Huge orders forecast to drive building industry


CGS International Securities Research said the construction sector in Malaysia has of late seen a strong flow in new orders for data centres, semiconductor factories and industrial warehouses. — Bloomberg

PETALING JAYA: Data centre projects along with semiconductor factories and industrial warehouses are expected to drive orderbook replenishments for the construction sector in Malaysia.

The value of jobs from these projects will likely be massive, potentially filling the gap left by the lack of progress in certain proposed mega-projects such as the mass rapit transit three (MRT3).

According to CGS International Securities Research, the construction sector in Malaysia has of late seen a strong flow in new orders for data centres, semiconductor factories and industrial warehouses.

The brokerage estimated that the value of data centre projects in Johor alone could replace the value of MRT3.

Citing a March 2024 global data centre report by DC Byte, CGS Research noted Johor stood as the fastest growing market within South-East Asia, with over 1.6 gigawatt (GW) of total supply as of February 2024, while Cyberjaya continued to see interest, according to DC Byte and Knight Frank.

“Stripping out early-stage capacity, we estimate a potential cost of US$7mil-US$9mil per megawatt to construct a data centre, which could translate into construction works of RM26bil to RM33bil in Johor alone over the next few years,” it said.

The estimated amount was equivalent to the value of MRT3 civil works of around RM28bil. However, CGS Research cautioned that the simple calculation was still dependent on other factors.

“Based on our conversation with contractors, the key requirements from data centre owners are speed-to-market with minimal execution risk and expertise in building information systems while having a vertically integrated construction outfit,” it said.

According to CGS Research, Sunway Construction Group Bhd (SunCon), Gamuda Bhd and YTL Corp Bhd would stand out as data centre winners. Overall, the brokerage reiterated its “overweight” call on the construction sector.

“We believe the government’s development expenditure (DE) allocation of RM90bil for 2024 versus RM43bil-RM50bil per annum for the past three DE plans (2006-2020) is a demonstration of its commitment to the construction sector,” CGS Research said.

In addition, it noted the government expected construction to be the fastest-growing sector in 2024 at 6.8% in terms of gross domestic product growth.

“We are encouraged by the recent approval for the Penang light rail transit (LRT) and award of flood mitigation projects. However, awards for Pan Borneo Sabah Phase 1B have been slow while MRT3 may be retendered,” it said.

“The timeline for the KL-Singapore high speed rail (HSR) has largely been met, with three consortia shortlisted for the request for financial proposal. We do not discount the possibility of the KL-Singapore HSR taking precedence over MRT3 as the government may want to spread DE over more states,” it added.

Meanwhile, CGS Research said although the KL Construction Index had risen 38% over a 12-month period, the construction sector’s valuation remained undemanding at one-year 13.7 times forward price-to-earnings ratio and 1.4 times price-to-book-value, above negative one standard deviation from mean since 2005.

On its top picks, CGS Research pointed to Gamuda, SunCon and Econpile Holdings Bhd, saying it liked contractors with a strong execution track record and economic moat.

It said Gamuda’s strong MRT track record and tunnelling expertise had enabled it to successfully penetrate into Australia and Taiwan, while SunCon’s fully vertically integrated structure should enable it to bag more data centre projects.

Econpile, which had the largest fleet of piling machinery among listed piling companies, meanwhile, would benefit from both public and private-sector jobs.

Further, CGS Research said the government’s contracting of IJM Corp Bhd and SunCon for the Johor-to-Singapore rapid transit system in 2023 indicated it recognised the need for competent contractors with a strong execution track record to ensure timeliness.

Hence, the brokerage expected the Penang LRT, KL-Singapore HSR and MRT3 to involve such players, putting YTL, Gamuda, IJM, SunCon, Econpile and WCT Holdings Bhd as key beneficiaries.

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