Kenanga Research keeps it OUTPERFORM call on Nationgate Holdings Bhd following its proposed acquisition of Hesechan Industries Sdn
Bhd (Hesechan) for the latter’s six-acres land with buildings adjacent to the group’s Plant 5 in Perai, Penang.
The research house believes that acquisition by electronic manufacturing service (EMS) provider is driven by the need for more space to expand especially for the relocation of more production capacity 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,” it said in its Company Update today (Feb 9).
It also kept its target price (TP) of RM1.70 based on an unchanged 25x FY24F price-earning ratio (PER).
“This is with 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.”
Nationgate is acquiring the entire equity interest in Hesechan from private company Heap Seong Chan Company Sdn Bhd for RM25 million cash.
Primarily involved in warehousing, general trading and the provision of logistics services, it has leasehold land measuring six acres (with 46 years remaining) with buildings commanding a gross floor area of 88,000 sq ft, adjacent to Nationgate’s Plant 5 in Perai, Penang, which measures 300,000 sq ft.
Aside from the need for expansion and higher volume order, Kenanga said the acquisition is to accommodate the qualification of its latest customer, xFusion, an AI-based data centre customer, currently underway, primarily focusing on final assembly works.
“Managing the intricate procedure of sourcing AI-related components from the United States, the group is sanguine on initiating a gradual ramp-up in the 3QFY24, which will then involve the printed circuit board assembly (PCBA) process on top of the final assembly works.
“At RM96 per sq ft (psf), we believe the group 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 Nationgate is acquiring comes with buildings with significant useable space.
“The acquisition will increase its net debt and gearing of RM82.4 million and 0.2x as at end-Sep 2023 to RM107.4 million and 0.3x, respectively, which are still manageable.”
The research house added: “We like Nationgate for its exposure to the fast-growing industrial and commercial products used in the networking and telecommunication sectors, 4IR-ready facilities that can take on higher complexity jobs, and added-value services such as chip-on-board (COB) that enhance customer stickiness and yield better margins.”
The risks to its call include heavy reliance on the networking segment, competition from foreign EMS players and adverse impact from component shortage.
