Coraza is acquiring a ready-built factory situated on 91,902 sq ft of freehold industrial land in Nibong Tebal, Penang, for RM17.7mn. We view the acquisition positively, as it will allow Coraza to capture opportunities and meet the demands of new projects. If we assume that the factory has a built-up area of 52,000 sq ft, it is estimated to enlarge Coraza’s total manufacturing floor space by 52.5%. The acquisition price at RM192/sq ft is comparable to properties in the vicinity of similar scale. In all, we maintain our earnings forecasts pending the completion of the acquisition, which is expected within three months. Reiterate Buy with unchanged TP of RM0.865 (22.0x CY24F EPS).

Acquiring Ready-Built Factory

• Coraza Integrated Technology Berhad (Coraza) is acquiring 91,902 sq ft of freehold industrial land together with offices and factories erected thereon in Nibong Tebal, Penang, for a total cash consideration of RM17.7mn from Huhtamaki Foodservice Malaysia Sdn Bhd.

• Coraza intends to finance the acquisition via a combination of internally generated funds and bank borrowings, with the exact proportion to be decided by the group’s Board of Directors at a later stage.

• According to the announcement, the acquisition is a strategic move, given the property’s prime location. It is situated opposite Coraza’s existing plant in Nibong Tebal, Penang, which houses its main production activities. Additionally, the acquisition will provide the group with an immediate increase in capacity while construction of its upcoming plant (adjacent to its existing plant in Nibong Tebal, Penang) is underway. Construction of the upcoming plant is scheduled to commence in 3QCY23 and is estimated for completion by 3QCY24. As such, the latest acquisition will allow Coraza to do away with leasing additional plants and, thereby, mitigate potential leasing and sunk costs. Moreover, the acquisition is also expected to ensure greater control over operations, better workforce support, and improved logistics arrangement, leading to long-term cost savings and the group’s overall operations streamlining.

Our View: Acquisition to Support Growth

• We are optimistic about the acquisition of the ready-built factory as it will allow Coraza to capture opportunities and meet the demands of newly awarded projects. While Coraza’s key end-user market, the semiconductor industry (61.8% of FY22 revenue), is undergoing a downcycle, it is poised to rebound in 2024. The World Semiconductor Trade Statistics organisation forecasts semiconductor sales in 2023 to decline 10.3% YoY to US$515.1bn before staging a rebound of 11.8% YoY to US$576.0bn in 2024.

• Meanwhile, we also expect the additional manufacturing space to allow Coraza to perform additional fabrication processes in-house versus outsourcing. While potentially translating to improved margins, this aligns with the group’s technology roadmap to evolve into a one-stop metal fabrication solution provider. If we assume that the factory has a built-up area of 52,000 sq ft, it is estimated to enlarge Coraza’s total manufacturing floor space by 52.5% (versus its existing manufacturing floor space of 99,066 sq ft).

• No valuation was carried out for this acquisition, with the property's purchase price arrived at on a willing-buyer willing-seller basis. However, we gather from the property portal iProperty that the purchase price of RM192/sq ft is comparable to properties in the vicinity of a similar scale with an asking price of RM209/sq ft. Assuming the acquisition is fully funded via borrowings, we estimate Coraza to turn from net cash (RM4.2mn as of end-1QFY23) to net debt but with net gearing low at 0.1x. Meanwhile, we estimate associated interest expenses to dilute our FY24F/FY25F earnings by <3.0%.

Impact

• We maintain our earnings forecasts pending the completion of the acquisition, which is expected within 3 months.

Valuation

• In all, we maintain our Buy recommendation on Coraza with a TP of RM0.865 based on 22.0x CY24F EPS. Beyond expectations for a 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 - 15 Aug 2023