• Keep NEUTRAL and MYR0.68 TP, 3% upside. Coraza Integrated Technology’s 1H23 earnings missed expectations, mainly due to weaker than-expected sales and margins. We cut our forecasts accordingly, taking into account the slowdown in overall semiconductor demand and increase in cost assumptions. While we believe the demand outlook will recover moving towards FY24F, we are unsure of the pace of recovery. That said, we maintain our cautious stance on the company for now – given its less attractive risk-to-reward ratio.

• Below expectations. Coraza’s 1H23 core profit of MYR0.5m (-93.3% YoY) met just 5-7% of our and consensus full-year estimates, due to weak market demand and cost pressures. Note that we stripped off the unrealised FX gain of MYR2.2m to arrive at the core profit. Geographically, 1H23 sales in Malaysia (-23.4%), Singapore (-39.6%) and the US (-34.9%) all declined.

• Results review. 1H23 revenue fell 28.5% YoY to MYR49.3m due to the continuous deferral of orders from semiconductor customers amid an ongoing inventory glut. 1H23 GPM slipped 5.7ppts YoY to 19.7%, as a result of underutilisation and the absorption of fixed costs. QoQ, 2Q23 revenue plunged by 26.3% to MYR20.9m on lower order volume by most of its customers, given the challenging business environment. Nevertheless, core net profit rose 52.5% QoQ to MYR0.3m, attributed to a lower effective tax rate resulting from capital allowances and reinvestment allowances claimed by its subsidiaries.

• Our outlook remains cautious, in light of the prevailing macroeconomic headwinds and the cyclical downturn in the semiconductor market, which may persist before a potential recovery kicks in in FY24F. We gather that its customers are cautiously avoiding over-ordering – which has led to Coraza’s book-to-bill ratio falling below 1x. Nonetheless, the group is focusing on increasing its capacity and expanding machining capabilities for high tolerance and complex components. This is to strategically position itself in anticipation of a semiconductor sector rebound in FY24F. Also, the group is actively diversifying its client portfolio by exploring opportunities to expand beyond its current clientele, while aiming to mitigate sectoral risk and navigate market volatility.

• Forecast and ratings. Given the earnings miss, we slash FY23F earnings by 32.4%, while keeping our FY24-25F earnings relatively unchanged. Our TP stays at MYR0.68, based on unchanged 20x FY24F P/E, and has a 4% ESG discount built in. Note that our TP has also factored in the dilution from the proposed private placement of up to 20% of the total number of shares. Key downside risks: Dependence on major customers, labour shortages, and FX rate fluctuations. The opposite of these factors would constitute upside risks.

Source: RHB Securities Research - 25 Aug 2023