’s 1QFY24 revenue jumped 31.5%, driven by a strong increase in deliveries across all product segments. The top three products (c.88% of group revenue) — networking and telco (+27.5%), industrial (+33.3%), and data computing (+73.4%) — saw robust growth. The networking and telco segment, contributing c.52% of group revenue, had previously faced a temporary slowdown due to a customer’s relocation out of China. Orders from the customer were already normalising. Meanwhile, the data computing segment, related to mining equipment and comprising about c.23% of group revenue, experienced a significant jump driven by a new model which was well received amidst current optimism in the DeFi market.

QoQ, contrary to its usual seasonality, 1QFY24 saw a 20.7% rise in revenue, while net profit increased by 28.1%. This was due to the low base in 4QFY23 as the typical seasonal uptick had failed to materialise due to a slowdown in orders from its networking and telecom customer that was in the midst of relocating out of China.

Outlook. We expect orders from the networking segment to improve further over the immediate term as its key customers move more production from China to Penang, boosting NATGATE’s utilisation as various products transition to mass production. Meanwhile, it has begun shipping its AI servers (approved by Nvidia) to customers and the shipment is expected to pick up in 2HFY24.

Forecasts. We increase our FY25F earnings forecast by 19% to reflect the better contributions from its AI server product.

Valuations. Consequently, we raise our TP by 30% to RM2.06 (from RM1.58) based a rolled-forward FY25F PER pegged to an unchanged PER of 25x. This represents a c.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: (i) its presence in the fast-growing industrial and commercial products used in the networking and telecommunication sectors, (ii) its 4IR-ready facilities that is able to take on jobs with higher complexity, and (iii) its value-added services such as chip- on-board (COB) that have high customer stickiness and yield better margins. Maintain OUTPERFORM.

Risks to our call include: (i) its 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) component shortages hurting production.

Source: Kenanga Research - 4 Jun 2024