• Stay BUY, new MYR0.68 TP from MYR0.64, 24% upside. Coraza Integrated Technology’s 1Q24 results met expectations, with sales showing its first QoQ uptick after six consecutive quarters of contraction. We anticipate more substantial improvement in the demand outlook in 2H, which is set to drive margin expansion through operating leverage for the group. We continue to like Coraza for its strong engineering know-how, positioning it to capitalise on the recovery in semiconductor equipment demand.

• Within expectations. Coraza recorded 1Q24 core loss of MYR1.4m (1Q23: MYR0.2m profit), which we deem is within estimates given the expectations of stronger recovery in 2H24. Note that we stripped off unrealised FX gain of MYR0.1m to arrive at the core profit. Geographically, 1Q24 sales declined in Malaysia (-41%) and the US (-38%) due to slower orders from all customers, while stronger sales in Singapore (+17%) offset these declines.

• Results review. YoY, 1Q24 revenue fell 30.3% to MYR19.8m due to the cyclical downturn in the semiconductor market – leading to the deferral of orders from semiconductor customers. 1Q24 GPM dipped 12.8ppts YoY to 9.9% as a result of underutilisation and the absorption of fixed costs. QoQ, 1Q24 revenue improved 25.5% – attributed to the gradual recovery of the semiconductor industry. Consequently, 1Q24 core losses narrowed QoQ to MYR1.4m from MYR3.2m in 4Q23.

• Outlook. To recap, Coraza was impacted by the semiconductor downcycle, compounded by absorption of high fixed costs resulting from its aggressive expansion post-listing. That said, the Semiconductor Industry Association is expecting double-digit growth in global semiconductor sales in 2024, thanks to the end of inventory correction. As part of the supply chain for some of the leading equipment makers and EMS players, Coraza stands to benefit from the new upcycle in the sector. A ramp-up in order volumes in 2H24F from existing or new customers is poised to drive significant margin expansion, primarily due to operating leverage and economies of scale. With the newly- acquired factory equipped with necessary manufacturing facilities, Coraza is well-prepared to capitalise on the upswing in demand.

• Forecast and ratings. Post results, we keep our FY24F-26F earnings. We revised Coraza’s ESG score to 2.8 from 2.5 to recognise its efforts on emissions disclosures and improved environmental risk management following the release of the FY23 annual report. Our TP is revised to MYR0.68, based on unchanged 20x FY25F P/E (close to mean) and after applying a 4% ESG discount. Key downside risks: Slower-than-expected semiconductor sector recovery, labour shortages, and FX rate fluctuations.

Source: RHB Research - 17 May 2024