History doesn’t repeat itself, but it often rhymes.
As Malaysia witnesses a surge in listed companies announcing forays into data centres (DCs) – the last 10 days alone have seen DC-related project announcements by Sime Property, Mah Sing and UEM Sunrise – long in the tooth investors such as yours truly will be reminded of uncomfortable parallels with the dot-com bubble of the late-90s.
Maybank Investment Bank’s (Maybank IB) IBG Research Team, in a note today (June 5), said the latter saw all manner of companies jumping on the internet / dotcom bandwagon before the bubble burst in 2000 under the weight of unsustainable capex and structurally unprofitable business models.
While the exponential share price increase (+370% YoY) for DC/AI infrastructure vanguard YTL Power is a compelling beacon, Maybank IB noted that even well subscribed DCs typically require 2-3 years to break even given frontloading of facility costs and the progressive ramp-up of operations.
Also, despite rapidly rising demand for AI compute, development and adoption in countries still in the nascent phase (like Malaysia) could be slow, especially as regulations pertaining to governance and data flow need to be passed.
Hence, a gradual ramp-up is likely, meaning monetisation challenges in the initial years. Additionally, the DC landscape is becoming very competitive very quickly, and it remains to be seen if locally-deploying cloud (AI) majors such as Microsoft, AWS and, most recently, Google, end up as customers or competitors of domestic participants.
For now, the preferred “paid upfront” proxy for the DC boom appears to be contractors, with top pick Gamuda recently clinching a MYR1.7b DC construction and fit-out job, SunCon already executing on multiple DC construction works and sector peers such as IJM and Kerjaya Prospek actively bidding.
Investors uneasy with a still-nebulous DC/AI profitability dynamic can fall back on established tech players which, based on 1Q24 reporting, are generally in rude health.
Among Maybank IB’s top picks are SAM Eng, which beat expectations to reflect strong aerospace revenues as well as higher PBT margin for both its’ aerospace and production equipment segments. Automation specialist Greatech’s orderbook stood at MYR1.01b as at end-May, with growth outlook bright as its key US-based solar and e-mobility customers remain prime trade war beneficiaries re the latest round of US tariffs on Chinese imports.
EMS play Aurelius Tech’s (ATech) 1Q24 earnings more than doubled with momentum underpinned by an expanding order book, ramp-up of new models/orders and expanded capacity into 2025.
