• Stay BUY, new MYR0.91 TP from MYR0.93, 33% upside. Coraza Integrated Technology posted a record-high 3Q22 revenue on improved business performances and a favourable FX rate. Nevertheless, 9M22 core earnings of MYR11.4m (+35.6% YoY) were a slight miss on lower-than-expected margins – dragged down by higher fixed costs. Yet, we remain bullish on its sustained robust demand from existing and potential customers from various industries, backed by its ongoing capacity expansion plans, orders, and cost past-through exercise.

• Slight miss. 9M22 revenue of MYR107.4m (+50.6% YoY) and core earnings of MYR11.4m were below our estimate at 62.9% but within consensus’ 74.4% projection. This was on higher-than-expected raw material and labour costs from the minimum wage policy and set-up cost of a 57k sq ft third plant in Kulim (Kedah) – resulting in a 9M22 GPM compression by 5.4pts YoY to 24.8%. Overall, the better YoY performance was mainly driven by higher sales volume, backed by additional floor space of a 20k sq ft plant on top of benefiting from a strengthening USD.

• Results review. 3Q22’s historic-high revenue of MYR38.6m (+37.1% YoY, +11.7% QoQ) was mainly attributed from the sheet metal fabrication segment, which accounted for MYR32m (+32.1% YoY, +10.2% QoQ) – making up 83.1% of 3Q22 topline – while the precision machining wing booked a revenue of MYR6.5m (+68.5% YoY, +19.4% QoQ). Coraza recorded 3Q22 core earnings of MYR4m (+6.8% YoY, +19.5% QoQ). The strong performance was mainly due to improved business performances and a favourable FX rate.

• Outlook. Despite inflationary challenges, supply chain issues, and a potential slowdown in semiconductor demand, Coraza remains positive about sustained robust demand from existing and potential customers. The group secured several new projects in the instrumentation industry and is currently working at an almost-full capacity. The construction of its new 91k sq ft adjacent plant expansion (slated to be ready by 2H23) and continued investment in new machineries should improve its production capacity and service offerings to meet with the increasing customer demand.

• Forecasts and ratings. We cut our FY22F-24F earnings by 8.6%, 2.2%, and 2.1% after factoring in higher labour cost assumptions. Our TP was also adjusted to MYR0.91 based on an unchanged 20x FY23F P/E (at a c.30% discount to industry peers) and after applying a 2% ESG discount based on our proprietary ESG methodology. Maintain BUY, as the valuation remains undemanding, considering Coraza’s strong growth outlook amid a healthy book-to-bill ratio that is supported by its aggressive expansion plans and strategy of focusing on high-mix-low-volume and newer products on top of benefiting from a strengthening USD.

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

Source: RHB Research - 29 Nov 2022