• Keep NEUTRAL, new MYR0.81 TP from MYR0.87, 5.3% upside. Coraza Integrated Technology will report its 1Q23 results on 26 May. We expect a softer patch of earnings in 1H23, given the macroeconomic headwinds and slowdown in overall semiconductor demand. However, we believe the weakness may be partially offset by new project wins, ongoing expansion plans, cost past-through exercises and recovery of volume in 2H23.

• We expect 1Q23 results to be soft. According to Gartner, worldwide semiconductor revenue could decline 11.2% in 2023 – indicating the challenging market conditions Coraza is facing, given that c.60% of its revenue is from the semiconductor industry. Certain customers are guiding a slowdown in demand, and have exercised caution to avoid over-ordering – resulting in the company’s book-to-bill ratio falling below 1x. Management expects orders and deliveries to soften c.20% in 1H23. On a brighter note, Coraza expects the weakness to be partially cushioned by new project wins from the aerospace, telecommunications, and instrumentation industries.

• Expansion plans. We understand that the construction of a new 91,000 sq ft adjacent plant expansion (to be ready by 2H23) is still intact. The company also secured c.200 new foreign workers, who will be arriving gradually. The c.MYR69.5m proceeds from the recently proposed private placement will allow Coraza to increase its capacity and expand machining capabilities for high tolerance and complex components, while tapping into new markets and broadening its customer base.

• Forecast and rating. We cut our FY23-25F earnings by 19-18% as we believe our previous estimates were too optimistic – taking into account the inflationary challenges and overall semiconductor industry weaknesses. Our TP is lowered to MYR0.81 – based on an unchanged 20x P/E – while we roll forward the valuation base year to FY24. Our TP is inclusive of a 4% ESG discount, given Coraza’s ESG score of 2.8 is below the country median. We retain our call, as we maintain our cautious stance on the company for now – given the less attractive risk-to-reward ratio.

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

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details.

Source: RHB Research - 15 May 2023