This article first appeared in The Edge Malaysia Weekly on March 13, 2023 - March 19, 2023

UNDERGROUND utilities and substation engineering specialist MN Holdings Bhd is diversifying its customer base to mitigate the risks of being too dependent on a few clients, such as Tenaga Nasional Bhd.

“We used to have some customer concentration, but maybe in the next quarter or two, you will see a more diversified customer base,” its executive director Dang Siong Diang tells The Edge in a recent interview.

This diversification is through a greater participation in large-scale solar (LSS) projects, data centres and semiconductor-related jobs.

MN Holdings serves mainly customers in the power, gas, sewerage and telecommunications industries.

In the past six months alone, the ACE Market-listed company clinched multiple LSS4 projects worth over RM150 million in total. Last October, its order book rose to about RM292 million after it won a RM22.5 million substation engineering contract to design and build two customer landing stations in Nusajaya Technology Park, Johor, for the Malaysian unit of Shanghai-based data centre company GDS Holdings Ltd — GDS IDC Services (M) Sdn Bhd.

With more data centres in the pipeline in Johor, executive director Datuk Clement Toh Eng Keat says the company is prepared to bid for more projects in the data centre category.

“Johor Baru has become a spot for new data centres, after Singapore limited the number of new buildings for data centres. Data centres consume a lot of power,” Toh notes.

Nonetheless, as the winning bids for LSS4 — which range from 17.68 sen per kilowatt-hour (kWh) to as high as 24.81 sen/kWh — are lower than those of the LSS1 to LSS3, will it affect MN Holdings’ margins?

Dang explains: “We do a lot of value engineering and technical know-how to reap extra profit and lower the costs from the projects. For example, we can come up with shorter cables with value engineering.”

In addition, the company is undertaking infrastructure work for the power utilities of Austria-based AT&S for RM35.02 million.

As at Jan 20 this year, MN Holdings had an order book worth RM325.9 million, with underground utilities and substation engineering jobs accounting for RM140.3 million and RM185.6 million respectively.

“We [have been] maintaining our order book at a healthy level of over RM300 million,” Toh says, noting that the underground utilities engineering tender book is RM40 million to RM50 million.

MN Holdings’ other business strategies include collaborating with partners to provide value-added services to customers and increasing the company’s competitive strength.

For a start, the company recently inked a memorandum of understanding with end-to-end cybersecurity solutions provider Intelligent Pie Consulting Sdn Bhd (IPIE) for collaboration in conducting potential operational technology cybersecurity projects in Malaysia. Proper and secured cybersecurity technology will play an important role in the engineering of substations, especially in improving efficiency, identifying faults and enhancing network security.

The targeted segments include Tenaga and its subsidiaries, Sarawak Energy Bhd, ­Sabah Electricity Sdn Bhd, independent power plants, as well as solar and battery power plants. Whenever MN Holdings is awarded engineering, procurement and construction and commissioning (EPCC) works, IPIE will be given the first right of refusal on the cybersecurity technology works.

“We’re entering into the IT scope, instead of just the normal IT contracting scope. We see this as a big opportunity for us because Tenaga needs this kind of cybersecurity. This would be great for the transformation of the company,” says Toh.

Also, the company is hopeful of leveraging Tenaga’s annual capex of RM20 billion until 2050 under the latter’s energy transition agenda.

“Tenaga is heading for digitalisation. This is the time we tap on it as soon as possible. Even though the market is not that big now, we foresee that in the next two to three years, it will be a big market for us,” Dang says.

Speaking of operational technology cybersecurity, IPIE CEO Simon Chin highlights that any unscheduled shutdowns will be painful for manufacturing plant operators. Thus, there are two key areas to look after: valves and hydraulics.

To increase business volume, MN Holdings is partnering with state government agencies for its underground utilities segment. It also plans to venture into the assembly of neutral disconnectors for sale and distribution in Malaysia. Neutral disconnectors are switches that provide protection of electrical circuits in substations as well as overhead transmission or distribution lines that form part of the electrical power grid systems.

On raw materials, Toh is not too worried about the fluctuation of metal and equipment costs, as most of the company’s projects are on a short-term basis of about six months. He also downplays the currency volatility concern.

“When we secure a tender, material manufacturers would hedge the price for us. It won’t affect us whether the price is up or down later. Normally, we will ask suppliers to quote in ringgit,” he explains.

In the six-month period ended Dec 31, 2022 (1HFY2023), the company posted lower net earnings of RM3.78 million against RM4.78 million in the same period a year ago, owing to an increase in administrative expenses.

Its net profit fell 32% to RM5.53 million in FY2022 from RM8.13 million in FY2021, owing to one-off listing expenses of RM1.97 million. As a result, net profit margin shrank to 5.32% from 7.06%, owing partly to the outsourcing of jobs to subcontractors.

“With the collaboration with IPIE as well as the LSS projects, the substation engineering order book should pick up,” says chief financial officer Pang Chien Chang.

“Based on our ongoing projects, earnings should be much better than last year. Billings for data centres and solar projects [have] started to come in in 3QFY2023.”

Segment-wise, contribution from substation engineering has been expanding, accounting for 43.9% of total revenue for 1HFY2023 against 26.1% for FY2022, while revenue share of the underground utilities engineering segment eased to 56.1%, from 73.9%, in the same period.

The company is aiming for equal revenue contribution from both the substation engineering and underground utilities engineering segments.

It does not have a guidance on earnings share for the segments. As it is, the underground utilities engineering segment still contributes a large chunk of its profits, at 72% for 1HFY2023 against 80% for FY2022.

Listed on the ACE Market at 21 sen per share in April 2022, MN has seen its share price gain 31% so far to close at 27.5 sen last Wednesday, for a market value of RM112.41 million.

The company is controlled by Toh (22.71%), managing director Loy Siong Hay (22.57%) and Dang (10.32%).

As at end-December 2022, MN Holdings had RM18.1 million in cash and short-term investments versus RM7.38 million in loans and borrowings. Trade and other payables stood at RM50.8 million while trade and other receivables were RM48.4 million.

Last month, the company undertook a bonus issue of warrants on the basis of one warrant for every two shares held. Assuming the full conversion of 204.38 million warrants into shares, it is expected to raise up to RM40.88 million, which will be used for payments to suppliers and subcontractors for raw materials and consumables as well as for new project performance bonds and operating expenses.

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