• Still BUY, new MYR1.04 TP from MYR0.91, 14% upside. FY22 core earnings exceeded expectations on higher-than-expected sales volumes, coupled with margin expansion due to a favourable product mix. At below- peer valuation of 17x FY23F P/E, we continue to like Coraza Integrated Technology for its sustainable growth outlook supported by aggressive expansion plans, its focus on high-mix-low-volume, and newer products.

• Above expectations. 4Q22 core earnings of MYR6.5m (+82.4% YoY, +62.5% QoQ) brought FY22 core earnings to MYR17.9m (+49.4% YoY). Standing at 108% and 119% of our and Street estimates, the results exceeded expectations. The positive deviation is attributed to stronger-than- expected sales momentum coupled with margin expansion.

• Results review. FY22 revenue of MYR143.3m (+35.1% YoY) was contributed by growth in the sheet metal fabrication (+32.8% YoY) and precision machining (+47.6% YoY) segments. Nevertheless, FY22 GPM contracted 2.4ppts to 26.2% owing to higher raw material and labour costs. 4Q22 revenue of MYR35.9m grew 3.2% YoY on higher sales from the semiconductor, life sciences, and medical devices industries. GPM expanded 5.2ppts YoY to 30.5%, buoyed by higher margin products and improvised costing structure, contributed by insourcing machinery processes followed by operation of the Kulim plant. 4Q22 revenue fell 6.9% sequentially due to lower sales from aerospace industries, while bottomline was helped by tax credit from the utilisation of the reinvestment tax allowance.

• Outlook. Management remains cautiously optimistic despite current inflationary challenges, supply chain issues, and softening demand from the semiconductor space. This is supported by its capacity expansion (to be ready by 2H23) and new project wins from the aerospace, telecommunications, and instrumentation industries. We gathered that the group managed to secure c.200 foreign workers, who will be coming in gradually, while its overall utilisation rate remains healthy at c.70%. Moving forward, margins may improve from stabilising raw material prices, operational efficiencies, and a favourable product mix, along with the continuation of the cost pass-through exercise.

• Forecasts and ratings. Our forecasts are unchanged except for the minor tweak resulting from our model up-keeping exercise, following the release of the full-year numbers. We lowered our share base to 429.2m (from 489.5m) following the 1.5% acceptance rate of special issue shares offered, and the Bumiputera Equity Condition is considered fulfilled. Correspondingly, our TP is raised to MYR1.04, based on unchanged 20x FY23F P/E (significant discount to industry peers) and after applying a 2% ESG discount, based on our proprietary ESG methodology.

• Key risks: Dependence on major customers, labour shortage, and FX rate fluctuations.

Source: RHB Research - 1 Mar 2023