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NATGATE: Electronic Manufacturer Sees Profit Miss on Softening Server Demand, Target Price Adjusted
| Investment Bank | TA SECURITIES |
|---|---|
| TP (Target Price) | RM1.55 (+10.7%) |
| Last Traded | RM1.40 |
| Recommendation |
The technology manufacturing firm reported that its core net profit for the first half of 2025 (6M25) reached RM105 million, marking a robust 120% year-on-year increase. However, this figure fell short of both the investment bank’s and consensus full-year forecasts, forming only 54% and 49% respectively, primarily due to an anticipated moderation in server demand during the second half of the year.
Performance Review
While 6M25 revenue surged an impressive 514% year-on-year to RM5.4 billion, largely driven by higher server deliveries, profitability was impacted by a shift in revenue mix towards the lower-margin server business. This led to a 6.1 percentage point contraction in the 6M25 EBITDA margin, which settled at 3.4%.
The second quarter of 2025 (2Q25) experienced a sequential decline, with revenue falling 8% quarter-on-quarter to RM2.6 billion. This downturn was attributed to lower server deliveries, an unfavorable foreign exchange impact, export restrictions on AI chips implemented in mid-May, and weaker operating leverage. The company’s inventory levels also saw a sharp decline from RM2.2 billion at the end of 1Q25 to RM802 million by the end of 2Q25, signaling reduced server deliveries in the latter half of the year.
Outlook and Recommendation
In light of the weaker server contributions, the investment bank has revised down its EPS forecasts for 2025-2027 by 7-28%. Despite these adjustments, the firm maintained its “BUY” recommendation for the stock, albeit with a reduced 12-month target price of RM1.55, down from the previous RM1.80. This new target price is based on an unchanged target price-to-earnings (PE) multiple of 20x on 2026E EPS.
The outlook suggests that improved visibility on server demand could act as a key re-rating catalyst, with a more significant materialization expected in 2026, which remains the primary driver of earnings growth. Key risks to the “BUY” call include further softening server demands, the potential loss of key customers, sharp Malaysian Ringgit appreciation, and margin compressions.
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