• D/G NEUTRAL from BUY, new MYR0.87 TP from MYR1.04, 0% upside. Coraza Integrated Technology has proposed a private placement of up to 20% of total number of issued shares, potentially raising up to MYR69.5m in multiple tranches. It has also proposed a long-term incentive plan (LTIP) of up to 10% of the total issued share capital over five years. We are neutral on the proposals, given the potential near-term share price overhang and dilution to EPS, but believe the funds raised to finance expansion and facility upgrades could accelerate and capture various growth opportunities.

• Proposed private placement and LTIP. Based on the indicative issue price of MYR0.81/share, a maximum of 85.8m shares may be issued to independent third-party investors. The MYR69.5m of proceeds is earmarked for the purchase of new machinery (MYR44.6m or 64.1%), debt repayment (MYR9.9m or 14.2%), and general working capital (MYR14.1m or 20.2%), while the remainder will be for related expenses for the exercise. The proposal is expected to be completed by 4Q23, upon securing relevant approvals including the shareholders’ mandate via an EGM. Meanwhile, the proposed LTIP of up to 10% of total issued share capital for eligible directors and employees comprises a share grant plan and employees stock option scheme or ESOS, and will be for a period of five years.

• Neutral on the proposal. Despite the near-term dilution to its EPS, we understand that this exercise will allow Coraza to increase its capacity and expand its machining capability for high tolerance and complex components, while tapping into new markets and broadening its customer base. A clean room and additional facility are planned for high-level assembled semiconductor products. On a proforma basis, EPS dilution would be at 20%, assuming the maximum scenario before taking into account the proceeds utilisation. Net tangible asset/share could rise to MYR0.17/share, while net cash/share may increase to MYR0.15 from MYR0.02 currently.

• Outlook. Despite current inflationary challenges and softening demand from the semiconductor space, especially in 1H23, management remains cautiously optimistic and will continue to explore opportunities to expand the existing portfolio to a more diversified customer exposure. New project wins from the aerospace, telecommunications, and instrumentation industries will help to cushion the demand volatility. Moving forward, margins may improve from stabilising raw material prices, operational efficiencies, and a favourable product mix, along with the ongoing cost pass-through exercise.

• Our forecasts are unchanged, except for the minor effects from tweaking our capex assumptions. We assume the maximum scenario dilution from the proposals resulting in a lower TP of MYR0.87 (was MYR1.04), based on unchanged FY23F fully diluted P/E of 20x (a discount to industry peer average of c.30x) and after applying a 2% ESG discount, based on our proprietary ESG methodology. Key risks: Dependence on major customers, labour shortages, FX rate fluctuations.

Source: RHB Research - 30 Mar 2023