• Still BUY, unchanged TP of MYR0.62 offers 77% upside. Coraza Integrated Technology’s 9M24 results are in line, with the sharp rebound in GPM stemming from better operating leverage due to a sales recovery. We believe its recent share price weakness presents a compelling opportunity for investors to accumulate and ride on the recovery in semiconductor equipment demand. Our outlook also remains positive, underpinned by the company’s strong engineering expertise, solid customer base, and exposure in the front-end semiconductor supply chain.

• Within expectations. 9M24 core profit of MYR0.2m came in within our and Street estimates. Note that we stripped off an unrealised FX loss of MYR1.8m to arrive at the core profit.

• Results review. YoY, 9M24 sales rose 13% to MYR73.4m, due to the recovery of orders from semiconductor customers and positive contributions from new product introductions. 9M24 GPM improved 2ppts YoY to 18.4%, from the recovery in revenue – which led to stronger operating leverage. Geographically, 9M24 sales increased in Malaysia (+14%) and Singapore (+16%). This was partly offset by a decline in sales in the US (-16%). QoQ, 3Q24 revenue surged 46.3% to MYR31.8m, while GPM rebounded sharply by 9.5ppts to 25.5%, attributed to aforementioned factors. Consequently, 3Q24 recorded core earnings of MYR1.9m, marking a turnaround from the MYR0.3m loss in 2Q24.

• Outlook. Gartner projects global semiconductor revenue to grow by 14% YoY in 2025, driven by the end of the inventory correction cycle. As a supplier to leading equipment manufacturers and EMS players, Coraza is well- positioned to benefit from the sector's anticipated upcycle. A ramp-up in order volumes from existing and new customers should lead to margin expansion, leveraging operating efficiencies and better economies of scale. This should, in turn, offset the high fixed costs chalked post-listing expansion. Construction of new factory began in July, and this will double its floor space when operational by 4Q25 – in time to capture the anticipated upswing in demand. Also, the group continues to proactively refine its manufacturing processes to enhance efficiency and effectiveness, while implementing cost control measures to mitigate the financial impact of FX fluctuations.

• Forecast and ratings. We make no changes to our earnings forecasts and MYR0.62 TP (inclusive of a 4% ESG discount). Our TP implies 20x FY25F P/E, which is close to its 3-year mean.

• Key downside risks: Slower-than-expected semiconductor sector recovery, labour shortages, and FX rate fluctuations.

Source: RHB Securities Research - 27 Nov 2024