Critical Holdings Berhad (CHB, 0291) will be making its debut on Bursa ACE Market today. The company primarily offers engineering solutions and maintenance services for Mechanical, Electrical, and Process Utilities (MEP) to critical facilities such as plant rooms, cleanrooms and data centres. Underpinned by its (i) complementary business model of engineering and maintenance services; (ii) robust orderbook equivalent to 1.75x of FY23 revenue; (iii) improving order wins outlook as CHB gradually transforms into a main contractor, we expect CHB to register core net earnings of RM14.8m and RM18m for FY24 and F25 respectively. BUY with a FV of RM0.48 based on 12x over FY24 EPS, a 30% discount to its listed peers on Bursa Malaysia due to its smaller market capitalisation.

CHB has two main business segments namely MEP Engineering and MEP Maintenance & Services. CHB typically is able to crosssell its MEP Maintenance & Services to ensure the proper functioning of MEP equipment and system. Such business model offers CHB additional growth opportunity from a complementary recurring business that has more stable and higher (at least 10% compared to MEP Engineering) gross profit margin.

As at 29 Oct 2023, CHB’s orderbook stood at RM264.5m, with more than RM150m expected to be recognized in FY24. It is noteworthy that CHB mainly targets the semiconductor, data center, telecommunication and medical & pharmceutical industries. CHB has earmarked RM6m from its IPO proceeds to acquire and set up new regional office in the central region of Malaysia to facilitate its growth especially in data centre business. In addition, CHB also plans to allocate 1,500 sqft for a testing facility for MEP systems to further enhance the integrity of its products and services. To further support its business expansion, CHB also intend to utilise RM6.1m to recruit an additional 51 skilled labours as well as acquire engineering tools, software, and motor vehicles.

CHB has also made noteworthy progress in vertically integrating into a main contractor as the share of revenue from main contractor job increased from 6% in FY20 to 35% in FY23. With RM9.9m from the IPO proceeds allocated as working capital, we anticipate a sustained revenue growth as a main contractor going forward, hence reducing the risk of bad debt while improving order wins outlook moving forward.

CHB is targeting to distribute a dividend of 25% from its earnings. Based on our estimates, the company is expecting to pay dividends of 0.1 sen per share for FY24 and FY25, translating into yields of 2.8% and 3.5% respectively. Balance sheet is solid with a a net cash position of RM7m as of 1QFY24.

Source: Rakuten Research - 18 Dec 2023

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