Review

• Coraza’s 1HFY23 core net profit of RM1.0mn (-85.9% YoY) came within ours but below consensus full-year estimates at 23.0% and 11.6% respectively. We expect the group’s performance to improve in 2HFY23 as its customers’ inventory glut eases.

• YoY. 1HFY23’s core net profit sank 85.9% YoY to RM1.0mn as revenue declined 28.5% YoY to RM49.3mn. The weaker revenue was attributed to the ongoing deferral of orders from customers within the semiconductor industry amid an inventory glut. The lower utilisation coupled with additional fixed costs for expansion of capacity and capability led the core net profit margin to narrow 8.4pp YoY to 2.1%.

• QoQ. 2QFY23’s core net profit declined 19.4% QoQ to RM0.5mn with revenue lower 26.3% QoQ to RM20.9mn. The semiconductor industry's cyclical downturn affected revenue, which declined QoQ for the 3rd straight quarter.

Impact

• We maintain our earnings estimates.

Outlook

• Amid the semiconductor industry’s cyclical downturn, we expect Coraza’s to continue observing a softness in 2HFY23, albeit with improvements relative to 1HFY23 as its customers’ inventory glut eases.

• Notwithstanding, with the semiconductor industry poised for an eventual rebound, Coraza remains focused on its expansion plans and new product introduction process as it seeks to capitalise on the next upcycle. According to the Semiconductor Equipment and Materials International association, global sales of semiconductor manufacturing equipment are forecasted to rebound from US$87.4bn (-18.6% YoY) in 2023 to nearly US$100bn (+14.4% YoY) in 2024.

• Coraza’s capacity expansion plans include: i) the recently proposed acquisition of a ready-built 52,000 sq ft factory in Penang, and ii) the construction of a new 91,110 sq ft factory in Penang estimated for completion in 3QCY24.

Valuation & Recommendation

• 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 medium-to-long term 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 - 25 Aug 2023