We believe Coraza will witness a multi-year growth from (i) Malaysia’s strong engineering supporting industries (ESI); (ii) strategic portfolio exposures into the semiconductor, instrumentation, life science & medical devices and aerospace industries; and (iii) better product mix from major custome rs’ highmargin products. Moreover, the new factory with additional 25% sheet metal fabrication capacity in FY24 should lift Coraza’s earnings to register a 22% CAGR for FY21-24 core PATAMI. We value Coraza at RM0.76/share, ascribing 18x P/E on FY23 EPS of 4.2sen (+26.7% upside).

An integrated engineering support service provider. According to Protégé Associates, Malaysia’s engineering supporting industry is expected to grow at 11% CAGR from a total market size of RM6.2bn in 2020 to RM11.7bn in 2026, supported by technological advancement and end-user markets including semiconductor (23% 2020-2022 CAGR to USD109bn), life science and medical devices (3% 2020-2050 CAGR to USD1.5bn), aerospace (5% 2021-2025 CAGR to USD417bn), and instrumentation (4% 2021-2025 CAGR to USD30.1bn). This bodes well for Coraza as it serves a variety of anchor customers from semiconductor (58.5% of FY21 revenue), instrumentation (18.6%), life science & medical devices (16.0%), aerospace & others (6.9%) sectors. Coraza has built longstanding relationships with customers J, P, and A (listed on NYSE/NASDAQ), collectively accounting for c.68% of its FY21 sales.

A winner of trade diversion. According to SEMI’s forecast, 2022 total equipment spending is slated to hit record USD109bn in 2022 from 2020’s USD71bn, premised on the ongoing chip shortage and national strategic interests. The buoyant outlook is also augmented by the ‘China+1’ strategy, where semiconductor players maintain China as the primary production base while looking for alternative production hubs outside China amid the US-China trade war. Malaysia, being a relatively wellestablished semiconductor ecosystem in ASEAN, has become one of the leading FDI inflow destinations, driving the needs for new machi nery which bodes well for Coraza. We reckon that this multi-year semiconductor upcycle will propel Coraza to new heights thanks to its strong presence in this industry supported by its in-depth experience and long-established relationships (c.15-21 years) with its anchor customers.

A promising outlook. With Coraza’s existing factory running at 80-90% capacity utilisation, 66.5% of the proceeds from IPO will be utilized to debottleneck its fabrication process via constructing a new double-story factory to accommodate new state-of-art machinery to capture the future strong demand. This new factory will be constructed in three phases (Figure#1) with full effect expected to kick in by Dec 2023, which will double the group’s built-up area while adding c.25% of the group sheet metal fabrication capacity. Overall, the expansion plan is expected to improve Coraza’s margin as previously outsourced jobs will now be fully completed in-house. This will also showcase Coraza’s capabilities to undertake more complex, high precision and high mix manufacturing in meeting stringent quality standards to attract potential and new iindustry clients.

Forecast. We are projecting Coraza’s core PATAMI to register a strong 22% FY21- 24f CAGR on the back of (i) capacity expansion via renting new factory to support FY22-23 growth; (ii) commencement of new factory in early FY24; and (iii) strong orders flow from customer J and P.

Fair Value of RM0.76. Following the 38% slump in share price from a YTD high of RM0.975 to RM0.60, Coraza’s risk-reward ratio has turned attractive at 14.7x FY23 P/E. We value Coraza at TP RM0.76, based on a target PE of 18x FY23 EPS, which is in line against the simple average of local peers’ valuation (Figure #4).

Source: Hong Leong Investment Bank Research - 27 Jun 2022