• D/G to NEUTRAL from Buy, unchanged MYR0.93 TP, 9% upside. 1H22 core earnings met expectations, with the YoY growth stemming from higher sales volumes and a favourable product mix. The weaker QoQ performance was due to higher material, rental, and labour costs. We expect a stronger 2H amid robust orders and better margins from the favourable product mix and cost pass-through exercise. Nevertheless, we believe optimism on its near-term growth has been factored in, following the strong share price rally, and there could be a potential overhang from the pending special issue.

• Within expectations. Coraza Integrated Technology’s 1H22 revenue of MYR68.9m (+59.4% YoY) and core earnings of MYR7.5m (+58.4% YoY) were within our and Street’s full-year estimates, at 41% and 46%, in view of stronger quarters ahead amid seasonal effects. Fabrication of metal sheet remains the main contributor at 83.4% of total revenue. The better performance was mainly driven by higher sales volumes and favourable product mix, on top of benefiting from a strengthening USD. Nevertheless, 1H22 GP margin dipped to 25.4% from 30.3% due to higher material and labour costs.

• Stronger 2H in sight. 2Q22’s MYR3.3m core earnings contracted 19.2% QoQ despite flattish revenue (+0.6% QoQ), mainly due to margin compression – affected by higher raw material and labour costs from the minimum wage policy, and additional headcount for the setting-up of a rented facility (20k sq ft) in Kulim, Kedah. However, we understand that the group has been working on gradually passing on the additional cost increases to its customers from 2Q22 onwards.

• Expansion mode. 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. The new 91k sqft adjacent plant expansion is under construction (to be ready in 12-15 months). However, we understand there has been a slight delay in the construction of its new factory, due to additional soil tests and escalation of construction costs. Meanwhile, proceeds (c.MYR43.5m) from the recently proposed special issue will allow Coraza to expand its machine fleet from 75 to 140 over the next three years to extensively grow its precision machining segment and capture growing demand.

• Forecasts and ratings. We maintain our forecasts and MYR0.93 TP, based on unchanged 20x FY23F P/E (at discount to industry peers) and after applying a 2% ESG discount, based on our proprietary ESG methodology. Our downgrade is premised on the fact that the stock has rallied more than 50% over the past month, and with less than 10% upside to our TP, we think optimism of strong growth has been largely priced-in for the near-term. Nevertheless, we remain confident in management’s ability to execute its expansion plans and capture the immense growth opportunities. Key risks: Dependence on major customers, labour shortage, and FX rate fluctuations.

Source: RHB Research - 26 Aug 2022