Water capex upcycle gathers pace

WATER-related stocks have periodically attracted attention amid tariff hikes and government capital expenditure (capex) to address pipe leakages and ageing infrastructure, but previous spending cycles have not been sustained.

However, there are signs that water infrastructure spending could be entering a more sustained upcycle.

Last week, Finance Ministry-owned water asset financier Pengurusan Aset Air Bhd (PAAB) raised RM720mil through the world’s largest blue sukuk, with proceeds earmarked for new and upgraded water treatment plants, pipelines and reservoirs across six states. The sukuk was oversubscribed 1.54 times, signalling strong institutional appetite.

Three major projects have also been announced since the beginning of 2026: the RM6bil Ulu Padas Water Supply Scheme, the RM5bil Northern Perak Water Supply Scheme and PAAB’s RM3.7bil Langat 2 Phase 2 Water Supply Scheme.

In a July 27 note to clients, Maybank Investment Bank Research (Maybank IB) said this signals an “imminent water capex upcycle”. It noted that PAAB’s projects under design, including Langat 2 Phase 2, had surged more than sixfold to RM12bil in 2025 from RM1.9bil in 2021.

The research house expects spending on new treatment plants and pipe replacement to generate “sizeable opportunities” for listed contractors and water infrastructure suppliers.

But how different is this cycle from previous ones?

Tradeview Capital chief executive officer Ng Zhu Hann tells StarBiz 7 the spending cycle is “long overdue”, with investment increasingly becoming a necessity rather than a “good to have”.

He says persistently high non-revenue water (NRW), ageing infrastructure and rising water demand mean upgrades and pipe replacements can no longer be deferred.

Recent tariff reforms, among the most significant in recent years, have also narrowed the tariff-cost gap, improving state water operators’ cash flows and supporting more timely lease payments to PAAB, which owns and leases out the water assets.

Meanwhile, the rapid expansion of data centres (DCs) is adding to water demand, particularly in Johor. Ng says water infrastructure upgrades will need to keep pace with DC developments, or water availability could become a bottleneck for future industrial growth.

This could benefit Engtex Group Bhd, a leading water and sewerage steel pipe manufacturer with a sizeable domestic market share.

As DC operators increasingly turn to recycled wastewater, demand for large-diameter mild steel and ductile iron pipes is also expected to rise, driven by the construction of water recycling plants and associated distribution networks.

Engtex, for one, says the value of government water tenders it is looking to participate in has risen to about RM1.1bil from RM500mil to RM600mil previously, with several major projects on its radar.

A senior management official says Engtex has also secured a two-year contract renewal to supply mild steel pipes to PAAB for pipe replacement needs nationwide. The official adds that the firm’s track record in large-scale water projects positions it well to convert more tenders into orders.

Meanwhile, Cosmos Technology International Bhd, which supplies electronic flow meters to the water and wastewater industry, says it has seen an increase in enquiries and tender activity related to NRW reduction, smart metering, leak detection and ageing infrastructure upgrades.

Its managing director Datuk Chong Toh Wee believes this investment cycle has stronger fundamentals than previous ones, as utilities increasingly prioritise operational efficiency to maximise existing water resources over expanding production capacity.

Chong adds that industrial demand is also growing, particularly in Johor, Selangor and Negri Sembilan, as DCs, semiconductor manufacturing and other high-value industries raise demand for reliable water infrastructure.

However, Tradeview’s Ng says that for the spending cycle to translate into a broader rerating of water-related stocks, earnings will need to catch up with the capex rollout. Greater analyst coverage could also help boost investor interest, he adds.

Engtex shares are down about a quarter to 43 sen this year, translating to a price-to-earnings ratio of 10.65 times. Cosmos shares are little changed at 28 sen, while water engineering company Salcon Bhd is down 14% year-to-date (y-t-d) to 22 sen.

Among big caps, Maybank IB sees Gamuda Bhd as well positioned to secure major water contracts, with the Ulu Padas and Northern Perak projects already in hand.

Analysts also see Ranhill Bhd and PBA Holdings Bhd, the water operators for Johor and Penang, respectively, as potential beneficiaries of the investment cycle.

Ranhill recently received regulatory approval to explore owning selected water assets, while PBA is set to benefit from Penang’s water tariff hike, which took effect on July 1. Both stocks have gained ground this year, with Ranhill up 25% y-t-d and PBA rising 7%.