Review

• Coraza reported a 9MFY23 core net loss of RM0.2mn, which came below ours and consensus full-year estimates for core net profit of RM4.4mn and RM3.0mn, respectively. On our end, results missed on weaker-than-expected revenue primarily due to the persistent deferral of orders from semiconductor customers.

• YoY. 9MFY23’s revenue dropped 39.6% YoY to RM64.9mn, primarily due to the persistent deferral of orders from semiconductor customers amid the semiconductor industry’s cyclical downcycle and inventory glut. The loss of economies of scale, coupled with additional fixed costs for expansion of capacity and capability, led Coraza to slip into the red with a core net loss of RM0.2mn versus a core net profit of RM11.2mn in 9MFY22.

• QoQ. In tandem with the semiconductor industry’s cyclical downcycle, revenue declined QoQ for the 4th consecutive quarter. As 3QFY23’s revenue declined 25.0% QoQ to RM15.7mn, Coraza slipped into the red with a core net loss of RM1.3mn versus a core net profit of RM0.5mn in 2QFY23.

Outlook

• While the semiconductor industry is at the tail end of the cyclical downcycle, we expect Coraza to continue observing softness in the near term.

• 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.

Impact

• To reflect actual 3QFY23 results and expectations for ongoing softness in the near term, we have lowered our FY23F/FY24F/FY25F revenue by 31.3%/13.7%/6.5%. Correspondingly, we now forecast earnings in the corresponding period at -RM1.9mn/+RM13.5mn/+RM20.3mn (previously +RM4.4mn/+RM16.9mn/+RM22.3mn).

Valuation & Recommendation

• Following our earnings downgrade, our TP for Coraza is lowered to RM0.60 (previously RM0.865) based on 22.0x CY24F EPS. Nevertheless, 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. Maintain Buy.

• 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 - 30 Nov 2023