• BUY, new MYR0.93 TP from MYR0.82, 10% upside. Coraza Integrated Technology has proposed a special issue of up to 14.3% of the total number of issued shares to satisfy listing requirements, as it seeks a Main Market listing transfer – potentially raising up to MYR43.5m. Despite the dilution impact, we are positive on the proposal, as the majority of funds will be utilised for its plans to continue expanding its fleet size to cater for rising demand, which in turn, should boost future earnings.

• Proposed special issue. Based on the MYR0.71/share indicative issue price, a maximum of 61.2m new ordinary shares may be issued to Bumiputera investors identified/approved by the Ministry of International Trade and Industry. Proceeds are expected to be utilised for the purchase of new machinery (MYR24.0m or 55.2%), debt repayment (MYR8.1m or 18.7%) and general working capital (MYR10.6m or 24.4%), while the remainder will be for related expenses for the exercise, which is expected to be completed by 4Q22, at the latest.

• Positive on the proposal. Apart from complying with listing requirements, we understand that the exercise will allow Coraza to manufacture a higher volume of big frames and structures, with the capacity expansion and purchases of machinery to grow its precision machining segment – bringing its total machine count from 75 to 140 over the next three years. While capex spending is elevated, it should allow Coraza to boost its capacity and increase market presence, paving the way for stronger growth ahead. On a proforma basis, EPS dilution would be at c.12.5%, assuming the maximum scenario before taking into account the proceeds utilisation. Net tangible asset/share could rise to MYR0.27, while net cash/share may increase to MYR0.11 from MY0.02 currently.

• Positive outlook reaffirmed following our visit to Coraza’s plant, which has high utilisation rates. The group remains bullish on sustained robust demand from existing and potential customers, and is in the midst of setting up its third rented facility to cater for increasing demand from its customers for both sheet metal and precision component machining services, pending the new 91k sqft plant expansion to be erected in the next 12-15 months.

• Forecasts and ratings. We raise FY22F-24F earnings by 4.9%, 10.9% and 12.7% as we bake in more aggressive growth assumptions, amid its strong orderbook (c.1x) replenishment. Our TP is raised to MYR0.93, based on a higher FY23F fully diluted P/E of 20x from 17x (20% discount to the 25x industry average), to reflect Coraza’s aggressive expansion plans to capture structural demand growth, and the semiconductor boom. The strategy of focusing on high-mix low-volume and newer products from its front-end semiconductor clients should contribute to further margin growth to catch up to its peers, on top of benefiting from a strengthening USD. Our TP includes a 2% discount on its intrinsic value, based on a 2.9 ESG score. Key risks: Dependence on major customers, labour shortages, FX rate fluctuations.

Source: RHB Research - 16 Aug 2022