Week Ahead 5 January 2025 on YTL Power

US stocks jumped on Friday, ending a 5-day losing streak. Stocks hit session highs around the same time Congressmen Mike Johnson was re-elected to Speaker of the House, signalling that internal fighting within the Republican Party may be more tame than in prior months.

A blog post by Microsoft president Brad Smith, who said that the company expects to spend $80 billion on data centres in 2025 amid ongoing AI frenzy, also helped boost technology stocks on Friday.

Investors were encouraged by the December ISM Manufacturing data, which came in at 49.3%, representing a nine-month high. That was well above economist estimates of 48.0%, and above November’s reading of 48.4%.

Looking to next week, investors will be focused on several economic updates, including jobless claims, preliminary consumer sentiment, and the US employment report for December.

Nvidia stock led gains among the “Magnificent Seven” tech stocks to start the new year after a group-wide sell-off in the last days of 2024. Nvidia shares rose 4.5% Friday after gaining roughly 3% the prior day.

That upswing followed a 4% dip between Christmas Eve and New Year’s Eve as mega tech stocks dropped across the board in the absence of a “Santa Claus rally”. Tesla stock plunged nearly 13% over that time frame, while Amazon and Microsoft dropped more than 4%. Meta and Google fell just under 4% and Apple dropped 3%.

Even with its December decline, Nvidia shares still ended 2024 up more than 150%. Wall Street analysts have remained bullish on the stock, estimating its shares will rise to roughly $173 over the next year from their current level of $138.

IN an interview with Financial Times a couple of days ago, our environment minister has said that global tech companies should expect to pay a premium for access to energy and water to serve data centres in Malaysia, as booming demand for AI infrastructure puts pressure on resources. Extracts from the article are as follow:

‘Malaysia has emerged as a global hotspot for data centres, the storage facilities that enable fast-growing technologies such as artificial intelligence, cloud computing and crytocurrency mining.

The country has attracted more than $16bn in investment commitments over the past year from Amazon, Nvidia, Google, Microsoft and Tik Tok owner ByteDance, most of it for data centre development in the southern state of Johor, which borders Singapore.

But data centres require huge amounts of energy and water to prevent them overheating, which has raised concerns among environmentalists and as well as Malaysian officials.

Nik Nazmi Nik Ahmad, Malaysia’s minister of natural resources and environmental sustainability, said the government was becoming “more selectiv”’ after the recent “huge boom” in data centres had put “a lot of pressure” on the country’s water and energy resources.

“We don’t want just any data centre, but if it’s coming with AI or some other technology that’s a bit more cutting edge, then we will consider them,” he told the Financial Times. But he added: “Data is the new oil of the 21st century, so we want to be part of that.”

Malaysia, and Johor in particular, has emerged as a data centre hub in recent years thanks to an abundance of cheap land and labour and its proximity to Singapore.

Nazmi said he expected data centres to pay a premium for access to water and energy supplies, adding that many were willing to do so to operate in the country. Malaysia has also drawn investment thanks to a moratorium in Singaporean new data facilities between 2019 and 2022 over concerns about energy consumption.

Malaysia in 2024 began permitting data centre operators to draw energy directly from green power producers, bypassing the grid. Nazmi said the change would support the development of the country’s renewable energy system, as tech companies paid for access to a reliable supply of clean power.

“Because these data centres are willing to pay a premium, they can push the boundaries with regards to renewable energy [and] water recycling in matters that not just general consumers but even normal industries might not be able to because they are not able to absorb the costs.”

There are 22 data centres in Johor, with a further eight under construction, according to research provider Baxtel. Malaysia said earlier in 2024 that there were more than 30 projects at various stages of planning in Johor, though there have been a handful of additional announcements since.

“The potential for data centres in Johor is huge,” said Bryan Tan, a partner specialising in tech at law firm Reed Smith, who added that it currently had capacity for as many as 40 facilities.

Johor is aiming to more than double its energy capacity to 2.7 gigawatts by 2027, which could support as many as 90 data centres, Tan said. But he added this could be achieved only by generating more clean energy.’

The take-away point from the above article is that data centres players should expect to pay a premium for water and energy supplies in the near future. That is consistent with the proposed electricity tariff hike of 14% from July 2025, which still needs the government approval.

This also means that Ranhill Utilities, being a 51%-owned subsidiary of YTL Power and the sole water supplier in Johor, will be able to charge higher water tariffs to data centres in the southern state. This higher water tariffs to data centres should be coming on top of the allowed water tariff hike secured by Ranhill from February 2024.

Apart from the direct beneficiary in Ranhill, YTL Power will benefit from the impending higher electricity tariffs from July 2025 in the way that its Kulai data centres will be even more cost competitive. Other data centres will be paying higher electricity tariffs from July 2025, or from any date Tenaga decides to charge higher, at 45 sen/kWh or higher. We are not sure at what rates the new data centre players have signed up electricity supply with Tenaga in 2024, but I expect Tenaga to have the right to revise up the electricity supply tariff to data centres when it gets the green light to raise the nationwide tariffs by 14%.

YTL Power has sufficient land at its Kulai DC Park to install up to 500MW of solar power. Based on the latest LSS5 winning tariffs of less than 20 sen/kWh (reportedly at 15-16 sen/kWh), the total costs of providing solar power with battery storage may come to about 35 sen/kWh. So YTL Power data centres will have a cost advantage of at least 10 sen/kWh compared to other data centres that are supplied from the grid. For a 100MW data centre, the cost advantage may come to RM87 million a year.

With the share price rise in past few weeks, the net short positions on YTL Power have increased substantially to 23.8 million shares at close Friday, but the net short positions on YTL remain below 0.1%.

Foreign funds were net buyer of YTL Power on Thursday with net purchase of RM5m but they net sold RM6m of YTL shares on the same day. Local institutional funds were big buyers of both YTL and YTL Power shares on 31 December with net purchase of RM15m and RM18m respectively.