Coraza Integrated Technology has proposed a private placement of up to 20% of total number of issued shares, potentially raising up to RM69.5 million in multiple tranches. It has also proposed a long-term incentive plan of up to 10% of the total issued share capital over five years.
RHB Research (RHB) said in the recent Malaysia Company Update report that they are neutral on the proposals, given the potential near-term share price overhang and dilution to earnings per share, but believe the funds raised to finance expansion and facility upgrades could accelerate and capture various growth opportunities.
Based on the indicative issue price of RM0.81/share, a maximum of 85.8 million shares may be issued to independent third-party investors. The RM69.5 million of proceeds is earmarked for the purchase of new machinery (RM44.6 million or 64.1%), debt repayment (RM9.9 million or 14.2%), and general working capital (RM14.1 million or 20.2%), while the remainder will be for related expenses for the exercise.
The proposal is expected to be completed by quarter four 2023, upon securing relevant approvals including the shareholders’ mandate via an emergency general meeting.
Meanwhile, the proposed long-term incentive plan of up to 10% of total issued share capital for eligible directors and employees comprises a share grant plan and employees stock option scheme, and will be for a period of five years.
“Despite the near-term dilution to its earnings per share, 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,” said RHB.
A clean room and additional facility are planned for high-level assembled semiconductor products. On a proforma basis, earnings per share dilution would be at 20%, assuming the maximum scenario before taking into account the proceeds utilisation. Net tangible asset/share could rise to RM0.17/share, while net cash/share may increase to RM0.15 from RM0.02 currently.
Despite current inflationary challenges and softening demand from the semiconductor space, especially in the first half of 2023, 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 capital expenditure assumptions,” said RHB.
RHB Research assumed the maximum scenario dilution from the proposals resulting in a lower trading price of RM0.87 (was RM1.04), based on unchanged financial year 2023 future fully diluted price-earnings ratio of 20x (a discount to industry peer average of c.30x) and after applying a 2% environmental, social and governance discount, based on their proprietary environmental, social and governance methodology. Key risks include dependence on major customers, labour shortages, forex rate fluctuations.