NATGATE is acquiring six acres of leasehold land with buildings adjacent to its Plant 5 in Perai, Penang, for RM25m cash. This is driven by the need for more space to support its expansion plans, particularly, for the relocation of more production capacity of a China-based optical transceiver customer to Penang. We keep our forecasts, TP of RM1.70 and OUTPERFORM call.

NATGATE is acquiring the entire equity interest in Hesechan Industries Sdn Bhd (Hesechan) from private company Heap Seong Chan Company Sdn Bhd for RM25m cash. Primarily involved in warehousing, general trading and the provision of logistics services, Hesechan has leasehold land measuring six acres (with 46 years remaining) with buildings commanding a gross floor area of 88k sq ft, adjacent to NATGATE's Plant 5 in Perai, Penang (with an area of 300k sq ft following a recent 80k sq ft expansion).

We believe the acquisition is driven by NATGATE's need for more space to support its expansion plans, particularly, stemming from the relocation of more production of a China-based optical transceiver customer to Penang. The group is also experiencing higher order volume from both the communication and smart computing which will render the need for more production floor space.

Additionally, the qualification of its latest customer, 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 3QFY24, which will then involve the PCBA process on top of the final assembly works.

At RM96 per sq ft (psf), we believe NATGATE getting a reasonably good deal here, judging from asking prices of RM88 to RM125 psf for vacant industrial land in Perai, Penang, while the land NATGATE is acquiring comes with buildings with significant useable space.

The acquisition will increase NATGATE’s net debt and gearing of RM82.4m and 0.2x as at end-Sep 2023 to RM107.4m and 0.3x, respectively, which are still manageable.

Forecasts. Maintained.

Valuations. 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 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) 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 - 9 Feb 2024