• Upgrade to BUY from Neutral, new MYR0.64 TP from MYR0.50, 42% upside. FY23 results disappointed on slower-than-expected demand recovery, but we believe the worst is over. Share price under-performance (2023: -43%) has likely factored in the low expectations, and we are expecting a strong turnaround in FY24 from a low base. We like Coraza Integrated Technology for its solid customer base and exposure to the front- end semiconductor supply chain to capture the overall recovery in semiconductor equipment demand.

• Below expectations. FY23 core losses of MYR3.8m (FY22: MYR17.9m profit) came in below our and Street’s estimates. The negative deviation was due to slower-than-expected sales and margins recovery. Note: We stripped off the unrealised FX gain of MYR1.2m to arrive at the core loss. Geographically, FY23 sales in Malaysia, Singapore, and the US declined 46%, 36%, and 51% with slower orders from all customers.

• Results review. YoY, FY23 revenue dipped 43.7% to MYR80.7m due to the deferral of orders from key customers, which were dragged down by the semiconductor sector’s downturn. FY23 LBT was at MYR3.4m vs 18.6m PBT in FY22 due to margins compression from the loss of economies of scale and higher depreciation expenses (+37.3% YoY). QoQ, 4Q23 revenue was flattish (+0.4%) due to the slow demand recovery. Despite LBT narrowing to MYR3.2m vs MYR3.6m LBT in 3Q23 – from the implementation of cost- control measures – core earnings widened QoQ to MYR3.2m due to the absence of tax capital allowances.

• Outlook. The Semiconductor Industry Association is expecting double-digit growth in global semiconductor sales in 2024, considering that inventory adjustments may have come to an end. We highlight that management guided for flattish QoQ revenue but is expecting a more meaningful recovery in 2H24. With consistent efforts to enhance capabilities and expand identified capacity, Coraza is well positioned to capitalise on the rebound in semiconductor demand. Additionally, any ramp-up in order volumes from existing or new customers is poised to drive significant margins expansion, in our view, primarily on operating leverage and economies of scale.

• Forecast and ratings. Post results, we cut our FY24F-25F earnings by 46% and 14%, and introduce FY26F numbers (+36%), reflecting a slower sales recovery assumption. However, we revise our TP to MYR0.60 after rolling over the valuation base year to FY25F, implying an unchanged 20x P/E (close to its mean). Our TP includes 10% ESG discount based on the 2.5 ESG score.

• Key downside risks: Dependence on major customers, labour shortages, and FX rate fluctuations. The opposite would constitute upside risks.

Source: RHB Research - 29 Feb 2024