Analysts and fund managers tell The Edge that construction stocks have more legs to run as they expect industry players to continue to reap benefits from the growing data centre demand.

KUALA LUMPUR (June 13): A rally in construction stocks has lifted the Bursa Malaysia Construction Index to a six-year high amid the hype surrounding data centres, fuelled by an increasing number of contracts given out to build such facilities, to meet the growing demand of computing power for generative artificial intelligence (AI).

The index, which tracks 48 constituents, climbed for the eight consecutive trading day on Thursday to settle at 267.67 points, up 4.32 points or 1.6% from a day earlier. Year to date, the index has gained 37.7%.

Analysts and fund managers tell The Edge that construction stocks have more legs to run as they expect industry players to continue to reap benefits from the growing data centre demand.

“The recent rally was driven mainly by private sector job awards, mainly from contracts to build data centres. There were also some condominium [jobs], indicating the pick-up in demand for high-rises, but the bigger ones are still data centres,” said Affin Hwang Investment Bank head of research Loong Chee Wei when contacted.

“We foresee more positive newsflow going forward, because as you can already see some land transactions taking place now, which will potentially lead to more data centre contracts. PE [price-to-earnings] ratio can run high. During the years of MRT awards, you can see their [construction stocks'] PE went above 20 times,” he noted.

Affin Hwang has been "overweight" on the construction sector since last year, according to Loong. Data centre projects, together with infrastructure jobs like the Penang International Airport expansion and Penang LRT this year, are new catalysts.

These would potentially expand the order books of the investment bank’s top buys like Gamuda Bhd (KL:GAMUDA) and Sunway Construction Group Bhd (KL:SUNCON), he said.

Bloomberg data shows that the Bursa's Construction Index is currently trading at a PE ratio of 46.8 times, with a forward PE ratio of 18.7 times.

Currently, 19 research firms are covering Gamuda, which is seen as the industry's bellwether, and 17 have it on "buy", two put in on "sell". The consensus target price is RM6.55, according to Bloomberg.

For SunCon, there are 14 analysts covering the stock. Ten placed it on "buy", while three have it on "sell" and one keeps it on "hold", with a consensus target price of RM3.69.

Danny Wong Teck Meng, CEO of asset management firm Areca Capital that is overseeing RM4.81 billion worth of assets, noted that the Construction Index rose from a low base as valuation had been under pressure over the past few years, no thanks to a drought of jobs during and immediately after the pandemic, and as Malaysia saw several changes of government.

“First of all they came from a low base — there were not many jobs in the past two years. Now, with a stable government, economic growth is expected to pick up pace. There is likely to be more job awards in the pipeline,” he said.

“Then, there is this booming segment of data centres, on top of the existing order book from infrastructure. We don’t know how far or how successful the data centre [hype] is going to take us, but at least the capex [capital expenditure] related to it is already here — the land owners are already benefiting,” he added.

Apex Securities Bhd head of research Kenneth Leong said while there is still room for the construction stocks to climb in the second half of 2024, the upside might be limited as many fundamentals have already been reflected in the current valuation.

“The [Construction] Index's forward PE is about 18 times, not very attractive but considered a fair valuation,” he said, adding that the research house is "overweight" on the sector in the first half of 2024. Its second half outlook will only be released in July.

“But a lot of other research houses have [overweight] ratings, because at that time [construction] valuation was very cheap, they were one of the laggards then,” he noted.

Still, as the positive sentiment continues unabated, Rakuten Trade's vice president of research Thong Pak Leng does not think investors will only consider fundamentals. “When sentiment is good, share price can go beyond fundamentals,” he said.