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Utilities & MEP Sector - Impact of Advanced Computing Chip Restrictions

🔷 The US restrictions on advanced computing chips have rattled the market, raising concerns about Malaysia's aspirations to become a data centre (DC) hub. Share prices of several Utilities and MEP players suffered due to fears of a potential slowdown in DC growth.

Utilities ⚡
🔷 TENAGA's allowed return for the regulated business in RP4 (2025-2027) should remain unaffected as the IBR framework includes mechanisms to compensate for any shortfall in allowed return due to lower-than-expected electricity demand from DCs. The at-risk portion is the RM16.3bn Contingent Capex, which relies on higher DC-driven electricity demand. Nonetheless, Contingent Capex does not form part of tariffs, so unused portions will not impact the allowed return during RP4. Future RAB growth will most likely depend on energy transition related growth, where the long-term average annual grid investment is forecasted to be RM12.1bn from 2023 to 2050 (vs RP4 base capex of RM8.9bn annually), according to the NETR.

🔷 For MALAKOF, the slowdown in DC growth should have minimal impact. Regardless of DC demand, 4GW of gas-fired plants are set to have their PPAs/SLAs expire by 2028, necessitating replacement with newer, more efficient gas plants, ensuring continued opportunities for MALAKOF.

🔷 YTLPOWR (NR) could be most severely affected due to limited GPU quota for Tier 2 countries (c.50,000 H100 GPU equivalents over three years (2025-2027)), directly affecting the Group's ability to build competitive AI infrastructure.

MEP 👨‍🔧
🔷 For some of the MEP players under our coverage, we believe the market has overreacted. The direct exposure to data centres is relatively low for both UUE and PEKAT.

UUE: Over 90% of UUE's revenue in Malaysia comes from TNB, while DC-related jobs contribute approximately 6% to their FY24 revenue.

PEKAT: EPE Switchgear is expected to contribute c.30% to the net profit in FY25F. 70% of EPE Switchgear's revenue is derived from TNB, 20% from the private sector, and 10% from the exports. While they do supply directly to DCs, the contribution remains immaterial.

🔷 Meanwhile, TNB's Capex is not solely dependent on rising electricity demand. Approximately 30% is allocated for maintenance, while around 40% (historically based on RP3) is tied to energy transition initiatives. The at-risk portion in RP4 (2025-2027) is the RM16.3bn Contingent Capex, which relies on higher DC-driven electricity demand. Base Capex in RP4 (+29% from RP3) will likely proceed as planned, ensuring continued job opportunities for UUE and PEKAT from energy transition-driven growth (long term average of RM12.1bn Capex annually to upgrade the grid).

On the flip side,
🔷 Power cables are critical components used in power distribution systems in DCs. Any slowdown in DC growth could negatively affect SCGBHD's purchase orders.

🔷 The regulation is set to take effect 120 days from publication, giving the Trump administration time to weigh in. While there is a possibility that policies may loosen under the Trump administration, news reports suggest the Biden team discussed the measures with its successor. Additionally, export controls have largely been a bipartisan national security priority, reducing the likelihood of a full reversal.

🔷 Overall, we believe TENAGA, MALAKOF, PEKAT, and UUE's earnings should be relatively shielded from any slowdown in DC growth in the near to medium term. For now, we maintain our recommendation for TENAGA (BUY, TP: RM16.04), MALAKOF (BUY, TP: 0.96), PEKAT (BUY, TP: RM1.17), UUE (BUY, TP: RM1.10) and SCGBHD (BUY, TP: RM1.63).

$TENAGA / 5347 (TENAGA NASIONAL BHD) $MALAKOF / 5264 (MALAKOFF CORPORATION BERHAD) $PEKAT / 0233 (PEKAT GROUP BERHAD)