• Still NEUTRAL, new MYR0.77 TP from MYR0.81, 2% downside, c.2% yield. 1Q23 earnings missed expectations, mainly on weak market demand and cost pressures. We cut our forecasts to reflect the softer numbers stemming from the slowdown in overall semiconductor demand and higher cost assumptions. That said, we believe the aforementioned weaknesses may be in the price, and its current valuation is fair, in light of its robust expansion plans for future growth and potential volume recovery in 2H23.

• Results below expectations. Coraza’s 1Q23 core profit of MYR0.2m (- 95.2% YoY, -96.9% QoQ) met only 1.1-1.2% of our and consensus’ full-year estimates due to weaker-than-expected revenue and GP margins, which contracted by 4.0ppts YoY to 22.6%. Note that we stripped off the unrealised FX gain of MYR1.5m to arrive at the core profit. Geographically, sales in Malaysia (-12.0%), Singapore (-34.7%) and the US (-10.5%) were all lower.

• Results review. 1Q23 revenue fell 17.4% YoY (-21.1% QoQ) to MYR28.3m due to weaker performance from both the sheet metal fabrication (-10.5% YoY, -15.2% QoQ) and precision machining (-50.3% YoY, -50.4% QoQ) segments. This was due to soft demand from semiconductor customers, in view of global macroeconomic headwinds. 1Q23 GP fell 29.8% YoY (-41.3% QoQ) to MYR6.4m on lower capacity utilisation, higher input costs, and loss of economies of scale. Similarly, 1Q23 PBT decreased 33.1% YoY (-43.4% QoQ) to MYR2.3m, in line with the weaker revenue performance.

• Outlook. Management remains cautious, in view of the overall weakness in the semiconductor industry, which may persist before a recovery is seen towards 4Q23. On a brighter note, management believes the weakness may be partially offset by new project wins, ongoing expansion plans, cost past- through exercises, and volume recovery in 2H23. The construction of its new 91,000 sq ft adjacent plant expansion (to be ready by 1Q24) should allow Coraza to increase its capacity and expand machining capabilities for high- tolerance and complex components, while tapping into new markets and broadening its customer base. The company also secured c.200 new foreign workers, who will be arriving gradually.

• Forecast and ratings. Given the earnings miss, we cut FY23-FY25 earnings by 30%, 5.6%, and 1.2%, taking into account the inflationary challenges and lacklustre demand outlook. Our TP is lowered to MYR0.77, based on an unchanged 20x FY24F P/E, and is inclusive of a 4% ESG discount, as Coraza’s ESG score of 2.8 is below the country median. While we believe the demand outlook will recover towards 2H23, we are unsure of the pace of recovery. Therefore, we maintain our cautious stance on the company for now, given the less attractive risk-to-reward ratio.

• Key risks: Dependence on major customers, labour shortages, and FX rate fluctuations.

Source: RHB Research - 29 May 2023