• 3Q24 headline profit was up 63% QoQ benefited from forex gains but impacted by various of one-offs. Excluding these, NatGate reported core net profit of RM22m

• 9M24 core net profit of RM70m rose 53% YoY, but with results below expectations

• We lower our 2024E EPS forecasts to reflect the weak 3Q24 results, while raising 2025–26E earnings forecasts to account for higher server deliveries. Maintain BUY with higher TP of RM2.65

3Q24 earnings missed expectations

NatGate reported a weak set of results. 3Q24 revenue doubled driven by higher server deliveries (+1.2x QoQ), with EBITDA margin contracted by 1ppts QoQ to 6%. While a margin decline was expected due to the higher proportion of server business contribution, the impact was more severe-than-anticipated. The weak margins, coupled with a higher effective tax rate (due to underprovision of earlier tax), resulted in lower core net profit of RM22m (-18% QoQ, +19% YoY) for the quarter.

Headline profit was distorted by various one-offs

While benefited from significant forex gain during the quarter, we gather that headline profit was also affected by various one offs, including RM18m provision made on product liabilities, RM7m product development costs, and RM20m cost of good revaluation. In deriving our 3Q24 core profit, we have excluded these from our computation. As a result, this brings 9M24 core net profit to RM70m (+53% YoY). Overall, results fell short of expectations, but in line with consensus, accounting for 60% of our and 69% of the street’s 2024 earnings forecast. The deviation against our forecasts was largely due to weaker-than-expected margins.

Maintain BUY with higher TP of RM2.65

We encourage investors to look past the weak 3Q24 results, which we view as a temporary setback. While we have reduced our 2024E EPS forecasts by 9% to reflect weaker margins, we are raising our 2025–26E earnings by 5–8%, factoring in higher server deliveries. Maintain BUY rating with a higher 12-months TP of RM2.65, based on updated mean PE of 35x on 2025E EPS (previously RM2.25 based on 32x PER). We continue to like NatGate for its unique AI exposure through the server business, and appealing structural growth story being a beneficiary of US-China geopolitical tensions. Risks to our BUY call include slower-than- expected orders, loss of key customers, weaker global demand, and margin compressions.

Source: Philip Capital Research - 28 Nov 2024