Review

• Coraza’s 1HFY22 core net profit of RM7.2mn (+46.5% YoY) came within ours and consensus full-year estimates at 47.7% and 44.5% respectively.

• YoY. 1HFY22’s revenue and core net profit increased 59.4% YoY and 46.5% YoY to RM68.9mn and RM7.2mn. This was driven by both the sheet metal fabrication and precision machining segments. By end-user market, contributions as a % of total revenue were led by semiconductor at 60% and followed by instrumentation at 21% and medical devices at 15%. Core net profit margin eased 0.9pp YoY to 10.4% mainly due to higher material cost amid inflationary pressures. Note however that the group will be progressively passing through the cost increase in the coming quarters.

• QoQ. 2QFY22’s revenue was stable as it improved marginally 0.6% QoQ to RM34.5mn, largely contributed by the semiconductor end-user market. However, core net profit eased 3.5% QoQ to RM3.5mn mainly due to increased labour cost from the addition of headcount for a new rented facility in Kulim, Kedah as well as the effect of the minimum wage hike from May 2022.

Impact

• We make no changes to our earnings estimates.

Outlook

• We expect Coraza to extend its growth trajectory in FY22, underpinned by its key end-user markets including semiconductor and instrumentation. We foresee strong demand for its fabricated parts designated for the semiconductor industry alongside the robust investments by fabs to expand capacity. The SEMI organisation forecasts global semiconductor manufacturing equipment sales in 2022 to grow 14.7% YoY to a new high of US$117.5bn.

Valuation & Recommendation

• We upgrade our TP for Coraza to RM0.985 (previously RM0.685) after ascribing a higher target PE multiple of 23.0x (previously 16.0x) against CY23F EPS. The upgrade to our valuation multiple follows the re-rating of small sized fabricators of intermediate metal products and mechanical assembly providers with exposure to the high growth sectors including semiconductor sector. Our ascribed target PE multiple of 23.0x is at a ~20% discount to peers weighted average of 28.2x against CY23F EPS premised on its lower ROE (refer to Table 3). Maintain Buy.
• Key downside risks include: i) dependence on major customers, ii) raw material price fluctuations, and iii) a prolonged COVID-19 pandemic and geopolitical tensions both weighing on economic growth and disrupting supply chains.

Source: TA Research - 26 Aug 2022