Company Update

15 May 2023

Nationgate Holdings OUTPERFORM ↔

Price : RM1.24
Fruitful China Marketing Trips Target Price : RM1.50 ↔
By Samuel Tan l samueltan@kenanga.com.my
NATGATE is riding on a new wave of original design manufacturers Share Price Performance
(ODMs) seeking production diversification into Malaysia. Its recent
marketing trips to China are promising potential new clients and orders
by end-2023. Besides, pivoting to consignment-based on-boarding for
future clients will yield higher margins and reduce inventory risks. It is
expanding its total floor space by c.50% by adding 80k sq ft to Plant 5
(by Jul 2023) and an extra 248k sq ft to Plant 7 (by Dec 2023). We
maintain our forecasts, TP of RM1.50 and OUTPERFORM call.
Tailwinds from China plus one policy. After our recent meeting with
NATGATE, we left with a strong sense of optimism. The group’s reassurance
of its bright prospects is supported by the growing number of ODMs looking
to diversify their production beyond China and expressing interest in
NATGATE’s capabilities. This follows the group’s multiple visits to China over KLCI 1,422.9
the past few months, meeting various ODMs that manufacture products YTD KLCI chg -4.9%
YTD stock price chg 226.3%
catered to industries such as data computing, networking, and automotive
power transmission. While the group is still in talks with these prospective
Stock Information
clients, we learnt that the discussions have been very positive with a good
Shariah Compliant Yes
chance of crystallising into new opportunities by end-2023.
Bloomberg Ticker NATGATE MK Equity
Strategising for margin expansion. Acknowledging the continued Market Cap (RM m) 2,571.7
shortages of certain key components, the group has decided to on-board Shares Outstanding 2,073.9
future customers on a consignment basis instead of the conventional turnkey 52-week range (H) 1.50
basis. We view this development positively as it allows the group to: (i) yield 52-week range (L) 0.81
3-mth avg daily vol: 9,276,457
higher margin with only manpower cost, (ii) mitigate raw material price
Free Float 33.8%
fluctuation, and (iii) reduce the risk of inventory overstocking and expenses
Beta 2.2
related to slow-moving goods. However, we have yet to factor in these
potential catalysts pending further details. Major Shareholders
Expansion on track. To accommodate new potential clients, the group is Ooi Eng Leong 57.9%
currently constructing a new capacity of c.80k sq ft at the third floor adding to Tan Ah Geok 7.2%
its existing c.216k sq ft Plant 5, which is scheduled for completion by July Lee Kim San 0.8%
2023. Furthermore, the expansion of another 248k sq ft alongside its existing
227k sq ft Plant 7 is progressing as planned, with completion expected by Summary Earnings Table
December 2023. Overall, this will increase the group’s total floor space by FYE Dec (RM m) 2022A 2023F 2024F
c.50%. Turnover 945.7 1,151.8 1,313.6
EBITDA 152.1 185.8 204.9
Forecasts. Maintained as we believe our forecasts have adequately PBT 85.6 113.2 134.3
reflected its near-term growth potential. Core Net Profit 85.6 113.2 134.3
Consensus - 118.1 137.7
We keep our TP of RM1.50 based on 23x FY24F PER, representing 30% Earnings Revision - - -
premium to peers’ forward mean. We believe the higher valuation is justified EPS (sen) 4.1 5.5 6.5
by the group’s favourable exposure to the fast-growing networking product EPS growth (%) 43.8 32.2 18.6
segment and its advanced capabilities which yield better margins as well as NDPS (sen) 0.0 0.0 0.0
enhancing customer stickiness. There is no adjustment to our TP based on BVPS (RM) 0.11 0.17 0.23
ESG given a 3-star rating as appraised by us (see Page 4). Price/BV (x) 11.2 7.5 5.4
PER (x) 30.0 22.7 19.2
Investment thesis. We like NATGATE for its: (i) exposure to the fast- Net Gearing (x) 1.4 0.6 0.4
growing industrial and commercial products used in the networking and ROA (%) 11.2 11.2 10.1
telecommunication sectors, (ii) 4IR-ready facilities that is able to take on ROE (%) 37.4 33.1 28.2
higher complexity jobs, and (iii) added-value services such as chip-on-board Dividend Yield (%) 0.0 0.0 0.0
(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.

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NATGATE Holdings Bhd Company Update
15 May 2023

Income Statement Financial Data & Ratios

FY Dec (RM m) 2020A 2021A 2022F 2023F 2024F FY Dec 2020A 2021A 2022A 2023F 2024F
Revenue 566.2 760.9 904.1 1,093.4 1,275.3 Growth (%)
EBITDA 57.3 95.7 125.8 154.6 179.4 Turnover 73.7 34.4 18.8 20.9 16.6
Depre & Amor -19.7 -25.9 -27.7 -28.5 -30.2 EBITDA 126.5 67.1 31.5 22.8 16.1
Operating Profit 37.5 69.9 98.2 126.0 149.2 Operating Profit 286.8 86.1 40.5 28.4 18.3
Other Income 1.4 1.7 4.5 2.2 2.6 PBT 420.5 90.4 42.0 33.7 21.2
Interest Exp -4.6 -7.2 -9.2 -7.1 -5.0 Adj Net Profit 482.6 94.2 27.0 28.9 21.2
Associate 0.0 0.0 0.0 0.0 0.0
PBT 32.9 62.7 89.0 118.9 144.2 Profitability (%)
Taxation -2.2 -3.1 -13.3 -21.4 -26.0 EBITDA Margin 10.1 12.6 13.9 14.1 14.1
Minority Interest 0.0 0.0 0.0 0.0 0.0 Operating Margin 6.6 9.2 10.9 11.5 11.7
Net Profit 30.7 59.5 75.6 97.5 118.2 PBT Margin 5.8 8.2 9.8 10.9 11.3
Core Net Profit 30.7 59.5 75.6 97.5 118.2 Core Net Margin 5.4 7.8 8.4 8.9 9.3
Effective Tax
Rate 6.8 5.0 15.0 18.0 18.0
Balance Sheet ROA 6.1 6.1 6.5 9.8 8.4
FY Dec (RM m) 2020A 2021A 2022F 2023F 2024F ROE 27.4 38.2 26.3 25.3 23.5
Fixed Assets 182.5 209.7 216.3 229.3 247.5
Intangible Assets 0.0 0.0 0.0 0.0 0.0 DuPont Analysis
Other FA 0.8 0.4 0.4 0.4 0.4 Assets Turnover (x) 1.2 1.3 1.2 1.1 1.0
Inventories 100.1 152.8 178.8 215.7 251.8 Leverage Factor (x) 4.2 3.8 3.3 3.0 2.8
Receivables 147.7 166.6 198.0 239.5 279.3 ROE (%) 27.4 38.2 37.4 33.1 28.2
Other CA 22.6 31.0 31.0 31.0 31.0
Cash 18.2 45.6 277.2 449.5 549.9
Total Assets 472.1 606.2 901.9 1,165.5 1,360.0 Leverage
Debt/Asset (x) 0.3 0.4 0.4 0.2 0.2
Payables 203.0 216.3 253.1 305.4 356.5 Debt/Equity (x) 1.4 1.5 1.4 0.6 0.4
ST Borrowings 76.4 143.0 143.0 37.5 37.5 Net (Cash)/Debt 136.1 184.5 264.4 -28.0 -300.4
Other ST Liability 1.8 1.1 130.4 350.0 375.2 Net Debt/Equity (x) 1.2 1.2 1.2 -0.1 -0.6
LT Borrowings 78.0 87.1 87.1 87.1 87.1
Other LT Liability 0.5 0.3 0.3 0.3 0.3 Valuations
Net Assets 112.4 158.4 288.0 385.3 503.5 Core EPS (sen) 1.5 2.9 4.1 5.5 6.5
DPS (sen) 0.0 0.0 0.0 0.0 0.0
Shr. Equity 112.0 155.9 287.7 385.3 503.5 BVPS (RM) 0.1 0.1 0.1 0.2 0.2
Mnrt. Interest 0.3 2.6 0.3 0.0 0.0 PER (x) 83.8 43.2 30.0 22.7 19.2
Total Equity 112.4 158.4 288.0 385.3 503.5 Div. Yield (%) 0.0 0.0 0.0 0.0 0.0
P/BV (x) 23.0 16.5 11.2 7.5 5.4
Cashflow Statement EV/EBITDA (x) 47.3 28.8 18.7 13.7 11.1
FY Dec (RM m) 2020A 2021A 2022A 2023F 2024F
Operating CF 45.8 28.9 73.9 87.4 111.4
Investing CF -39.6 -27.2 -34.3 -41.5 -48.4
Financing CF 6.1 26.1 192.1 126.4 37.5

Source: Kenanga Research

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NATGATE Holdings Bhd Company Update
15 May 2023

Malaysian Technology Peers Comparison

Net.
Net.
PER (x) – Core PBV ROE Div.
Core EPS (sen) Core EPS Growth Div.
Earnings (x) (%) Yld
Last Target (sen)
Mkt Cap Shariah Current (%)
Name Rating Price Price Upside (%)
(RM'm) Compliant FYE
(RM) (RM)
1-Yr. 2-Yr. 1-Yr. 2-Yr. 1-Yr. 2-Yr. 1-Yr. 1-Yr. 1-Yr. 1-Yr.
Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd.

D&O GREEN TECHNOLOGIES BHD UP 3.99 3.51 -12.03% 4,938.8 Y 12/2023 10.3 14.0 31.6% 35.5% 38.6 28.5 5.2 14.0% 1.7 0.4%
GHL SYSTEMS BHD OP 0.810 1.05 29.63% 918.9 Y 12/2023 3.0 3.4 21.3% 12.9% 27.0 24.0 1.7 6.5% 0.0 0.0%
INARI AMERTRON BHD MP 2.22 2.60 17.12% 8,287.1 Y 06/2023 10.2 11.5 -3.2% 12.7% 21.8 19.3 3.3 15.0% 9.7 4.4%
JHM CONSOLIDATION BHD MP 0.800 0.800 0.00% 481.8 Y 12/2023 5.3 5.9 40.0% 10.6% 15.1 13.6 1.4 9.8% 0.5 0.6%
KELINGTON GROUP BHD OP 1.45 1.92 32.41% 932.4 Y 12/2023 8.7 9.0 1.1% 3.2% 16.6 16.1 3.3 21.3% 2.4 1.7%
KESM INDUSTRIES BHD MP 7.25 8.24 13.66% 311.9 Y 07/2023 (10.0) 6.7 -2250.0% -32.6% N.A. 108.8 0.9 -1.2% 7.5 1.0%
LGMS BHD OP 1.11 1.50 35.14% 506.2 Y 12/2023 3.5 5.9 26.2% 69.8% 31.9 18.8 5.1 17.4% 0.0 0.0%
MALAYSIAN PACIFIC INDUSTRIES
BHD
UP 27.50 20.00 -27.27% 5,469.7 Y 06/2023 81.1 130.6 -51.0% 61.0% 33.9 21.1 2.6 7.9% 35.0 1.3%
NATGATE HOLDINGS BHD OP 1.24 1.50 20.97% 2,571.7 Y 12/2023 5.5 6.5 32.2% 18.6% 22.7 19.2 7.5 39.6% 0.0 0.0%
OPPSTAR BHD UP 1.77 1.30 -26.55% 1,126.1 N 12/2023 3.1 4.0 18.1% 29.6% 57.5 44.4 39.1 90.7% 0.8 0.5%
P.I.E. INDUSTRIAL BHD OP 3.37 4.05 20.18% 1,294.2 Y 12/2023 22.5 25.3 22.0% 12.5% 15.0 13.3 2.1 14.6% 7.0 2.1%
SKP RESOURCES BHD UP 1.25 1.20 -4.00% 1,953.0 Y 03/2024 9.7 7.9 -11.1% -17.9% 12.9 15.8 2.2 17.8% 4.8 3.8%
UNISEM (M) BHD MP 2.82 2.75 -2.48% 4,548.9 Y 12/2023 8.9 13.8 -41.2% 55.7% 18.3 16.4 1.8 5.9% 6.0 2.1%
Simple Average -13.6% 23.6% 25.4 20.5 5.9 19.9% 1.4%
Source: Kenanga Research

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NATGATE Holdings Bhd Company Update
15 May 2023

Stock ESG Ratings:

Criterion Rating

Earnings Sustainability & ★ ★ ★ ☆

Quality
★ ★ ☆
GENERAL

Community Investment
Workers Safety & Wellbeing ★ ★ ★
Corporate Governance ★ ★ ★
Anti-Corruption Policy ★ ★ ★
Emissions Management ★ ★ ★

Technology & Innovation ★ ★ ★ ☆

Supply Chain Management ★ ★ ★
SPECIFIC

Energy Efficiency ★ ★ ★
Effluent/Water Management ★ ★ ★ ☆ denotes half-star
★ -10% discount to TP
Waste Management ★ ★ ★
★★ -5% discount to TP
Ethical Practices ★ ★ ★ ☆ ★★★ TP unchanged
★★★★ +5% premium to TP
OVERALL ★ ★ ★
★★★★★ +10% premium to TP

Stock Ratings are defined as follows:

Stock Recommendations

OUTPERFORM : A particular stock’s Expected Total Return is MORE than 10%

MARKET PERFORM : A particular stock’s Expected Total Return is WITHIN the range of -5% to 10%
UNDERPERFORM : A particular stock’s Expected Total Return is LESS than -5%

Sector Recommendations***

OVERWEIGHT : A particular sector’s Expected Total Return is MORE than 10%

NEUTRAL : A particular sector’s Expected Total Return is WITHIN the range of -5% to 10%
UNDERWEIGHT : A particular sector’s Expected Total Return is LESS than -5%

***Sector recommendations are defined based on market capitalisation weighted average expected total
return for stocks under our coverage.

This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not
make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the
specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This
document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees.
Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document
or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or
employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or
otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies.

Published by:

KENANGA INVESTMENT BANK BERHAD (15678-H)

Level 17, Kenanga Tower, 237, Jalan Tun Razak, 50400 Kuala Lumpur, Malaysia
Telephone: (603) 2172 0880 Website: www.kenanga.com.my E-mail: research@kenanga.com.my

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