• Initiate BUY, MYR0.82 TP based on 17x FY23F P/E, 41% upside. We like Coraza Integrated Technology for its solid growth path (3-year CAGR: 29.2%), backed by a c.1x healthy book-to-bill ratio, and the structural growth in semiconductor equipment demand. It has process know-how in varying complexities and exposure to the front-end semiconductor supply chain. Ongoing capacity expansion plans should enable Coraza to further improve operating efficiency and grow its market presence. Our 17x target P/E is line with its closest peers, but below the industry average.

• Integrated engineering supporting services provider. It provides a wide range of services including fabrication of sheet metal, precision engineering, and related services such as design and development (D&D) and value-added sub-module assembly. From the early D&D stage, Coraza collaborates with its customers to provide additional inputs on design and manufacturability of the desired products. The ability to provide processes with varying complexities and high tolerance in a cost-efficient manner allows it to thrive and build sticky relationships with customers.

• Positive outlook for semiconductors. According to IDC, FY22 will be another record-breaking year for the semiconductor industry. Structural technology advancements, such as the proliferation of EVs, IoT, and E&E devices (which mainly consist of semiconductors), have resulted in increased demand in semiconductor-related industries, from the front-end design house and foundries to back-end OSATs, equipment makers, and the engineering supporting industry (ESI) that supplies various parts and components. As part of the supply chain for some of the leading equipment makers and EMS players, Coraza stands to benefit from the prolonged growth cycle and the abundance of demand for engineering supports and metal sheet, stemming from the robust FDI and E&E ecosystem in Penang.

• Aggressive expansion plan to capture immense growth opportunities. In anticipation of strong demand for its services, Coraza intends to construct a new factory with a total built-up area of c.91,110 sq ft (+98%) to expand its production capacity and capabilities. It also intends to purchase new machinery to bring its total machine count from 75 to 81 over the next three years. The additional laser, turret, and bending machines will increase its metal sheet fabrication capacity by c.25%.

• Earnings estimates and valuation. We project above-industry growth, ie 29.2% 3-year earnings CAGR, supported by greater capacity on the back of a business expansion to capture structural demand growth – given its overall capabilities, operating excellence and long-term relationships with its clientele. Also, the strategy of focusing on high-mix low-volume and newer products from its front-end semiconductor clients should contribute to further margin growth, on top of benefiting from a strengthening USD. Our 17x target P/E is in line with its closest peer’s, SFP Tech (SFPTECH MK, NR) but below the 26x industry average. Our TP includes a 2% discount on its intrinsic value, based on its ESG score of 2.9. Key risks: Dependence on major customers, labour shortage and FX rate fluctuations.

Source: RHB Research - 30 Jun 2022