This article first appeared in The Edge Malaysia Weekly on November 4, 2024 - November 10, 2024

WATER-related stocks are generally not regarded as the sexiest counters on Bursa Malaysia, but this may change as the federal government has pledged to spend more on water infrastructure, principally to address the long-standing problem of excessive non-revenue water (NRW) loss.

Already, large conglomerates Berjaya Corp Bhd (BCorp) [KL:BCORP] and YTL Power International Bhd [KL:YTLPOWR] have taken up substantial stakes in Salcon Bhd [KL:SALCON] and Ranhill Utilities Bhd [KL:RANHILL] respectively, signalling their interest in the sector given its increasing importance to businesses, particularly in light of the data centre boom in the country.

With higher government spending on water infrastructure, and data centre demand for water especially in Johor and Selangor, analysts say the sector is ripe for take-off.

“It looks like things are picking up for the water sector. It is positive, as the water sector has long been neglected,” says a senior analyst at an international research firm.

On Bursa Malaysia, there are several companies in the sector, ranging from water operators such as PBA Holdings Bhd [KL:PBA] and Ranhill, to water infrastructure contractors such as Salcon and Taliworks Corp Bhd [KL:TALIWRK].

Pipe makers Engtex Group Bhd [KL:ENGTEX] and Hiap Teck Venture Bhd [KL:HIAPTEK] also supply to contractors for water reticulation projects. Cosmos Technology International Bhd [KL:COSMOS] could also be a beneficiary of higher NRW spending.

With the exceptions of PBA and Ranhill, water-related stocks, especially on the construction side, have not received much attention in the market.

For example, Salcon has lost 6.45% of its market value year to date (YTD) to 29 sen per share as at last Wednesday, while the market value of Taliworks as at Oct 30 was 7.78% lower than the start of the year at 77.5 sen. Hiap Teck, meanwhile, has lost a significant 25.88% of its value YTD to 30.5 sen per share, while Engtex has lost 17.88% of its value YTD to 61 sen.

Although Cosmos’ share price is still up 2.93% YTD, it has lost 18.75% of its value over the last six months to 39 sen apiece.

The government is increasing spending on NRW reduction programmes, with RM2.525 billion allocated for this purpose. It is looking to reduce the nationwide NRW average to 31% by 2025 from 37.4% currently.

Under the recently launched Water Sector Transformation Roadmap 2040 (AIR2040), the government is encouraging private-sector participation in the water sector to address the growing gap in funding available to upgrade the infrastructure.

Under the road map, the government aims to transform the sector into an economic sector that will contribute 0.45% to Malaysia’s gross domestic product by 2040, with an accumulated value add of RM172.6 billion between 2021 and 2040.

“In the context of NRW spending, Ranhill should be one of the beneficiaries, as the water operator of Johor, since it has KPIs (key performance indicators) for NRWs annually. If it hits or exceeds the NRW reduction level, it will receive a grant, which is 75% of capex spent for NRW initiatives.

“Other beneficiaries of NRW reduction include PBA Holdings, the Penang water operator,” says an analyst who covers water-related stocks such as Taliworks and Salcon. He opines that Engtex and Hiap Teck may benefit from NRW reduction since more pipes will be needed.

“In the context of contractors, Taliworks is a key contractor that is involved in water treatment plants (WTP) and water supply projects of more than RM1 billion, namely the Padang Terap Water Supply Project and Sungai Rasau WTP and water supply scheme (Phase 1),” he adds.

The RM2.525 billion spend will be in the form of federal grants to the states, especially Perlis, Pahang, Kelantan, Sabah, Sarawak and Labuan. Other states such as Johor, Penang and Selangor, whose water operators are more financially sustainable, are also undertaking their own NRW programmes.

For example, Pengurusan Air Selangor Sdn Bhd is spending RM400 million on its own NRW reduction programme, while Ranhill SAJ Sdn Bhd, which is 80%-owned by Ranhill, had awarded its sister company Ranhill Technologies Sdn Bhd a RM283.89 million NRW reduction programme in Johor.

Analysts are expecting an accelerated pipe replacement capital expenditure cycle in the second half of 2024 and next year, driven by the government’s plan to reduce NRW. This would benefit Engtex and Hiap Teck as they are manufacturers and distributors of pipes.

“The water supply projects in Malaysia such as the Rasau water supply scheme, Langat 2 water treatment plant and the Perak-Penang water transfer scheme are expected to utilise larger-diameter pipes.

“These projects are potentially driving demand for Engtex’s mild steel pipes,” says another analyst who covers the sector.

Engtex has seen better results so far this year, due to a recovery in demand for certain manufactured steel products, especially mild steel concrete-lined pipes and wire mesh.

In the first half of the financial year ending Dec 31, 2024 (1HFY2024), Engtex’s net profit more than doubled to RM11 million from the previous corresponding period, despite a slight decline in revenue.

Hiap Teck too has had a good year. For the financial year ended July 31, 2024 (FY2024), the group’s net profits more than tripled to RM107.3 million from RM31.83 million in the previous corresponding period, driven by both the manufacturing segment and its joint venture, Eastern Steel Sdn Bhd. Eastern Steel is a steel producer based in Kemaman, Terengganu, with an annual production capacity of 2.7 million tons of billets and slabs.

While Hiap Teck’s pipe manufacturing business had turned around in FY2024, it could be a challenge for the group going forward as the government has proposed to impose a carbon tax on the steel industry by 2026.

As for Salcon, it has been involved in many NRW projects throughout the years as it is one of the leading water infrastructure contractors in the country. Between July 2019 and September 2024, it was contracted by the Sandakan Water Department at a cost of RM23.5 million to operate a customer call centre and conduct the monitoring and maintenance of district metering zones, meter reading and billing.

The group was also contracted by Syarikat Air Negeri Sembilan Sdn Bhd for a change-out programme of bulk meters to electromagnetic meters under a private finance initiative worth RM30 million between January 2017 and January 2021. It was also contracted for the NRW reduction programme for the entire state of Kelantan between August 2008 and August 2012 at a cost of RM129.9 million.

“Our current total tendered/pre-qualified projects are valued at RM1.2 billion as at Dec 31, 2023, for both local and overseas projects, while the outstanding order book stood at RM308.3 million, with 61% from the water unit, [and] 18%, 1% and 20% from wastewater, NRW and other units respectively,” Salcon said in its 2023 annual report.

Taliworks, on the other hand, had an order book worth RM724.4 million as at August 2024, according to group executive director Kevin Chin Soong Jin. “Our focus on securing new projects aligns with our strategic goals to improve water infrastructure and operational efficiency. We are optimistic about the future and actively exploring opportunities that will allow us to make a meaningful impact on the industry.”

Meanwhile, Cosmos’ business in the supply of NRW control management systems, such as advanced pressure management systems, pressure reducing valves, noise loggers and electromagnetic flowmeters, could also stand it in good stead with the higher NRW spending.

In a written reply to The Edge, Cosmos’ managing director Datuk Chong Toh Wee states that the group anticipates an increase in capital expenditure owing to the NRW programme.

“We have successfully secured some NRW projects, particularly involving the replacement of electromagnetic water meters previously managed by Air Selangor, and Cosmos currently holds a tender book value of RM30 million for projects for Air Selangor, SADA (Kedah) and Sabah,” he says.

The water sector has attracted attention from large companies over the last 12 months.

In November 2023, BCorp emerged as a substantial shareholder of Salcon, after its indirect subsidiary Inter-Pacific Capital Sdn Bhd acquired 4.78 million shares in the group, increasing its stake to 5.43%.

BCorp has continued to raise its stake in Salcon. As at Sept 9, the group held a 15.7% stake in Salcon and is now the largest shareholder ahead of Tan Sri Tee Tiam Lee, who has a 12.55% stake.

At around the same time in November 2023, YTL Power acquired 243.33 million shares in Ranhill, representing 18.87% of the company, from Cheval Infrastructure Fund LP, making it the second largest shareholder.

Then, in May this year, YTL Power acquired Tan Sri Hamdan Mohamad’s shares in Ranhill through SIPP Power Sdn Bhd for RM405.2 million. The acquisition pushed its stake to 53.19% from 21.77%, making it the largest and controlling shareholder of the group.

While YTL Power had offered to buy the remaining shares of Ranhill from minority shareholders at 99.5 sen per share, the company had emphasised that it would keep Ranhill listed on Bursa.

YTL Power is a major investor in data centres in Johor. In December 2023, Nvidia Inc and YTL Power announced they would be developing an artificial intelligence cloud and supercomputer infrastructure in Kulai at a reported development cost of US$4.3 billion.

While BCorp is not a major data centre player, its investment in Salcon underscores its ambition to participate in the water sector, which is expected to receive a government boost due to the mushrooming of data centres in Malaysia.

The extent of demand for water in Johor by data centre operators remains unclear. The state has the lowest NRW level in the country at 25%. Nevertheless, if the demand for water from data centres is huge, it can be assumed that a lot more investments will be needed in Johor’s water sector. 

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