From construction to chips, Malaysia's data centre boom spreads

KUALA LUMPUR: Malaysia's data centre boom is spreading deeper into the economy, creating new opportunities across construction, power infrastructure and the technology supply chain, analysts said.

It is estimated that Malaysia's data centre capacity could reach eight to nine gigawatts (GW) by 2030, creating a RM128 billion to RM162 billion market for the domestic mechanical and electrical (M&E) sector.

CIMB Securities Sdn Bhd said about 3.8GW is already under construction or backed by signed electricity supply agreements, while another 4GW to 5GW of incremental demand is expected by the end of the decade.

The ripple effect is also being felt elsewhere in the technology ecosystem, with company earnings tracked by RHB Research more than tripling in the second quarter on stronger factory loadings.

At the same time, contractors involved in the power infrastructure needed for data centres are seeing their project pipelines grow.

THE BUILDING BLOCKS

For the construction industry, much of the opportunity lies in the M&E works needed to keep increasingly power-hungry data centres running.

CIMB Securities estimates the capital value of M&E equipment and construction at US$4 million to US$4.5 million for every megawatt (MW) of capacity, equivalent to RM16 million to RM18 million per MW.

While the cost per MW has remained broadly stable since the start of the data centre boom, rising power intensity from changing server architecture is resulting in larger job awards.

Localisation policies are also opening the door to greater domestic participation, creating opportunities for local subcontractors and equipment manufacturers.

CIMB Securities said local companies have an advantage in navigating domestic regulatory requirements.

But the growing pie is attracting more players. A shortage of large-scale infrastructure projects elsewhere has pushed more well-funded contractors into the data centre market.

Kerjaya Prospek Group Bhd is among the latest entrants, having secured an RM858 million mechanical, electrical and plumbing fit-out contract for a data centre in Iskandar Puteri.

Some contractors are going a step further by developing data centre campuses together with their utility infrastructure.

CIMB Securities said this could lower execution risks for clients and improve the chances of contractors securing repeat work.

The research house maintained its "Neutral" call on the construction sector, but described the domestic data centre pipeline as a silver lining.

It retained "Buy" calls on Gamuda Bhd and IJM Corp Bhd for selective exposure to the sector.

Gamuda has about RM7 billion of data centre wins from its Springhill data centre campus. CIMB Securities said IJM, meanwhile, is supported by restructuring, potential dividend upside and earnings visibility from data centre progress billings.

But building and fitting out data centres is only part of the equation. They also need huge amounts of electricity, bringing Malaysia's power infrastructure into the picture.

POWERING THE BOOM

Hong Leong Investment Bank Bhd (HLIB) believes Malaysia's power infrastructure cycle is building faster than expected, driven by data centres, Tenaga Nasional Bhd's (TNB) capital expenditure and solar projects.

The growing pipeline can be seen at MN Holdings Bhd, whose tenderbook has reached a record RM5 billion. Tenders linked to TNB, data centres and solar projects are all at record highs.

Its existing order book stands at RM1.6 billion, providing visibility against HLIB's financial year 2027 (FY27) revenue forecast of RM1.2 billion.

HLIB expects about RM1 billion of data centre and solar projects to be recognised during the year.

More could be coming down the pipeline.

Separately, HLIB said the Data Centre Task Force had approved an additional 5GW of capacity on top of what it described as an existing 8.3GW.

If the projects progress to electricity supply agreement signings in 2027, the research house expects a significant increase in project awards in 2027 and 2028.

For MN Holdings alone, the data centre tender pipeline stands at RM1.6 billion, including about RM500 million linked to a major customer.

The remainder largely comprises one underground utilities engineering project and three new data centre developments.

Data centres, however, are not the only game in town. MN Holdings' solar tenderbook has reached a record RM400 million, while TNB still has a sizeable portion of its FY26 regulated capital expenditure programme to deploy.

The utility had spent RM5.6 billion of its RM13 billion target at the time of HLIB's report.

Large transmission projects are also adding to the pipeline. Two 500-kilovolt (kV) projects at Pakas and Ujong Pasir account for about RM1.5 billion of MN Holdings' TNB tenderbook.

Another RM1 billion comes from 132kV and 275kV projects.

HLIB's channel checks point to more 500kV projects coming to market, with another seven potentially being launched from 2027 onwards.

The research house maintained its "Buy" call on MN Holdings and raised its target price to RM4.65, reflecting the faster build-up in power infrastructure demand.

EARNINGS MORE THAN TRIPLE

While contractors prepare for the next wave of infrastructure spending, Malaysia's technology companies are already seeing an earnings recovery take shape.

Aggregate core earnings among the 12 companies tracked by RHB Research surged 206 per cent quarter-on-quarter to RM154.5 million in the second quarter from RM50.5 million previously.

But the headline number masks an uneven recovery. Aggregate earnings were still 25.8 per cent lower than a year earlier, dragged mainly by weakness among electronic manufacturing services (EMS) players.

Strip out the EMS outliers, and sector earnings rose 21.7 per cent year-on-year, reflecting what RHB Research described as a broad-based recovery and semiconductor upcycle.

Eight of the 12 companies delivered earnings within expectations, the firm said. Inari Amertron Bhd and Cnergenz Bhd were the key outperformers on stronger revenue and margins.

On the flip side, SKP Resources Bhd and VS Industry Bhd missed forecasts due to weaker-than-expected revenue and margins, an unfavourable product mix and higher input costs.

RHB Research cut its overall FY26 technology sector earnings forecast by 2.8 per cent, mainly due to weaker projections for SKP Resources and VS Industry.

Excluding EMS players, however, it raised its aggregate FY26 and FY27 earnings forecasts by 2.5 per cent and 5.1 per cent respectively.

The research house maintained its "Overweight" call on the technology sector and expects the momentum to continue into the second half.

It pointed to improving earnings, positive management guidance, healthy order books and high factory loadings as factors supporting the outlook.

Artificial intelligence (AI) is helping to fuel the recovery. Heavy investment is filtering through different parts of Malaysia's semiconductor supply chain, lifting demand for wafer fabrication equipment and automated test equipment (ATE).

This is benefiting ATE and engineering support companies, while outsourced semiconductor assembly and test (Osat) players are seeing stronger earnings from higher factory loadings.

Capital expenditure linked to AI and data centre buildouts, together with demand for power-management and automotive integrated circuits, is also supporting the recovery.

RHB Research said ATE and engineering support companies are sitting on record backlogs, while Osat players are seeing record revenue and loadings.

EMS remains the weak link. The research house maintained a neutral outlook on the segment as it bottoms out, although higher seasonal demand is expected to improve utilisation and margins in the second half.

New project transfers and mass production are expected to make a more meaningful contribution by FY27.

WHO COULD BE NEXT?

As the earnings tide turns, RHB Research sees greater opportunities among technology stocks that have yet to fully catch up.

It sees more upside among laggards and second-tier stocks where improving earnings and operations have yet to be fully reflected in valuations.

The sector is trading at about 25 times forward earnings, around its five-year mean, even as earnings are projected to grow by more than 30 per cent.

In simple terms, valuations remain around historical levels despite expectations of much stronger earnings.

RHB Research's five top picks are Malaysian Pacific Industries Bhd (MPI), Pentamaster Corp Bhd, CTOS Digital Bhd, Coraza Integrated Technology Bhd and JHM Consolidation Bhd.

MPI is benefiting from surging AI server-related demand, particularly for power semiconductors. It is expanding its AI server-related packaging lines to 28 from 16.

Its new Suxiang facility is expected to begin operations in the second half of its current financial year, backed by an initial business pipeline of about US$30 million.

RHB Research has a target price of RM55.80 on MPI.

Pentamaster, meanwhile, is sitting on a record RM550 million order book, supported by medical and AI-driven factory automation demand.

It is also benefiting from demand for semiconductor testing solutions used in AI and high-performance computing applications. RHB Research has a target price of RM6.32 on the company.

Among domestic-focused software and digital solutions providers, RHB Research prefers CTOS, believing most of the negatives have already been priced into the stock and earnings are poised to recover.

Its RM1.11 target price implies 73.4 per cent upside from its last closing price of 64 sen, the largest potential upside among the 12 technology stocks under RHB Research's coverage.

At the smaller end of the market, RHB Research singled out Coraza and JHM as its preferred picks, expecting both to benefit from an earnings rebound, stronger revenue and operating leverage.

Coraza is expected to deliver two consecutive years of record revenue and earnings, supported by a larger addressable market, higher-value projects, vertical integration and a broader customer base.

RHB Research has a target price of RM1.45 on Coraza.

For JHM, the research house believes the worst is behind it, with stronger recoveries expected in its semiconductor-related sheet metal and automotive businesses.

Growth is supported by new orders from existing customers, contributions from Magna Autosystems Inc and a RM300 million Proton contract secured through its JHM Dekai Auto Lighting joint venture.