This article first appeared in The Edge Malaysia Weekly on July 15, 2024 - July 21, 2024

TALIWORKS Corp Bhd [KL:TALIWRK] sees the country’s data centre boom driving up investments in water infrastructure over the near to medium term, and is primed to take on more jobs.

“We foresee the boom in the data centre market will drive increased demand for water resources, mainly for cooling purposes. From early indications, a hyperscale data centre with a capacity of 100mw, based on current technology, may require approximately 9,000 to 9500 cu m of treated water per day to operate.  As such, we envisage more investments in the water infrastructure space in these two states [Johor and Selangor] to accommodate the expansion of data centres,” its executive director Kevin Chin Soong Jin tells The Edge.

Taliworks says it has the capacity to undertake up to RM2 billion worth of water infrastructure contracts, which is RM1.2 billion more than its outstanding order book of about RM800 million. Its order book includes the RM602.43 million contract to design and build a water pumping station and water pumping mains to the existing Bukit Lipat Kajang reservoirs, distribution and associated works (Package 2) for the Rasau water treatment plant (WTP) and water supply scheme (Phase 1).

The group is also undertaking the construction of the new Bukit Lipat Kajang booster station and reservoirs for RM294 million (Package 3). It secured both contracts in December 2021 from Pengurusan Air Selangor Sdn Bhd (Air Selangor).

In recent years, Malaysia has become a focal point for data centre investments, securing a whopping RM114.7 billion between 2021 and 2023, Minister of Investment, Trade and Industry Tengku Datuk Seri Zafrul Abdul Aziz reportedly said.

Johor has received more investments in data centres than any other state due to its proximity to Singapore. Within this year and next, at least 1.22gw of data centre capacity is expected to go live in Johor, based on the total amount of power the data centres will require.

This raises the question of water supply adequacy, as data centres need a lot of water to run. While Peninsular Malaysia has ample electricity reserves, the sufficiency of water supply can vary significantly from state to state.

According to Suruhanjaya Perkhidmatan Air Negara’s (SPAN) Water and Sewerage Fact Book 2022, Johor’s water reserve margin stood at 11.5% in 2022, while Selangor, which includes Kuala Lumpur and Putrajaya, had a reserve margin of 15.2%.

In Selangor, the RM6.14 billion Rasau water supply scheme — spread over two stages and that is partly funded by a RM1.8 billion grant from the federal government — is one of the main water infrastructure projects meant to increase the state’s water supply security. Selangor’s water reserve margin is set to increase to 17.7% by 2030, from 15.34% in 2023, according to Air Selangor’s 2023 Sustainability Report released on June 27.

However, the project — which upon completion will have the capacity to produce 1,400 million litres per day (MLD) of treated water — appears to be behind schedule. This is going by the completion rate of just 11% for the Package 2 contract and 6% for the Package 3 contracts that Taliworks is undertaking, according to analysts tracking the group.

“The construction arm [of Taliworks] saw a slight 1% year-on-year (y-o-y) drop in revenue for 1Q2024, with the Package 2 and 3 of Sungai Rasau WTP having a completion rate [based on accounting progress] of 6% and 11% [as at end-1Q2024]. Such progress is deemed slow as we previously expected a cumulative progress of circa 30% by end-FY2024 for both packages,” RHB Research says in a note on the group’s financial results for the quarter ended March 31.

Sluggish approvals given to Taliworks for work on the site has been blamed for the slower-than-expected progress. According to Air Selangor, the overall progress of the Rasau project stood at 11.15% in December 2023. Nevertheless, the water operator is confident it will be able to supply water to data centres without compromising on the public water supply.

During a recent press conference on the publication of its sustainability report, Air Selangor acting CEO Abas Abdullah said the water operator has carried out projections of water demand by the data centres.

“For Air Selangor, we must be ready. We can allocate water to data centres without compromising on the water supply to the public,” he added, pointing out that the state’s water reserve margin will still be between 17% and 20% by 2030 after accounting for the expected extra demand from data centres.

Apart from the Rasau scheme, Air Selangor is also embarking on Phase 2 of the Langat 2 WTP project. Upon targeted completion by 2030, the scheme is expected to boost the water operator’s supply capacity by another 1,100 MLD.

To increase its water reserve margin, Air Selangor is undertaking pipe replacement initiatives, as well as the Labohan Dagang WTP Phase 2 project, which will contribute an additional 200 MLD to the water operator’s supply capacity. For pipe replacements, it targets to launch 300km worth of contracts per year starting in 2024. For each contract awarded, the completion will take 18 to 24 months, says the country’s largest water operator.

According to Air Selangor, the pipe replacement initiatives are estimated to cost RM13 billion, which will be spread over 20 to 30 years. Pipe replacement is an important aspect for the operator to reduce its non-revenue water (NRW) levels to 27.5% by 2025 and 25% by 2030. Last year, RM105.7 million was spent on pipe replacement programmes covering 93.88km.

The planned water infrastructure works, if implemented in a timely manner, represent sizeable contract opportunities for water contractors like Taliworks.

In Johor, the state with the highest influx of data centres in the country, investment plans on water infrastructure are not as clear.

The state’s water infrastructure is managed by Ranhill SAJ Sdn Bhd, a joint venture between Ranhill Utilities Bhd [KL:RANHILL] and state-owned Syarikat Air Johor Sdn Bhd. Ranhill had not responded to a request for an interview at press time.

According to Ranhill SAJ’s website, the operator manages 46 WTPs in the state with a total treatment capacity of 2,133 MLD, 716 reservoirs and 24,002km of pipelines that supply treated water to four million people in Johor as well as industries across the state. The company had an NRW rate of 26.3% as at 2022. It has set a target to reduce the level to 20.9% by 2025.

Johor Special Water, a subsidiary of state-controlled Permodalan Darul Takzim, has been tasked with looking for additional water resources for future industrial use, Johor’s investment, trade, consumer affairs and human resources committee chairman Lee Ting Han reportedly said on July 1. Investments being looked at include the building of new water treatment plants, the installation of new piping to connect water sources to new areas, as well as the exploration of new water sources through Johor Special Water, he added.

Johor and Selangor are not the only states that need more investments in their water infrastructure. The water supply situation in the country can be considered unsustainable because of decades of underinvestment, some experts have opined.

For instance, in 2022, Kedah had a 0% water reserve margin, which limits the potential of the state for investments. Investors — such as those in the semiconductor industry, which the Kulim Hi-Tech Park is a beneficiary of — require a steady supply of treated water to operate.

Similarly, Kelantan’s water reserve margin stood at only 3.9% in 2022, while that of Melaka and Perlis stood at 4.7% and 8.4% respectively. SPAN recommends having a reserve margin of 15% to cater for current and future demand.

The federal government has often had to step in to provide funding for water infrastructure projects, say analysts, noting that it allocated RM1.1 billion under Budget 2024 to improve water supply issues, especially in Kelantan, Sabah and Labuan.

“Such solutions [federal government funding] may relate to infrastructure like water treatment plants, which Taliworks is currently constructing,” says RHB Research in its May 15 note.

The research house maintains its “buy” call on the stock, with a lower target price of 98 sen, from RM1.01 previously, with the company’s 1Q results coming in at only 20% of full-year consensus estimates, owing to sluggish progress on construction projects.

RHB’s forecast dividend per share (DPS) of four sen for FY2024 implies a 5% yield at Taliworks’ closing price of 80 sen on July 10, which gave the company a market capitalisation of RM1.6 billion.

Taliworks declared a DPS of one sen for 1QFY2024, on par with 4QFY2023 but was below the 1.65 sen in 1QFY2023. It paid a total DPS of 5.95 sen for FY2023, down from 6.6 sen in FY2022.

In the first quarter ended March 31 (1QFY2024), Taliworks’ net profit jumped 49% y-o-y to RM17.35 million despite no significant variation in revenue because its gross profit was boosted by 16% during the quarter due to the increase in Air Selangor’s Bulk Water Supply Rate, to 48 sen per cu m effective Jan 1 from 42 sen previously.

Apart from being a contractor of water infrastructure, Taliworks also operates the Sungai Selangor WTP Phase 1 (SSP1) that supplies almost 20% of the total treated water requirement of the state, under an operations and maintenance (O&M) contract.

Sungai Harmoni Sdn Bhd, a subsidiary of Taliworks, is the O&M operator of SSP1 with a combined design operating capacity of 950 MLD. As part of a water restructuring exercise undertaken by the Selangor government to consolidate the water industry in the state, the company entered into a Bulk Water Supply Agreement with Air Selangor in 2019. The SSP1 O&M contract has been extended by seven years to December 2036.

Meanwhile, Hong Leong Investment Bank (HLIB) Research lowered its earnings forecast for Taliworks’ current financial year by 4.4%, but adjusted it upwards by 7.7% and 9.1% for FY2025 and FY2026 respectively after adjusting for slower-than-expected construction progress and higher-than-expected potential toll compensation. “While 1Q2024 earnings was boosted by net compensation from Grand Sepadu (RM12.6 million at the joint-venture level), management expects to recognise further compensation for the remainder of FY2024,” says the research house.

HLIB Research maintained its target price of 81 sen, with a “hold” call, as at May 15. The less sanguine forecast is based on the fact that Taliworks “is undergoing a transitory period, prioritising new growth drivers through strategic investments over dividends”.

The research house notes that Taliworks’ management remains flexible on its dividend payout, electing to prioritise growth opportunities in its core areas.

“We believe that should there be sizeable identified investments, the possibility remains that dividends could be reduced further. Recall that in 4Q2023, the quarterly DPS was cut from [the] previous norm of 1.65 sen to 1.0 sen amid its strategic reprioritisation,” it says, adding that lower dividends are a downside risk for the stock while the upside risks to its recommendation include a high return on investment. 

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