• Maintain OVERWEIGHT. In the past few weeks, Malaysia has witnessed a slew of developments in terms of new data centres (DC) – particularly ones with capacities of >40MW – being planned for development in various areas. We view such news flows to be a testament to Malaysia’s vibrant market for DCs, which – in turn – benefits the construction sector in terms of providing job replenishment opportunities. Contractors with certain niches, eg industrialised building systems (IBS) capabilities (namely Gamuda), are set to benefit from the DC growth prospects in the longer run.

• DC construction in Malaysia. The domestic DC market is forecasted to grow at a 6-year CAGR (2023-2029) of 13.9% from USD1.8bn in 2023 to USD4bn by 2029. In 2023, Malaysia’s DC construction costs stood in the range of USD6.7-10m/MW, making it more affordable when compared to Singapore and Indonesia (specifically Jakarta). With as much as 1,400MW reportedly planned to be built up here over the next 5-10 years, the expected costs to construct (or job value from a contractors’ perspective) may easily reach between MYR40bn and MYR60bn in total. On further scrutiny, electrical systems make up most of a DC’s cost structure at 40-45%.

• Navigating potential heightened competition in DC construction. With more contractors venturing into the DC construction market – players should develop their own respective niche in the DC supply chain, eg Gamuda is positioning itself as an efficient DC builder via its industrialised building systems (IBS) expertise. It completed its first DC job for AIMS Data Centre (8MW) in just eight months vs the anticipated 13 months.

• Potential DC hotspots aside from Cyberjaya and Johor. Johor and Cyberjaya are considered as “established” according to Cushman & Wakefield’s Asia-Pacific DC Maturity Index. Therefore, alternative sites – namely Sarawak (amidst Singapore’s DC investments in return for the state’s electricity sales) and Kedah (Delapan Special Business Economic Zone) – can serve as alternative DC hotspots in the event Johor and Cyberjaya are fully occupied.

• ESG highlights. We take comfort from the reliance on IBS to produce precast components for DC construction, as such systems limit wastage and emit lesser carbon emissions than conventional methods. Applications for cooling systems for DCs may prompt involvement of contractors with a niche in such systems, eg Sunway Construction and KJTS Group (KJTS MK, NR)

• Top picks for the DC construction play include Gamuda and Sunway Construction, which have secured a total of at least MYR2bn worth of DC contracts. A notable mention would be IJM Corp, which has been involved in providing industrial piles for DCs and has a DC contract under its tenderbook.

• Key risks: Unforeseen labour shortages and intense competition, which may lead to margins compression.

Source: RHB Securities Research - 4 Jun 2024