Review

• Coraza’s 1QFY23 core net profit of RM0.6mn (-90.5% QoQ, -84.6% YoY)  came below ours and consensus full-year estimates at 4.6% and 3.4%. On our end, while revenue was in line, the miss was due to weaker-than-expected margin as a result of operating leverage. Core earnings exclude  unrealised forex gain of RM1.5mn.

• Coraza’s core net profit sank 90.5% QoQ and 84.6% YoY to RM0.6mn as  revenue declined 21.1% QoQ and 17.4% YoY to RM28.3mn. The drop in  revenue was mainly due to push-out orders from customers within the semiconductor segment followed by the ongoing inventory adjustment cycle. The lower utilisation coupled with additional fixed costs from expansion plans at the group’s Kulim plants caused core PBT margin to narrow 3.3pp QoQ and 7.0pp YoY to 8.3%.

Impact 

• We have cut our FY23F earnings estimates by 63.9% upon factoring in weaker margins to reflect actual 1QFY23 results. Our FY24F/FY25F  earnings estimates are only revised slightly lower by 2.3%/2.6% as utilisation in those years are expected to remain high.

Outlook

• We expect Coraza to observe a slowdown in FY23. Management anticipates a subdued outlook in the next 2 quarters. This is in tandem with weaker demand from the group’s key end-market semiconductor segment, which is undergoing a downcycle. That said, Coraza remains focused on its expansion plans and new product introduction process as it seeks to capitalise on the next upcycle.

Valuation & Recommendation

• Following the earnings revision, our TP for Coraza is lowered to RM0.865  (previously RM0.89) based on 22.0x CY24F EPS. However, given the stock’s improved risk reward potential following recent share price correction, we upgrade our recommendation from Sell to Buy. Beyond  expectations for transitory slowdown in FY23, we view that Coraza is  poised for a rebound once the tide for the semiconductor industry turns.

• We like Coraza for its earnings growth prospects backed by its expansion  plans, exposure to high growth industries including semiconductor and  instrumentation, and established relationships with multinational  corporations.

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

Source: TA Research - 29 May 2023