NATGATE: Earnings Miss on Margin Contraction, Future Growth Anticipated from 2026 Onwards

Despite a significant surge in revenue, the company’s 9M25 core net profit of RM119 million fell below both internal and street expectations, prompting analysts to revise future earnings estimates. This performance indicates a mixed operational period characterized by strong top-line growth but also notable margin pressures.

Performance Review

For the nine months ended 2025 (9M25), revenue reached RM6.4 billion, primarily driven by robust server deliveries which boosted the data computing segment’s contribution by over 3.3 times to RM5.9 billion. However, this impressive revenue growth was accompanied by a 4 percentage point (ppts) year-on-year contraction in the EBITDA margin, which fell to 3.4%. This margin compression is attributed largely to a higher contribution from lower-margin server business, which accounted for 91% of total revenue. As a result, the 9M25 core earnings represented 85% of PhillipCapital’s full-year estimates and 74% of the street’s consensus.

Recent Quarter Challenges and Outlook

The third quarter of 2025 (3Q25) saw a sequential decline in both revenue and core net profit, dropping by 63% and 43% respectively. This downturn was primarily due to the absence of sizeable deliveries as the current generation GPU server model approached the end of its life cycle. While EBITDA margin marginally expanded by 0.7 ppts sequentially in 3Q25, it still fell below expectations despite a more favorable revenue mix. Looking ahead, a softer sequential result is anticipated for the fourth quarter of 2025 (4Q25) given the expected absence of server deliveries that supported earlier quarters. This led to a 7% cut in 2025 EPS and a 14-16% reduction for 2026-27E, following adjusted GPU assumptions.

Future Growth Trajectory

Sentiment surrounding the stock is expected to remain subdued in the near term, largely due to limited earnings visibility as the group navigates a gestation phase in developing its next-generation GPU server models. Nevertheless, commercial readiness for these new models is projected from 2Q26 onwards. This development is expected to enable the company to resume a more discernible growth trajectory, with volumes scaling up throughout 2026.

Investment Recommendation

PhillipCapital maintains its “BUY” rating on the stock, albeit with a revised 12-month target price of RM1.30, down from the previous RM1.55. The new target price is based on a target Price-to-Earnings (PE) multiple of 20 times the estimated 2026 earnings per share (EPS). Key risks to this recommendation include softer server demands, the potential loss of key customers, sharp appreciation of the Malaysian Ringgit, and margin compressions.