Art of Investments


Publish date: Tue, 19 Dec 2023, 03:02 PM

Yesterday, a company listed and I was very surprised that it only opened 43% higher than IPO price because the fair value of this company could be as high as 4x from the IPO price.

The name of the company that listed yesterday is Critical Holdings Berhad.

What does Critical do?

It is a contractor. But what is so special about this contractor? It is not just a normal building or infrastructure construction player. Critical does very specialised work in the construction industry. More specifically, they provide design and construction service for critical facilities such as plantrooms, data centres and cleanrooms. Plantroom is a specific part of buildings that houses critical items such as boilers, chillers etc. All buildings have plantrooms. The plantroom is one of the most highly technical part of the building that requires special expertise that normal construction players will usually subcontract out. 

Because of the highly unique nature of Critical's work, their profit margins are also much higher than the normal construction players.

Critical has strong and fast-growing presence in the North of Peninsular Malaysia, especially in Penang. The boom in investments from MNCs setting up manufacturing facilities in Penang explains why Critical's revenue has been growing from just RM50million 2 years ago to an estimated RM200million this year. 

Critical does not have much presence in Johor, which is the centre of the data centre boom. It is also not easy for a company earning RM50million revenue to win data centre jobs in Johor which could be worth a few hundred million. With this IPO, Critical now has access to large funding and is poised to capitalise on the data centre boom in Johor. Below are some quotes and strategies highlighted by the management:

How to value Critical?

Critical's work is highly unique and because of this, they fetch higher margins than all the normal construction companies. In the most recent quarter, Critical recorded a net profit margin of 12%. The closest comparable would be HSS Engineering. HSS does not do the same work as Critical but they have very similiar characteristics to Critical in that HSS does highly specialised work in the construction industry and because of this, they also fetch double-digit profit margins of around 10%. HSS is valued at 26x PE today. If we were to assume a full year net profit of RM20million for Critical (10% margin on RM200million of revenue) and apply a PE of 26x, Critical would be valued at RM1.40 per share. At today's share price of RM0.57, there is a potential upside of 345%.

Based on Critical's latest quarterly profit and profit record for the past 2 years, this company is also almost certain to be eligible to transfer to the Main Board by next year. With their IPO, Critical will now be able to get financing easily and it is a matter of time before Critical clinches a large data centre job. 

It is a matter of time before Critical's share price reflects the undervaluation and massive future potential of the company.

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