Following our recent meeting with management, we are more upbeat about CORAZA’s outlook, underpinned by a demand recovery amid the upcycle of the global semiconductor sector. Management believes the worst is over, and the group will likely continue seeing sequential improvements in the upcoming quarters. The group has recently seen an increase in orders, with its order book at around RM70.0mn. Management is confident that the order book will continue to grow, underpinned by the strong upcycle in the global semiconductor sector. On the other hand, the large-scale expansion plans in Nibong Tebal, Penang, are progressing well, with P3 targeted for completion by July 2025, while P5 is expected to commence operations in 4Q2024. Overall, we maintain a Buy call with a higher target price of RM0.66.

Expect the Turnaround to Continue

To recap, the past few quarters have been very challenging for CORAZA as the group faced the downturn of the global semiconductor sector in 2023. Amid this challenging period, the group also experienced persistent deferrals of orders from semiconductor customers. The loss of economies of scale, coupled with additional fixed costs for capacity expansion, caused CORAZA to slip into a loss in 3QFY23. Since then, the group continued to report losses until the recent quarter, 3QFY24, when it managed to return to profitability by recording a core profit of RM2.3mn. This turnaround was driven by a recovery in demand as the global semiconductor sector returned to an upcycle, as well as higher contributions from the introduction of new products. The encouraging results in 3QFY24 mark the third consecutive quarter of QoQ earnings improvement.

Moving forward, management believes that the worst is over and that the group will likely continue seeing sequential improvements in the upcoming quarters, underpinned by a recovery in demand.

Seeing More Orders Coming Back

The group has recently seen an increase in orders, with its order book standing at around RM70.0mn, approximately 50% of which comes from the semiconductor sector and 32% from instrumentation. Growth will continue to be largely driven by its key end-user markets, including semiconductor, instrumentation, and life sciences and medical devices. Meanwhile, the group has started to see more meaningful contributions from new product introductions.

Overall, management is confident that the order book will continue to grow, underpinned by the strong upcycle in the global semiconductor sector. The global semiconductor market is expected to close in 2024 on a high note, driven by robust demand fueled by investments in AI data centres. Looking ahead, the World Semiconductor Trade Statistics Organization forecasts semiconductor sales to jump 11.2% YoY, reaching USD697.2bn in 2025.

Going forward, management guided that while the group will continue working closely with key customers, it will also focus on other industries, including aerospace and telecommunications, in order to reduce the group's concentration risk in the semiconductor industry.

Expansion Plans Remain Intact

In terms of the plant capacity expansion plan, management has provided the latest update on the progress of P3 and P5 in Nibong Tebal, Penang. P3 is still under construction and is targeted for completion by July 2025. The new plant, featuring approximately 83k square feet of production floor space, is expected to be operational in 4Q2025. As of September 2024, the construction progress was recorded at 19.7%. On the other hand, P5 is targeting to commence operations in 4Q2024. P5 has about 53k square feet of production floor space and will offer a comprehensive one-stop solution for the fabrication of complex frames and structures.

Overall, we remain positive about Coraza’s sizeable expansion plans, as it will allow the group to strategically capture growing opportunities from both existing and new customers, partly catalyzed by the trade diversion theme amid US-China trade tensions.

Impact

As we factor in a stronger outlook, adjustments are made to reflect higher sales volume assumptions. Consequently, earnings forecasts for FY25 and FY26 were raised by 14.1% and 14.2%, respectively.

Valuation & Recommendation

After revising the earnings forecasts and rolling forward our valuation base year to CY26, we revised the target price from RM0.49 to RM0.66, based on a PE multiple of 22.0x CY26F EPS. Maintain a Buy call on the stock. Overall, we like CORAZA for its medium-to-long-term earnings growth prospects backed by its expansion plans and exposure to high-growth industries, including semiconductor, instrumentation, and medical and life science.

Key downside risks include: i) dependence on major customers, ii) raw material price fluctuations, and iii) geopolitical tensions both weighing on economic growth and disrupting supply chains.

Source: TA Research - 16 Dec 2024