• CRITICAL plans to increase its exposure in the new regions by setting up regional offices, coupled with an expansion of technical personnel and the acquisition of new tools to capture the growing demand for critical facilities.
   
• At the IPO offer price of RM0.35, CRITICAL is trading at 13.6x based on FY23 core net EPS of 2.58 sen. Meanwhile, CRITICAL’s forward P/E valuation for FY24-25f is estimated at 11.1x and 10.5x, respectively.
   
• We arrived at our fair value of RM0.44 (25.7% potential upside from its IPO price) by ascribing a target P/E of 14x to our forecasted FY24f EPS of 3.15sen. The assigned P/E is at a 47.4% discount to CRITICAL’s selected peers’ average P/E of 26.3x, due to CRITICAL having a relatively smaller market capitalisation.

Company Overview

• Established in 2013, Critical Holdings Berhad (CRITICAL) is principally involved in designing and building, project management, supply, installation, testing, commissioning, maintenance and services support of MEP systems and equipment for critical facilities.

• CRITICAL was registered with CIDB as a Grade G7 contractor in 2014, which allows tendering for projects with unlimited contract value in Malaysia. In 2017, CRITCAL expanded in Kajang, Selangor with a new service and support office.

• There are two business segments, namely (i) MEP Engineering Solutions (91.49% of group revenue), which carried out on a project basis and payments are received based on progressive milestones or purchase orders and (ii) MEP Maintenance and Services (8.51% of group revenue), which are recurring revenue from preventive maintenance and services required on a regular basis.

• For MEP Engineering Solutions, clients consist of (i) critical facility owners/operators, in which CRITICAL is the main contractor, or (ii) main contractors, which CRITICAL would act as a subcontractor.

• Some of the Competitive Strengths of CRITICAL are:
  
  i. The ability to provide comprehensive MEP Engineering Solutions and are specialised in critical facilities
  
  ii. Adherence to stringer quality, safety and environmental standards in the delivery of the design and buld of MEP Engineering Solutions
  
  iii. Qualified and experienced key senior management team with proven track record supported by technically competent engineering personnel
  
  iv. Wide client network and established relationships with subcontractors and suppliers
   
• From 2018 to 2022, the MEP engineering industry in Malaysia has grown by a CAGR of 14.8%. Going forward the industry is expected to grow by a CAGR of 15.2% from 2022 to 2025, supported by demand factors such as:
  
  i. Expansion in the local end-user industries, which requires MEP engineering services, in industries namely the Semiconductor and electronics, Telecommunications, Data Centres and Solar industries.
  
  ii. Foregin investment and domestic investment in services, manufacturing and primary sectors.
  
  iii. Increasing outsourcing and relocation of E&E manufacturing activities to Southeast Asia.
   
• CRITICAL has 2.3% of market share. The MEP engineering industry has unique barriers to entry as a CIBD license is required, coupled with a strong team of experienced personnel to ensure the projects can run smoothly, producing optimal results.

Investment merits

• Regional expansion to central and southern regions and expansion of project capacity. CRITICAL plans to increase its exposure in the new regions by setting up regional offices, coupled with an expansion of technical personnel and the acquisition of new tools. These manoeuvres will help CRITICAL to gain exposure from M&E clients in the regional areas, as well as gaining the ability to take on more projects at a time and tackle bigger scale projects.

• Growth of end user industries which require critical facilities such as data centres, Semiconductor/E&E, Telco and Solar Power. Such end user industries are driven by the growth in foreign and domestic investments, increased outsourcing and relocation of manufacturing to SEA due to the US-China trade war and the Northern state E&E & Southern state data centre growth. Therefore, we believe CRITICAL’s potential regional exposure and the stronger capacity will help CRITICAL to capture this lucrative opportunity. Do note that CRITICAL has numerous Data Centre projects in the orderbook, one with a contract value of RM38.5m, which demonstrates CRITICAL’s capabilities in building data centres.

Financials

• Strong sales and earnings growth from FY21 to FY23. In FY23, CRITICAL recorded revenue of RM150.9m (2 Year CAGR of 67.6%) and core PATMI at RM9.6m (2 Year CAGR of 41.4%) due to the strong growth in the orderbook.

• Projected to grow in line with the expansion plans. We forecast CRITICAL’s revenue to grow at 21% and 10% to RM182.6-200.9m for FY24-25f supported by (i) growing end user industries, hence growing demand for critical services and (ii) the expansion of CRITICAL’s technical personnel to carry out projects. Thus, we project its core PATMI to grow at a rate of 22-6% to RM11.7-12.4m for FY24-25f.

Valuation

• At the IPO offer price of RM0.35, CRITICAL is trading at 13.6x based on FY23 core net EPS of 2.58 sen. Meanwhile, CRITICAL’s forward P/E valuation for FY24-25f is estimated at 11.1x and 10.5x, respectively.

• We arrived at our fair value of RM0.44 (25.7% potential upside from its IPO price) by ascribing a target P/E of 14x to our forecasted FY24f EPS of 3.15sen. The assigned P/E is at a c.47.4% discount to CRITICAL’s selected peers’ average P/E of 26.3x, due to CRITICAL having a relatively smaller market capitalisation.

• CRITICAL pledges to a 25% dividend pay-out ratio to shareholders, which may translate to 2.2-2.4% dividend yield for the next two years.

Investment risks

• A significant portion of revenue is derived from the top 5 customers. Therefore, there may be income risks without long-term agreements with the top 5 customers, which accounts for 67.4% of revenue in FY23, as the contracts awarded are on a project-byproject basis, hence failure to maintain a working relationship with these customers may cause CRITICAL to lose a significant portion of revenue and it may take time for new customers to fill the revenue gap of the major customer.

• Dependent on the performance of end user markets of customers. CRITICAL’s business is dependent on the continued development of the end-user markets of customers, therefore in the case of a retraction in such end user markets, the demand from CRITICAL’s services may fall significantly, thus negatively impacting its revenue.

Source: Mplus Research - 18 Dec 2023