• MYR0.47 FV based on 14x FY25F (Jun) P/E. Critical Holdings plans toraise MYR26m from its IPO primarily for capex, acquisition of a new regionaloffice, expansion of the sales and technical team as well as working capital.We forecast a 3-year earnings CAGR of 12%, underpinned by the group’sstrategic expansion into the central region in West Malaysia (which mayfacilitate its future expansion in the southern region) and the rise in demandfrom its end-user industries, especially semiconductor players, data centresand solar photovoltaic (PV) manufacturers.

• A critical facilities expert. Founded in 2014, CHB has been deliveringmechanical, electrical and process utilities (MEP) design and engineeringservices tailored for buildings and facilities that require such criticalinfrastructure. This niche market demands highly technical skills,automatically forming an extra barrier to entry. Over the years, the companyhas maintained an excellent track record, with more than 74% of FY23 jobscoming from recurring clients, a testament to its good workmanship.

• Expanding footprint into the central and southern region. CHB isplanning to allocate 23% of the IPO proceeds to acquire a new regionaloffice in the central region. As there are more potential critical facilities(especially data centres and semiconductor facilities) to be set up in theCyberjaya, Selangor and Johor areas, we think this expansion is crucial forthe group to exhibit a stronger presence in the central region and potentially,down south. For FY23, plantrooms and cleanrooms contributed more than30% of CHB’s orderbook while data centres made up 14.7%.

• Bright prospects of end-user industries, including the E&E,semiconductor, data centre, and solar power sectors. This is seen throughthe sizeable investments into Malaysia planned by notable technologygiants ie Infineon Technologies, which earmarked MYR25bn to expand inKulim, Kedah. Also, the Malaysian data centre market size is expected topost a CAGR of 9.4% in 2022-2028, while the National Energy TransitionRoadmap (NETR) has set a focus towards solar energy – necessitatingsolar PV manufacturing (which also requires critical facilities ie plantrooms).

• We estimate CHB’s core earnings to increase by c.18%, 9% and 10%YoY in FY24F-26F. This is backed by growth prospects of its clients’industries (data centres, semiconductor, solar PV) which can solidify jobreplenishment. Recurring net profit margin is expected to stabilise at c.7%in FY24F-26F, taking into account of the successful penetration into newmarkets and less-volatile building material prices.

• Valuation. We ascribe a MYR0.47 FV based on 14x FY25F P/E. For peercomparison purposes, we chose contractors that are involved inconstruction of critical facilities ie data centres plus semiconductor playersas they require plantrooms and cleanrooms. The target P/E is c.41% belowthe blended 23.6x 2-year forward P/E of the selected peers – premised onthe smaller indicative market capitalisation.

• Key risks include a slowdown in the E&E markets, slower-than-expectedjob replenishments and low availability of construction materials.

Source: RHB Securities Research - 5 Dec 2023