Post Coraza's 2QFY22 investors' briefing, we remain upbeat on the group's prospects. Key takeaways include i) order book remains largely intact at ~1.0x FY21 revenue, underpinned by its key customers with exposure to the high-growth semiconductor, instrumentation, and life science and medical devices industries, ii) large-scale expansion plans in Nibong Tebal, Pulau Pinang is ongoing, albeit with delays expected, iii) the group is fulfilling growing orders via rented sites. In all, we maintain our projection for sales and core net profit to grow at a 3-year CAGR of 16.5% and 18.8% to RM167.8mn and RM21.5mn in FY24F. We retain our TP for Coraza at RM0.985, based on a PE multiple of 23.0x against CY23F EPS. Reiterate Buy.

Review of 1HFY22

To recap, Coraza reported robust growth in 1HFY22 as its revenue and core net profit increased 59.4% YoY and 46.5% YoY to RM68.9mn and RM7.2mn. Revenue was driven by the sheet metal fabrication and precision machining segments, which accounted for 83.4% (FY21: 84.7%) and 16.6% (FY21: 15.3%) of total revenue. The growing % of contributions from the small precision machining segment reflects the group's greater involvement in its customers' supply chain. By industry, contributions as a % of total revenue were led by semiconductors at 59.8%, followed by instrumentation at 20.3%, life science and medical devices at 13.3%, while the balance was from aerospace, telecommunications, and electrical and electronics at 6.6%.

Management highlighted that challenges faced during the year include higher raw material prices and minimum wages, which led the core net profit margin to narrow by 0.9pp YoY to 10.4%. That said, we expect Coraza’s FY22F core net profit margin to remain resilient at 11.4% (FY21: 12.1%), with the increased costs expected to be passed through in the coming quarters.

Order Book Largely Intact

Amid macroeconomic headwinds, management is comforted that Coraza has not seen the cancellation of orders and its order book remains largely intact at ~1.0x FY21 revenue. Its key customers' resilience is underpinned by exposure to the high-growth semiconductor, instrumentation, and life science and medical devices industries. Going forward, management said that while the group will continue working closely with key customers to cater to their growing demand, it will also focus on other industries, including aerospace, where demand has been picking up amid the sector's recovery. At the same time, this will also help to reduce the group's concentration risk to the semiconductor industry.

Expansion Plans Ongoing, Albeit with Delays Expected

Coraza is undertaking large-scale expansion plans, which involve the construction of a new factory adjacent to its existing factory in Nibong Tebal, Pulau Pinang. The new factory will have a total built-up area of 91,110 sq ft and enlarge the group’s overall manufacturing floor space by ~100%. Based on the original timeline, construction will be carried out in 3 phases over 2 years, from January 2022 to December 2023. However, delays are expected, with the consultant still performing soil tests to determine the appropriate piling system to deploy. In the meantime, the group will be fulfilling its growing orders via rented sites, including a 20,000 sq ft site and an upcoming 57,000 sq ft site.

Above all, we remain upbeat on Coraza’s sizeable expansion plans as it will allow the group to strategically capture opportunities from the slew of investments by semiconductor multinational corporations in northern Malaysia, partly catalysed by trade diversion amid US-China trade tension. As such, we maintain our projection for sales and core net profit to grow at a 3-year CAGR of 16.5% and 18.8% to RM167.8mn and RM21.5mn in FY24F.

Impact

No change to our FY22-24 earnings projections.

Valuation

We maintain our TP for Coraza at RM0.985, based on a PE multiple of 23.0x against CY23F EPS. Maintain Buy. We continue to like Coraza for its i) established track record in providing integrated engineering supporting services, ii) longstanding relationships with multinational corporations, iii) experienced management team, iv) healthy margins, and v) earnings growth prospects backed by its expansion plans and exposure to high growth industries including semiconductor.

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 - 9 Sept 2022