DC boom draws more contractors into race

PETALING JAYA: Competition among contractors for Malaysia’s lucrative data centre (DC) construction projects is putting some pressure on margins, but the strong project pipeline means established players should continue to maintain pricing power.

Rakuten Trade head of equity sales Vincent Lau said the growing number of contractors looking to enter the DC space could put pressure on margins, particularly for smaller and newer players without an established track record.

These companies would have to offer lower prices to secure a share of the lucrative market, while established contractors such as Gamuda Bhd and Sunway Construction Group Bhd would continue to have an advantage due to their track record.

“The DC construction job pipeline is still fairly strong.

“We have the liberty and the opportunity – and the government has the power – to choose the better ones, rather than simply taking any project,” he told StarBiz.

“Some data centre projects in other countries have been cancelled or delayed, and Singapore and Thailand are also facing resource constraints.

“I believe some of these projects may benefit Malaysia, as we still have the capacity for them.

“On margin compression, it is not expected to be perpetual.

“The compression is coming from those who want to enter the space offering lower prices,” he added.

“But the established players will say that the cost differential is not much, and they will still be awarded the projects over untested players.

“The untested players will instead get subcontracting work from the Gamudas and SunCons, so those would be smaller portions, while the big projects will still be with the big boys.”

Lau said pricing power among established contractors could ease slightly, but margins would still be higher than those in conventional construction.

He said DC margins could come down to around 11% to 12%, from 12% to 13% previously, but would remain above the typical 4% to 5% margins for conventional construction.

For smaller players seeking to enter the space, he said sacrificing some margin to secure projects would still be worthwhile, although they would have to commit more resources to meet tight project deadlines.

Meanwhile, CMIB Research said key insights from its mechanical and electrical (M&E) expert speaker session held recently reinforce its structural view that DC job flows are cascading down to local subcontractors and equipment manufacturers, with the capital value of the M&E equipment and construction market estimated at US$4mil to US$4.5mil/megawatts or MW (equivalent to RM16mil to RM18mil/MW).

“While cost per MW has remained broadly stable since the onset of the DC boom, rising power intensity from evolving server architecture is driving larger job awards.

Supportive localisation policies, aimed at driving greater local participation across the supply chain, provide another tailwind.

Moreover, we flag that local players enjoy a competitive edge beyond cost, exhibiting greater agility in navigating complex regulatory bureaucracies.

“With about 3.8GW under construction or backed by signed electricity supply agreements and a further 4GW to 5GW of incremental demand expected by 2030, we see 8GW to 9GW of cumulative DC capacity pipeline through 2030, translating into an RM128bil to RM162bil total addressable market for the domestic M&E space,” the research house said in a report yesterday.

CIMB Research said competition has intensified among main contractors as a dearth of large-scale infrastructure jobs pushes well-funded players into the lucrative DC market.

It noted Kerjaya Prospek Group Bhd marks the latest entrant, having secured an RM858mil mechanical, electrical, and plumbing DC fit-out contract in Iskandar Puteri.

“We note certain contractors have differentiated by developing DC campuses with integrated utility infrastructure, de-risking execution for clients and strengthening their proposition for repeat awards.”

CIMB Research said El Nino poses an underappreciated two-pronged impact: extreme weather disruptions drive input cost volatility, while tightening water availability shifts the trade-off towards mechanical cooling, expanding M&E job scopes.

CIMB Research reiterated its “neutral” call on the construction sector, with the domestic DC pipeline offering a silver lining.

For selective exposure, the research house said it retained its “buy” calls on Gamuda (RM7bil DC wins from its Springhill DC campus) and IJM Corp Bhd (for restructuring, dividend upside, and earnings visibility from DC progress billings), with target prices of RM6 and RM3.25 respectively.