Post Coraza’s 4QFY22 investors briefing, we have downgraded our recommendation on the stock to Sell with a lower TP of RM0.89  (previously RM0.985) based on a PE multiple of 22.0x (previously 23.0x)  against CY24F EPS. This mainly follows our earnings downgrade as we lowered FY23F to FY25F sales to factor in the weak near-term outlook.  Into FY23, management guided Coraza’s book-to-bill ratio at <1.0x, with orders and deliveries to have softened by ~25-30% and order book standing at ~RM70mn. The weakness is in tandem with the slowdown of the semiconductor industry, which is the group’s key end-user market.  Key risks include i) dependence on major customers, ii) raw material price fluctuations, and iii) geopolitical tensions weighing on economic growth and disrupting supply chains.

Review of FY22

To recap, Coraza closed FY22 on a strong note with record high revenue and core net profit of RM143.3mn (+35.1% YoY) and RM17.2mn (+40.7% YoY). The sheet metal fabrication and precision machining segments drove robust growth.  As a % of total revenue, they respectively accounted for 83.3% (-1.4pp YoY) and  16.7% (+1.4pp YoY) of total revenue.

Note that the improved % of the contribution from the smaller precision machining segment represents the group’s strategic effort to uplift profitability over the medium-to-longer term as the more complex processes involved versus sheet metal fabrication offer a higher margin. That said, FY22’s gross profit margin narrowed 2.4pp YoY to 26.2%, mainly due to increased costs from labour and raw materials, which are expected to be progressively passed through to customers.

Meanwhile, by industry, as a % of total revenue, contributions were led by semiconductor at 61.8% (+3.3pp YoY) and followed by instrumentation at 18.6%  (unchanged YoY), life science and medical devices at 13.8% (-2.2pp YoY). The balance of 5.8% (-1.1pp YoY) was from aerospace, telecommunications, and electrical and electronics.

Softer Order Book Amid Semiconductor Industry’s Slowdown

Into FY23, management guided Coraza’s book-to-bill ratio at <1.0x, with orders and deliveries to have softened by ~25-30% and order book standing at  ~RM70mn. The weakness is in tandem with the slowdown of the semiconductor industry, which is the group’s key end-user market. According to the SEMI  organisation, global semiconductor manufacturing equipment sales are forecasted to come off an estimated record high of US$108.5bn (+5.9% YoY) in  2022 towards US$91.2bn (-15.9% YoY) in 2023, before rebounding to US$107.2bn (+17.5% YoY) in 2024. As we factor in the weak near-term outlook, we have cut our FY23F/FY24F/FY25F earnings estimates by  33.5%/19.6%/8.8 to RM12.2mn/RM17.3mn/RM22.9mn after lowering sales in the corresponding period by 22.5%/11.9%/3.9%.

To navigate the near-term challenges, management shared the group’s strategic efforts over the coming 12 months, including i) investment in new machinery and special processes to improve production capacity, service offerings, and secure new customers, and ii) new product introduction projects related to the aerospace, telecommunications, and instrumentation industry to diversify customer and industry exposure.

Expansion Plans Intact, Albeit with Further Delays

On the expansion front, management shared that earlier plans to construct a  new factory adjacent to Coraza’s existing factory in Nibong Tebal, Pulau Pinang,  are intact. However, the commencement of construction has been delayed further from the original timeline of January 2022 to mid-2023. The new factory,  with a total built-up area of 91k sq ft, is expected to enlarge the group’s overall manufacturing floor space by ~46% to 290k sq ft.

Above all, we remain positive 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 Malaysia, which has been partly catalysed by the trade diversion theme amid US-China trade tension.

Valuation

Corresponding to our earnings downgrade and as we roll forward our base year valuation to CY24F, we revise our TP for Coraza lower to RM0.89 (previously  RM0.985) based on a PE multiple of 22.0x (previously 23.0x). Also, given the stock’s unfavourable risk-reward potential, we downgrade the stock to Sell.

Key risks include i) dependence on major customers, ii) raw material price fluctuations, and iii) geopolitical tensions weighing on economic growth and  disrupting supply chains.

Source: TA Research - 8 Mar 2023