Second Collaboration with Bridge Data Centres

Mah Sing has expanded its collaboration with Bridge Data Centres (BDC) to further develop Mah Sing DC Hub @ Southville City in Bangi. This new collaboration adds 35.68 acres (Plot 3a and 3b) and 200MW of power capacity to the initial 17.55-acre (Plot 2) development announced in May 2024, resulting in a combined development area of 53.23 acres with a total power capacity of 300MW. For the exact locations of Plot 2, Plot 3A, and Plot 3B within the 150- acre Mah Sing DC Hub @ Southville City, refer to Appendix 1.

BDC, primarily owned by Bain Capital, is a leading provider of DC solutions in Asia Pacific, with operations in Malaysia, India, and Thailand. In Malaysia, BDC operates four DCs: a 5+15 MW facility in Cyberjaya, a 16 MW centre in MRanti Park, Bukit Jalil, and a 126 MW centre in Kidex, Sedenak, Johor.

According to the announcement, the 35.68-acre land allocated for this 200MW power capacity project is valued at RM311.0mn, translating to approximately RM200psf. This represents a significant increase compared to the earlier valuation of RM160psf for Plot 2, making it the highest recorded valuation for a DC land sale that we have tracked to date – see Appendix 2.

After securing these two deals, the DC Hub has three remaining plots: Plot 3C, Plot 3D, and Plot 1, capable of accommodating 100MW, 100MW, and 90MW, respectively. This brings the site’s total potential power capacity to 590MW, exceeding the previous management guidance of 500MW. Management has also confirmed that the site’s infrastructure, including power and water supply, can support this expanded capacity. Additionally, ongoing negotiations with potential partners are underway for the remaining plots.

Targets Minimum 20% Equity Stake in JV

Consistent with the previous joint venture (JV) structure, Mah Sing will manage the construction of data centre facilities and infrastructure, facilitate approval processes, and contribute the land. Meanwhile, BDC will be responsible for designing the facilities to meet the requirements of high-capacity clients. BDC is actively seeking to attract hyperscale and AI data centre customers with strong financial backing.

The JV company will be formed with equity participation from both Mah Sing and BDC, with the exact shareholding to be determined later based on contributions. Mah Sing aims to secure a substantial stake, targeting a minimum of 20% and potentially up to 30%, enabling it to qualify for equity accounting and proportionally recognise its share of the JV's profits.

Our View

We are optimistic about this development, as it effectively leverages Mah Sing’s existing landbank to generate recurring income from DCs. This strategic move not only diversifies Mah Sing’s revenue streams but also opens potential for similar projects at other sites, including the MSS Business Park in Sepang. Additionally, we gather that the 42.5 acres of land at Meridin East in Johor, with up to 300MW capacity, could also be sold to DC operators.

In addition to generating recurring income, Mah Sing is projected to achieve a significant gain from the sale of 53.23 acres of land to the JV. Assuming a conservative net margin of 35%, the potential gain could be around RM120mn. However, it is worth noting that some local developers have reported net margins of up to 70% for land sales to DC operators, indicating the possibility of even higher returns.

The 300 MW DC project is projected to generate approximately RM1.6bn in annual revenue, assuming a monthly rental rate of USD110 per kilowatt (kW). This estimate is significantly lower than Singapore’s rates of USD315-480 per kW, as reported in CBRE’s Global Data Center Trends 2024. Assuming a net margin of 15%, Mah Sing’s 20% equity stake in the JV could yield a profit share of RM48.7mn, equivalent to roughly 23% of its FY23 core earnings.

In terms of capex requirements, the development cost for the 300 MW DC is estimated to be between USD2.1bn and USD3.6bn (or RM8.6bn to RM14.8bn), based on industry benchmarks of USD7mn to USD12mn per MW. If the JV secures 70% debt financing for the project, Mah Sing’s commitment to a minimum 20% equity stake would translate to a capex requirement of RM83.5mn to RM452.5mn, after deducting the land sale proceeds of RM433.1mn from the 53.23 acres involved in the project.

We believe Mah Sing’s strong balance sheet, with a low net gearing ratio of 0.1x and a cash balance of RM911mn as of end-June 2024, positions it well to finance this venture. Additionally, a potential sale of the 42 acres of land at Meridin East could further bolster funding for the DC development. Recent land transactions in Johor for DC operators have ranged from RM90 to RM140psf, translating to potential proceeds of RM165mn to RM256mn.

Subject to BDC securing hyperscale or AI DC customers, the DC first phase is anticipated to be operational by 2026. We will include DC earnings in our model once the joint venture structure is finalised.

Impact

No change to our FY24-26 earnings forecasts.

Valuation

Incorporating the additional 200MW DC into our SOP valuation, we revise our target price to RM2.40/share, which includes a 3% ESG premium. The group’s property and existing businesses are valued at a CY25 P/Bk ratio of 1.0x. For the DC segment, we have applied a 15x EV/EBITDA multiple. While typical EV/EBITDA multiples for DC operators range between 21x and 28x, we opted for a more conservative multiple to account for the longer timeline needed for full operations and the potential uncertainties during the development phase. Maintain Buy on the stock.

Source: TA Research - 29 Oct 2024