This article first appeared in The Edge Malaysia Weekly on September 30, 2024 - October 6, 2024

PENANG-headquartered Critical Holdings Bhd (KL:CHB), which was listed on the ACE Market of Bursa Malaysia last December, appears to be in a good position to ride the nation’s data centre (DC) boom. Having strengthened its core businesses over the last decade, the mechanical, electrical and process utilities solutions (MEP) and maintenance services provider hopes to clinch more DC and semiconductor jobs.

“There has been quite a lot of mention of semiconductor and DC projects down south and centrally in Selangor. We are setting up a central regional office [in Johor] in the next two months to take advantage of this growth,” its CEO Tan Si Lim tells The Edge in an exclusive interview in Kuala Lumpur.

“Our goal is to increase the revenue contribution from data centres while maintaining the strong performance of our plant room and clean room segments. By leveraging our established MEP solutions expertise and expanding our presence in key growth areas, we are confident in sustaining this momentum and driving long-term growth.”

Notably, Maybank Research Pte Ltd said in a Sept 24 report that it expects DC demand in Asean to increase at a compound annual growth rate of 20% over four years.

Critical Holdings has two main divisions — one supplying MEP solutions and another providing service and maintenance, handling after-sales support and contributing recurring income to the group. Both segments contributed about 91% and 9% to the group’s revenue, respectively,  in the financial year ended June 30, 2023 (FY2023). The MEP business focuses on clean rooms, plant rooms and data centres.

Critical Holdings raised RM26 million from its initial public offering last year, of which RM6 million has been allocated for the acquisition of the new regional office, primarily to support its DC projects, as well as RM1.6 million to purchase new engineering tools, software and motor vehicles.

The company has also allocated RM4.5 million to expand its workforce to 100 persons from 80 currently, focusing on hiring engineers and mechanics. Tan says human capital recruitment is one of the main cost pressures the company is faced with currently.

The revenue from Critical Holdings’ top five customers collectively accounted for 46.42% to 67.44% of the total revenue for FY2020 to FY2023. Tialoc Malaysia Sdn Bhd — a turnkey solutions provider in the field of plants and facilities, environmental technology systems as well as composite process equipment — is listed as one of the group’s top five customers.

Critical Holdings has an order book of RM130 million. Its tender book now stands at RM862 million, while its unbilled order book of RM264.53 million is expected to be billed up to the end of 2027.

“We are bidding for a number of projects, four of which we are quite focused on and are hoping to clinch. We will find out within these few months. One is a DC job, and three are semiconductor-related projects,” says Tan.

Mechanical engineers by training, 46-year-old Tan and business partner Chow Chin Seang, 48, who is now the chief operating officer of the company, went into the business together in 2013, by acquiring Success Facility Management Sdn Bhd.

“We began with service and maintenance jobs. Of course, being in Penang, we were quite fortunate to be in the centre of a booming semiconductor industry which provided us with a steady stream of projects. We gradually built the company over the years, securing contracts for MEP solutions for plant rooms and clean rooms. In 2017, we got our first job for a Tier III data centre. So from there on, we specialised in providing MEP solutions to critical facilities. To date we have constructed and completed some 650,000 sq ft of clean rooms in total. Last year, we also secured our first hyperscale data centre project,” shares Tan.

Tan and Chow control the company with 70% equity interest held via their private vehicle TCCO Holdings Sdn Bhd.

Asked about the group’s unique selling proposition amid fierce competition, Tan cites “cost competitiveness” and “adherence to tight timelines” as its chief strengths, given the time-sensitive nature of the business.

“Critical Holdings operates in critical M&E (mechanical and electrical) facilities, serving industries with high demand on uptime and efficiency, such as advanced technology, manufacturing plants, data centres, third-party logistics, warehouses and healthcare. These industries cannot afford downtime due to the significant impact on costs and productivity. Notably, Critical Holdings does not engage in commercial or residential projects,” Tan says, admitting that the group faces competition from other industry players, many of which are not listed companies, which also provide MEP engineering solutions for critical facilities.

“We intend to solidify our presence in the Malaysian market. As we strengthen our operations team in Penang, we are developing our southern arm to take advantage of the DC trend which is another growth segment for us. While the engineering and tender teams will still be supported by the Penang office, the service and maintenance team will be based on-site in Johor, forming a new team from the region.”

Currently, DC jobs make up about 10% of Critical Holdings’ total revenue, so there is room for growth. Plant room and clean room jobs collectively contribute 80%, with service and maintenance jobs making up the balance 10%.

“In addition, there are also semiconductor factories and third-party logistics companies with jobs that we are eyeing,” Tan says.

When asked about the group’s closest competitors, Tan only names integrated building support services provider KJTS Group Bhd (KL:KJTS), and says most of its peers are not listed.

A key issue facing Critical Holdings is the growing intensity of competition in the engineering services market. Not only are such service providers among local companies aplenty — most of which are not listed — but new international players from China have been tendering for the engineering jobs in data centre and semiconductor projects, Tan says.

Notably, Critical Holdings relies heavily on the services of its pool of 239 subcontractors and 226 suppliers to complete its projects.

“We work closely with a smaller pool of about 30 of these subcontractors, who have been with us since the early days. They are a major factor in our ability to maintain our competitive edge because of their willingness to work with us towards presenting competitive pricing in our tenders. Competition is made tougher by players who bid at prices below our cost,” says Tan, adding that the group’s net profit margin of 6% to 8% since 2020, tends to be “hard to maintain when it comes to DC projects”.

“As such, we have an [internal] team which seeks to improve our costing structures. We also seek to expand our business to non-Chinese investor clients. So far, we have been fortunate that the [bulk of] our clientele is from Europe, the US, Singapore and Taiwan.”

For the fourth quarter ended June 30, 2024 (FY2024), Critical Holdings posted a net profit of RM7 million on the back of RM91.3 million in revenue. Net profit for the full year was RM19.3 million, double the RM9.5 million in FY2023, while revenue rose 78% to RM268.3 million.

Asked about the significant annual increases in group revenue since FY2019, Tan attributes this to “the rising value of contracts secured by the company, which started at RM1 million to RM2 million and steadily increased”.

“Most contracts are completed within 12 to 18 months, depending on the nature of the project,” he says.

As for guidance for the company’s profitability, he says: “Hopefully we can achieve double-digit growth on the top line. We will try to maintain our FY2024 revenue in FY2025, and subsequently re-evaluate the path forward.”

Critical Holdings has a dividend policy to pay out 25% of its net profit.

Year to date, shares of Critical Holdings have risen 48.4% to 92 sen apiece last Thursday, valuing the company at RM340.14 million.

At 92 sen, the shares were trading at a forward price-earnings ratio of 13.73 times. The only brokerage covering Critical Holdings is Phillip Capital, whose analyst has forecast a target price of RM1.33 for its shares. 

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