Sustained Robust Growth for Coraza, Upgraded to “Buy” Rating: RHB IB

RHB Research has upgraded Coraza Integrated Technology to “BUY” rating from Neutral, with unchanged target price (TP) of MYR0.93. This shall translate to 23% upside. The research house attended Coraza Integrated Technology’s post-results group briefing, and came away feeling upbeat on its growth prospects. The group remains bullish on sustained robust demand from existing and potential customers, backed by its ongoing capacity expansion plans and c.1x healthy
book-to-bill ratio.

1H22 results recap. 1H22 revenue and core earnings were up 59.4% and 58.4% YoY driven by higher sales volume and favourable product mix, on top of benefiting from a strengthening USD. Nevertheless, 1H22 GPM dipped to 25.4% from 30.3% due to higher material and labour costs.

Outlook. Despite inflation challenges, supply chain issues and potential slowdown in semiconductor demand, management indicated that there is no cancellation of orders from its customers. Most of its customers (from various industries) continue to see strong growth moving into 2H22 and 2023. Besides, management also believes that the group is well poised to benefit from the robust foreign direct investment and electrical & electronic (E&E) ecosystem in Penang. On a brighter note, the group is not experiencing major labour shortage issues as it has managed to secure more than 100 foreign workers which will be coming in gradually. It is understand that the cost pass-through exercise (from the increase in material price and staff cost) is still ongoing and should reflect gradually in the upcoming quarters.

Expansion plans. Despite the slight delay in construction of its new factory, the group has rented an additional facility in Kulim, Kedah, and is looking to onboard a new customer that requires a bigger structure. Management also indicated that new machines are expected to arrive at the rental site within 6-9 months for capacity expansion. The new finishing line will enable the group to provide finishing services for aerospace parts in-house. This should allow it to save some logistic and packaging cost, which will lead to margin expansion. On a side note, Coraza does not rule out the option of acquiring rented facility/new buildings to cope with robust customers’ demand should there be an urgency and order certainty from these customers.

Turn bullish given the share price weakness. Coraza’s recent share price weakness presents a good buying opportunity into its strong growth outlook due to its various customers such as its front-end semiconductor customer, supported by its aggressive expansion plans, strategy of focusing on high-mix low-volume and newer products, on top of benefiting from a
strengthening USD. The research house maintains its forecasts and TP at MYR0.93, based on unchanged 20x FY23F P/E (at discount to industry peers), and after applying a 2% ESG discount, based on its proprietary ESG methodology. Note that the TP has also factored in the dilution from the proposed special issue of up to 14.3% of the total number of shares.

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

Salient points:

Target Price (Return): MYR0.93 (+23%)
Price (Market Cap): MYR0.755 (USD71.8m)
ESG score: 2.90 (out of 4)
Avg Daily Turnover (MYR/USD) 5.32m/1.19m

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